The credit crisis continued to exact a toll on U.S. corporate credit quality in the second quarter of 2008, according to Fitch Ratings. The par value of U.S. corporate bond downgrades totaled $115.4 billion, bringing the total value of bonds affected by downgrades over the past year to $423 billion, more than the prior two years combined.

Par downgrades resulting from troubles in the U.S. financial sector declined in the second quarter 2008 from levels recorded in the prior three quarters, but credit erosion picked up some momentum on the industrial side as high energy costs and lackluster consumer spending continued to affect profitability in some sectors.

"While downgrades affected 3.1% of U.S. corporate bond volume, upgrades remained modest at $29.1 billion and affected 0.8% of outstanding bonds," said Eric Rosenthal, Director of Fitch Credit Market Research.

New issue volume was exceptionally strong in the second quarter, totaling $275.5 billion, the highest quarterly level in recent years. Issuance advanced 53% from the previous quarter and in the aggregate rose across financial and industrial sectors, as well as across high grade and high yield. Issuance patterns among industrials, however, tended to follow economic themes, with defensive sectors registering the biggest gains.

With loan market activity still weak and bond issuance robust, the par value of newly minted bonds actually topped the par value of newly originated loans in both the second quarter and the entire first half of the year. In contrast, in 2006 and 2007, loan issuance topped bond issuance by a margin of 2 to 1.

"The ability of the corporate bond market to satisfy refinancing and other capital needs will continue to be critical this year as other pockets of the debt markets such as syndicated loans and structured finance continue to languish," said Mariarosa Verde, Managing Director of Fitch Credit Market Research.

In the first half of this year, LPC/Reuters reported syndicated loan volume of $411.9 billion while bond market volume stood at $455.0 billion. Total bond issuance in the first half of the year topped bond refinancing needs by a margin of 1.8 to 1.

Investment grade financials contributed $150.4 billion to new issue volume in the second quarter, up from $106.4 billion in the first quarter, while investment-grade industrials tallied $91.7 billion, up from $63.6 billion in the first quarter. The speculative-grade sector also showed some vigor with issuance rebounding to $33.3 billion from just $9.5 billion in the first quarter.

The par value of U.S. corporate bonds scheduled to mature for the remainder of 2008 stood at $308.1 billion at the end of June, compared with $194.9 billion scheduled to mature over the same time horizon one year ago. The majority of this volume (97%) consists of investment-grade issues ($297.4 billion), with the rest speculative grade. Of the high grade paper slated to mature, most is concentrated in banking and finance ($224.6 billion).