In This Issue: The Leveraging Of America: A Rising Tide Of Riskier Credit: You don't have to look too far to see that credit risk has been rising over the past few years. LBOs, dividend recaps, more aggressive financial policies, investors hungry for yield, and cheap money have made the credit landscape more challenging than ever before. Declining credit quality is nothing new, as credit ratings have been falling for more than two decades, but over the past three years, the slide has accelerated. Flashpoints For U.S. Corporate Health Care Credit Quality: In the U.S. Corporate Health Care sector, the growing demand for life-sustaining goods and services from an aging population is fairly predictable. In terms of credit, however, it's quite a different story. Currently, credit ratings on U.S. health care companies carry about three times as many negative outlooks as positive ones. Credit Trends: Cheap Money For Borrowers, Higher Risks For Investors: The spread between both investment- and speculative-grade bonds and U.S. Treasuries has shrunk to record lows. Inflows from foreign investors and alternative investor demand have compressed spread levels and provided immense market liquidity. With spreads compressed across all rating categories, the cost of maintaining an investment-grade rating no longer affords firms a significant cost advantage. Food Vs. Fuel: In An Era Of High Oil Prices, Who Gets The Corn?: Over the past year, the dividing line between the food and energy sectors of the U.S. economy has blurred considerably. Standard & Poor's expects another active year in the agribusiness sector as the drumbeat continues for greater bioenergy initiatives, especially ethanol and biodiesel. The overall credit quality of the rated U.S. agribusiness, seed, fertilizer, farm equipment, beverage, and packaged food companies should remain relatively stable in the near term. Seed, Fertilizer, And Farm Equipment Companies Will Reap Stable Credit Quality As Demand For Corn Rises: With the high price of crude oil and surging interest in renewable energy sources, Standard & Poor's is seeing a demand for some crops that goes beyond the need to feed people and livestock. The push for gasoline additives means larger plantings and new agricultural initiatives that are likely to have a measurable impact on the prospects of companies that produce fertilizer, seed, and farm equipment. As Ethanol Demand Drives Up Corn Prices, Food And Nonalcoholic Beverage Companies Get A Taste Of Higher Costs: During the past 18 to 24 months, higher packaging, energy, and raw ingredient costs-especially the cost of corn- have pressured the operating performance of packaged food and soft drink companies. The rising price of this commodity-off of its recent highs of more than $4 per bushel, but still well above historical levels-is a result of corn's increasing use in ethanol. U.S. Ethanol Production: An Uncertain Future: The truth, of course, is that ethanol doesn't come from corn. Rather, it comes from ethanol manufacturing plants. As the demand for this corn-derived gasoline additive has risen, the ability to satisfy it has fallen on roughly 120 U.S. ethanol plants. Although there are a handful of large rated ethanol producers, most are small, unrated, private, or cooperatively owned facilities. How Brazil Took The Lead In Ethanol: While the U.S. is just beginning its stated journey toward energy independence, Brazilian companies have been investing billions of dollars in sugar mills to boost ethanol production. Countries looking to emulate Brazil's success with ethanol would do well to understand the strides the nation has made-and the pitfalls it has encountered. | 
