By Jonathan Stempel
NEW YORK, Oct 28 (Reuters) - The credit quality of Standard & Poor's 500 companies is falling, and that may bode ill for investors counting on a quick recovery for the benchmark, according to the company that creates the index.
S&P said on Monday that of the 434 companies in the index that carry bond ratings, 114 have "negative" outlooks, which means their ratings are more likely to fall than rise. Another 25 are on "review" for a downgrade, which means they may be downgraded in the next three months.
In contrast, just 16 S&P 500 companies have positive outlooks and just three are on review for an upgrade.
The negative rating trends reflect a combination of last decade's willingness of companies to take on debt to foster growth, this decade's slowing economy and decreased consumer and business demand for products and services, and technical market changes. The S&P 500 closed Monday nearly 43 percent below its all-time high of 1553.11.
"Investors right now have heightened credit quality concerns," and falling ratings are boosting borrowing costs, which can hurt earnings. said Diane Vazza, S&P's head of global fixed-income research, in an interview.
"We are late in the credit cycle, which has been on a downward trend since late 1998," she continued. "There have also been structural changes over the past several years such as utility deregulation, the increased speed with which capital markets open and shut, and questionable accounting and trading practices."
S&P rates companies on a 22-notch scale from "AAA" to "D." The average rating of the 434 companies is a high "BBB-plus" rating, a low investment grade. The number of companies rated investment-grade is 375, while 59 carry "junk" ratings.
Among well-known U.S. companies with a "negative" outlook or on review for downgrade are No. 1 media company AOL Time Warner Inc. , No. 2 automaker Ford Motor Co. -- despite its downgrade last week -- and No. 4 retailer Sears Roebuck & Co. .
Just eight S&P 500 companies are rated "AAA": insurer American International Group Inc. ; payroll services giant Automatic Data Processing Inc. ; oil giant Exxon Mobil Corp. ; conglomerate General Electric Co. ; drug giants Johnson & Johnson , Merck & Co. and Pfizer Inc. ; and package deliverer United Parcel Service Inc. .
Vazza said investors should not use credit ratings standing alone as a direct predictor of stock prices. Still, she said stock investors might use a company's "credit rating, history and clearly its rating outlook when assessing its stock, as additional analytical research tools."