MARC today released its 2012 Annual Corporate Default and Rating Transitions Study, which tabulates defaults and changes in ratings for the issuers rated by MARC over the years.
The study reviews the bond market in 2012, which marked a record year for private debt issuance. Corporate bond issues rose to RM124.6 billion in 2012 compared to RM55 billion in 2011, supported in particular by sharply higher issuance of government guaranteed non-rated bonds. For 2013, MARC expects gross private debt issuance to moderate to RM75-90 billion, with the implementation of projects under the Economic Transformation Programme as a major catalyst in sustaining issuance.
For the public sector, MARC sees gross issuance levels of about RM90-95 billion, as the government tempers its budget deficit to 4.0% of GDP. This level of issuance is well supported by ample domestic liquidity and sustained foreign investor interest. The high level of foreign ownership of MGS is not expected to be destabilising, as MARC estimates that the bulk of these holdings are from real money investors, foreign central banks and sovereign wealth funds, which are expected to be “sticky”.
Turning to corporate defaults and rating transitions, MARC notes only one default in 2012 within its rating universe compared to two defaults in 2011. However, the rating downgrade-to-upgrade ratio increased, with 10 downgrades (2011: eight) and one upgrade (2011: two) occurring during the year, with all but one downgrade recording a one-notch rating cut. On the other hand, rating stability remained strong with 84% of issuers in the study retaining their rating classification throughout the year (2011: 84.6%).
Over the long term, issuers in MARC’s rating universe exhibited an overall default rate of 1.9% with high-grade issuers defaulting only 1.5% of the time and high-yield issuers defaulting 6.3% of the time. Approximately 81% of issuers are in the high-grade category, with ratings of A and above. The sector most susceptible to default and downgrades were issuers in the industrial products sector, while the financial sector was the least susceptible.
In addition, as expected, MARC finds that higher grade credits tended to default less and have higher rating stability. The time to default of an AA-rated issue from the date of initial rating was 6.4 years, compared with 3.8 years for a BBB-rated issue. Defaults and rating downgrades are also highly correlated with the general health of the economy. However, these last results should be treated with some caution due to the small sample size of defaults under MARC’s rating universe.
Overall, the study amply supports and underscores the vision of MARC as a “provider of trusted insights on risk”. The high level of rating accuracy and stability demonstrate the credibility of MARC’s issuer ratings as a guide to investors of the credit risk of issuers, which help set the foundation for the growth and development of Malaysia’s capital markets.
For a copy of MARC’s 2012 Annual Corporate Default and Rating Transitions Study, please click here.