MARC today published its 2015 Annual Corporate Default and Rating Transitions Study which tabulates defaults and changes in ratings of issuers rated by MARC over the years.
The global economy continues to be weighed by decelerating growth in emerging economies, particularly China, which to some extent is exerting downward pressure on commodity prices and denting the prospects of commodity-dependent economies. Policy divergence remained in play with the US Federal Reserve embarking on a normalising rate cycle while most of the rest of the world was easing aggressively in an effort to revive their stalling economies and fight deflation.
In line with challenging business conditions amid continuing global headwinds and slower economic growth, corporates in general have reported weaker earnings. Total borrowings were also on the rise, partly attributed to the low interest rate environment post-Global Financial Crisis. As a result, corporates’ balance sheets were under stress from declined earnings and higher debt levels. These factors have weighed on corporate credit profiles and triggered negative rating actions in MARC’s rating universe.
Nevertheless, despite a more challenging backdrop, MARC’s rating stability remains strong at 90.6% in 2015, remaining above its long-term average (2000 – 2015) of 84.3%. By issuer count, a total of 58 issuers held on to their existing ratings from 2014 to 2015. The high rating stability can be attributed to the high concentration of investment grade issuers in MARC’s rating universe. MARC’s corporate ratings also demonstrated a positive relationship between the rating and its stability over the long term (1998-2015) for high-grade issuers. After adjusting for withdrawn issuers, the high-grade category continues to show higher stability with rating stability for AAA, AA and A standing at 98.5%, 93.7% and 88.5% respectively.
MARC recorded six rating downgrades in 2015 (2014: four downgrades) and no rating upgrades for its publicly rated credits and non-publicly disclosed rated credits. These include rated entities whose ratings were enhanced through credit wraps. Our public-rated universe experienced three rating downgrades, while the remaining three were non-publicly disclosed standalone ratings. It is worth noting that all but one downgrade were single-notch. Across sectors, the infrastructure & utilities and trading & services sectors each recorded two downgrades, while the industrial products and property sectors each recorded one downgrade. Since the year 2000, the industrial products sector has experienced relatively higher negative rating migrations compared to other sectors on account of limited business diversification on the part of issuers who are generally mid-sized with modest shareholder strength, and are therefore generally more vulnerable to economic cycles.
There were no defaulted issuers during the year under review. That brought the long-term annual corporate default rate for the year 2000 to 2015 marginally lower to 2.3% (2014: 2.4%), with high-grade and high-yield long-term default rates of 1.0% and 9.0% respectively. Going forward, MARC does not rule out the possibility that the current trend of negative rating actions dominating rating migrations in MARC’s universe will prevail as challenging economic conditions continue to exert pressure on corporates’ cash flow generating ability. Issuers belonging to the oil and gas-related, automotive and property sectors are likely to face heightened financial pressures over the near term as a result of margin compression, lower sales, low commodity prices and inventory build-up. These factors are likely to affect their debt servicing capacity and ability to discharge other fixed payment obligations in general.
Nevertheless, maintaining balance sheet discipline and prudent working capital management will be key to withstanding a more challenging operating environment. As most issuers are concentrated in the investment grade category, default are expected to remain low in 2016.
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