Posted Date : 16 Mar 2010
Malaysian Rating Corporation Berhad (MARC) has released its 2009 Annual Corporate Default and Ratings Transition Study. The report discusses rating trends in 2009, default activity and the outlook for 2010.
The agency’s rating universe remained relatively stable although there was a marked absence of positive credit actions and a higher number of defaults, downgrades and negative outlooks in 2009. Approximately 12% of MARC’s rated long-term corporate universe of 107 issuers migrated beginning January 2009 and ending December 2009, while the ratings of the remaining 88% were affirmed. Corporate rating migrations over the period studied were largely negative, reflecting the impact of full-blown recessions in major countries on the domestic economy.
An elevated annual corporate default rate of 5.6% was recorded in 2009, up from 1.8% in 2008. The deterioration in credit quality was limited to issuers at the lower end of the investment grade and non-investment grade rating bands given their higher vulnerability to financial distress.
Although the domestic economy was seemingly insulated from the subprime crisis when it first emerged in the US, the contraction in developed countries has affected Malaysia. The difficult operating environment also sent corporate profitability lower where the estimated median operating margin of Bursa Malaysia-listed companies declined from 8.1% in 2008 to 5.5% in 2009.
The trend of downgrades surpassing upgrades that occurred globally among the rating agencies was also mirrored in MARC’s corporate rating universe, sending the default probability higher in 2009. The ratio of corporate downgrades to upgrades, which was seen at 1.3:1.0 in 2008, rose to 3.7:1.0 in 2009, reflecting a challenging operating environment among corporations. High yield issuers which are more vulnerable in a stress environment contributed majority of downgrades announced. Meanwhile, from a broad sectoral perspective, the Industrial Products sector, which demonstrates a fairly high degree of sensitivity to the economic environment, contributed to 45.5% of the total issuer downgrades in 2009.
Amidst the deep global recession, there were eight corporate fallen angels (formerly investment grade issuers who have been downgraded to BBB and lower) in 2009 compared to four fallen angels recorded in the previous year. This translates to a fallen angel rate of 7.5%, up from 3.7% in 2008 in MARC’s rating universe. Out of eight corporate fallen angels, three remain in MARC’s pool of distressed issuers going into 2010.
Over the 1998-2009 period, the one year cumulative issuer weighted average default rate stands at 2.5% for the corporate universe with high grade and high yield default rates of 1.6% and 12.5% respectively. The relatively high reported number also reflects sample size limitations. Furthermore, the effect of a limited sample size became more pronounced at the end of 2009 with the withdrawal of another 25 issuers from the 2010 static pool, leaving the pool with only 90 issuers.
Going into 2010, the agency expects the tail risk from corporate defaults to remain, mainly contributed by the 2009 surviving fallen angels. On a positive note, however, with the recovery taking hold in the economy, corporate credit quality should see improvement.
MARC’s base case 2010 annual corporate default rate is projected at 3.3%, premised on the agency’s view of continuous improvement in economic activity going forward as reflected in MARC’s recently revised GDP growth forecast of 5.2% for 2010.
For a copy of MARC’s “2009 Annual Corporate Default and Rating Transition Study”, please visit MARC’s website at www.marc.com.my
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