Rising stars continue to shine, says Barclays Capital

Boston Scientific, Case New Holland, Georgia Pacific, Interpublic and Tyson Foods are among Barclays Capital’s top candidates for getting upgraded from junk to investment grade. The bank’s analysts demonstrate in the latest issue of their US Credit Alpha report that an upgrade to investment grade provides a short-term boost for a high yield credit’s spreads, even though the market usually has a pretty good idea in advance that an upgrade is likely to happen. This is because there is strong demand for rising stars from investors who are unable to buy high yield.

The long-run different in default rates between triple B and double B credits is small, at only 0.8% a year, says the report, citing Moody’s. But Barclays Capital calculates that the long-term spread differential between the two categories of credits is 186 basis points, which implies a much larger difference in default rates of 2.7% (assuming 30% recovery rates).