MARC today published its 2016 Annual Corporate Default and Rating Transitions Study which tracks the history of corporate ratings assigned by the rating agency from inception in 1996 through to December 31, 2016. This is MARC’s 12th annual Corporate Default and Rating Transitions Study; the first study was published in 2006.
MARC’s rating stability rose to 93.9% in 2016, up from 90.8% in 2015, lifting its long-term average rating stability to 85.1%. Improved ratings stability was recorded in spite of considerable external and domestic headwinds faced by the economy in 2016, including the protracted low oil price environment and weak global demand. Apart from improvement in domestic corporate earnings recorded in the fourth quarter of 2016 compared to a year earlier, MARC also noted a moderation in corporate borrowings growth. Both trends contributed to fewer negative rating actions in MARC’s rated universe.
MARC’s rated universe of issuers is primarily investment grade; of this universe, 96.4% maintained their ratings throughout 2016. Adjusting for withdrawn issuers, the stability rates for “AAA”, “AA” and “A” rated issuers were 98.6%, 94.0% and 88.5% respectively, demonstrating a strong positive relationship between the ratings of investment grade credits and long-run rating stability. In 2016, MARC downgraded four issuers as compared to six in 2015. The agency did not upgrade any issuers in 2016 and 2015. Of the four downgrades in 2016, two issuers experienced a one-notch rating downgrade while the remaining two experienced two-notch downward rating adjustments. The absence of severe negative rating actions or rating cliffs underscores continuing timely rating action on the part of MARC. MARC’s long-term accuracy ratio (covering the period 1998-2016) rose to 67.3% from 66.9%, suggesting an improvement in the effectiveness of MARC’s ratings as a measure of relative default risk.
Similar to 2015, no defaults were recorded from MARC’s rated universe in 2016. As a result, the long-term annual corporate default rate of the agency’s rated universe fell marginally to 2.1%, translating to long-term default rates of 0.9% and 9.0% for investment grade and high yield credits, respectively.
Against a baseline scenario of moderate domestic economic growth, manageable inflation and accommodative monetary policy stance, MARC expects the corporates in its rated universe to largely maintain credit-supportive corporate earnings and financial metrics. The predominance of investment-grade credits and stable outlooks in MARC’s rated universe suggest a sideways trend in credit quality. This expectation is also conditioned upon rated corporates remaining committed to disciplined capital investment and acquisition activity, as well as sound balance sheet management.
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