The balance sheets of the nation's businesses have deteriorated to a point where most firms are unlikely to improve their creditworthiness dramatically before the end of the decade, a study by a Wall Street brokerage house reported today.
Although the report by Salomon Brothers Inc. notes that corporate credit has improved in recent months due to the improved economy, it also suggests that the trend is unlikely to continue in light of strains on the financial markets posed by large federal deficits and the anti-inflation leanings of the Federal Reserve Board.
"American business corporations are likely to be exposed to serious credit risks at least until the end of the decade," wrote the authors, Salomon Brothers' Vice President James McKeon and financial analyst Steven Blitz.
The two officials of the firm's bond research department said their study of credit ratings by Moody's Investors Service in the last decade indicates an "alarming" drop in the quality of corporate credit.
In 1970, almost 66 percent of the companies rated by Moody's were given an "A" bond rating or better, a figure that dropped to only 53 percent in the first quarter of 1983. For purely industrial companies, that figure fell from 59 percent to 47 percent. Moreover, the report says that, since the end of 1981, the rating firm's downgradings exceeded upgradings by 371 to 85.
Although the authors note that the expanded use of short-term credit by companies undercuts the importance of their lowered bond ratings, the new reliance on short-term credit instruments "leaves business borrowers highly vulnerable to interest rate swings.
"Given the difficulty lower-rated firms face in covering fixed costs, this kind of financing strategy invites failure," the report says. "The increasing pace of business failures in recent years bears evidence of the associated risks."
The corporate credit problems date back to the mid-1960s, when inflationary pressures mounted, the report says. Further adding to the crunch were trends toward "creative banking," the development of aggressive conglomerates that utilized extensive leveraging, and the increasing use of short-term credit.
That strategy began to backfire with the rapid rise of interest rates in 1980, causing a rapid deterioration of corporate balance sheets.
"The deterioration in balance sheet ratios is mainly the result of the squeezing of income statements by sluggish revenue growth and a sharp rise in financing charges," the report said.
Debt maturity levels also have also fallen sharply in recent years.