Posted Date : 01 Apr 2015
MARC today published its 2014 Annual Corporate Default and Rating Transitions Study which tabulates defaults and changes in ratings of issuers rated by MARC over the years.
The year 2014 saw the divergence of monetary policy between the United States and most of the rest of the world. As the US Federal Reserve tapered its monthly bond-buying programme and ended it in October, others could not take their feet off the monetary accelerator due to weak growth prospects.
On the domestic front, low interest rates and an influx of foreign liquidity in the aftermath of the Global Financial Crisis (GFC) narrowed corporate bond spreads as yield-hungry investors increased their demand and risk appetite for lower-rated bonds. Consequently, Malaysian corporates (particularly those from the non-financial sector) raised their leverage positions.
A total of 60 issuers (excluding structured finance and short-term paper issuers) were in MARC’s rating universe at the beginning of 2014, with 51 issuers rated in the high-grade segment while the remaining were high-yield issuers.
The dust from the GFC continued to cloud business sentiment in 2014. As before, the industrial products sector was the hardest hit with the highest downgrade rate, followed by the trading & services as well as property sectors. Four ratings were downgraded in the year (five in 2013), a reflection of the Malaysian economy’s improved growth. And just like in 2013, there was one default and no upgrade action in 2014, making it the year with the least rating migration since 2002.
As such, MARC’s downgrade rate fell slightly to 6.7% in 2014 (2013: 7.8%), just a hair’s breadth above the long-term average rate of 6.6%. Meanwhile, MARC’s rating stability improved to 91.7% (2013: 90.6%), the highest since 2002 which exceeds even the 2000-2014 average of 83.9%. MARC’s one-year accuracy ratio also improved, rising to 98.3% in 2014 from 63.5% in 2013.
As expected, an analysis of MARC’s rating migrations showed a positive relationship between rating and stability over the long term (1998 – 2014). For instance, after adjusting for withdrawn issuers, high-grade issuers displayed a higher level of rating stability (93.5%) compared with high-yield issuers (77.4%). Among high-grade issuers, the AAA-rated category displayed greater rating stability of 98.8% (AA-rated category: 93.0%), indicating the relative stability of these rating categories.
Going forward, MARC envisages negative rating activities to continue outpacing positive ones in view of rising leverage among corporations, in particular those with substantial foreign currency debt. Factors that could limit positive rating actions include continuing ringgit vulnerability and potentially higher financing costs. We, however, expect corporate defaults to stay low in 2015.
For a full copy of this report, please click here.