Dow Avoids Junk Bond Fears (DOW)

The ratings agencies may have missed all the blow-ups in mortgage ratings and financial ratings ahead of The Great Recession.  But the upgrades for corporate debt ratings are still on the rise even as the economic growth slows.  Dow Chemical Co. (NYSE: DOW) just escaped the risk of heading into junk bond territory today after Standard & Poor’s Ratings Services boosted its outlook on the chemicals giant to “Positive” from “Stable.”  Normally this might not be a huge upgrade or bias change.  The difference here is that Dow Chemical has a BBB- rating by S&P, which is the lowest investment grade rating.  Had today’s review changed the outlook to “Negative,”  Dow Chemical would have likely seen its bond spreads widen out.  That would in turn raise the cost of its borrowing at a time that its balance sheet remains leveraged from the $18.4 billion acquisition of Rohm & Haas.  Long-term debt is now (as of June 30) at $18.108 billion and “Other Liabilities” and “Deferred Long Term Liability Charges” are $11.97 billion.

S&P noted its second quarter profits and higher revenues.  Despite having missed some targets, S&P expects  modest revenue growth in 2011.  Thomson Reuters’s 2010 revenue estimate is $52.56 billion versus $55.05 billion expected in 2011.  S&P is also looking for capacity improvements, pricing gains, a better product mix, and additional cost cuts.

This will bring lower borrowing costs via debt spreads at the same time that Treasury yields are extremely low.  The “Stable” rating did not imply that a downgrade was close.  This just moves the needle away from any junk bond territory as this sets S&P in the position that it can raise the debt rating to a solid “BBB.”  Shares were negative but Dow’s stock is now up 0.3% at $26.08 versus a 52-week range of $19.75 to $32.05.

JON C. OGG

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