Credit outlook weak for Canadian corporations, S&P says

New York, May 13 - Canadian corporations face a weak outlook for credit quality, Standard & Poor's said Tuesday.

The rating agency said that 31% of the 141 Canadian companies it rates at the parent level had either a negative outlook or were on CreditWatch negative as of May 5. Only 5% had a positive outlook or were on CreditWatch positive while 64% had a stable outlook.

The picture is worse than a year ago when 21% had a negative outlook or were on CreditWatch negative, 72% stable and 7% positive.

Of the 11 issuers on CreditWatch negative and two issuers with a negative outlook, utilities showed the worst trend with 93% of all rated entities having a negative bias.

S&P noted that a significant number of issuers were affected by the imposition of regulated price caps for electricity in Ontario. Under the proposed plan, it is highly unlikely that any local distribution company will be able to meet financial targets that would generate financial measures necessary to sustain currently assigned ratings, S&P said.

Insurers were also a weak area with five issuers or 63% of all companies having a negative outlook or on CreditWatch negative. S&P said it has a negative outlook on the Canadian life insurance industry. Although it one of the most financially strong in the world, it faces challenges including the continued pressure for insurers to increase their ROE, negative credit market trends, pressure on wealth management businesses due to continued softness in the global equity markets, market overcapacity and risk associated with industry consolidation.

S&P did, however identify three issuers as most likely to be raised to investment grade from junk. These companies are rated BB+ and either have a positive outlook or are on CreditWatch positive. The rising starts are Moore North America Inc., Western Oil Sands and Biovail Corp.

Seven Canadian issuers - four industrials, two utilities and one financial institution - are at risk of moving in the other direction, picked out by S&P because they have BBB- ratings that either carry a negative outlook or are on CreditWatch negative.

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