Negative Watch

Definition of ‘negative’

The negative watch is a status that credit rating agencies (Standard and Poor’s, Moody’s and Fitch) give a company when deciding to lower the credit rating of the company. After the rating Agency puts a company on the negative, there is a 50% chance that the rating company will officially drop in the next three months.

Breaking down the ‘negative’

When the rating Agency downgraded the credit rating of the company, it is a signal that companies are likely to lag compared to its peers. Having your credit rating downgraded is a big blow for business because it will have to pay higher interest rates to attract funds. This is in addition to the negative reputation it receives in the public eye. It downgraded the credit rating means that the company is not solvent enough to repay its debts. For example, the company might not have sufficient free cash flow (SDS) to meet long-term commitments, otherwise you can be a big problem from the point of view of their position in the industry and the ability to acquire new contracts, or customer retention and guarantee future income.

The rating Agency also can place the whole country on the negative in addition to companies. For example, Fitch announced that rising US budget deficit could jeopardize the country’s credit rating. This would put the country in a difficult position, as in the United States is used to produce pure (highest rating). In 2011, Standard and Poor’s did downgrade U.S. debt on the heels of the financial crisis. In April 2018 Fitch forecasts that the US budget deficit could hit 5% of the national GDP for the year, and rise to 6% by the end of 2019. The model also assumes that these levels of debt may increase to 129% in 2027. If this pace continues, Fitch may downgrade American sovereign creditworthiness from stable to negative. This is a negative signal of an impending downgrade.

Negative watch premium and default

Companies and countries placed on negative watch could end up paying by default, the access to capital for growth. Default Premium is the additional amount a borrower must compensate the lender for taking the risk of default. Investors often measure the premium for default, as the profitability of the issue exceeds the yield on government bonds of similar coupon and maturity. For example, if a company issues 10-year bonds, the investor can compare that with U.S. Treasury bonds with 10 years maturity.

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