“The agency’s rating universe remained relatively stable with a lower number of issuer defaults as a result of the economy’s return to growth,” said Mohd Razlan Mohamed, MARC’s CEO. He further added that the pressure on domestic credit quality had eased with revenue growth, in addition to improved operating margins and corporate liquidity.

 

Approximately 20% of MARC’s rated long-term corporate universe of 115 issuers migrated during the one year period beginning January 2010 and ending December 2010, while the
ratings of the remaining 80% were affirmed. Corporate rating migrations over the period studied indicated an improvement in corporate credit quality over the previous year. There were three
issuer defaults throughout the year, a decline of 50% from 2009’s six issuer defaults.

 

The annual corporate default rate in 2010 came in at 2.6% in 2010 compared to 4.5% recorded in 2009, with three issuers from MARC’s long-term corporate rating universe missing
payments on their respective obligations. The number is comparable to the long-run issuer weighted average default rate of 2.6% estimated over the last 14 years, according to the study.

 

The ratio of corporate downgrades to upgrades, declined to 2.3:1.0 in 2010 from 2.7:1.0 in 2009, reflecting the improved operating environment and corporate credit quality. MARC
upgraded the debt ratings of six issuers over the period studied and downgraded the debt ratings of 14 issuers, resulting in upgrade and downgrade rates of 5.2% (2009: 2.2%) and 12.2% (2009: 6.0%)
respectively.

 

The rating agency said that the increase in the number of downgraded issuers did not signal a general decline in creditworthiness as the negative rating actions were mostly due to
industry-specific developments. Half of the downgrades in 2010 came from the Selangor water sector-related issuers whose cash flows were negatively affected by the standstill in the water
industry restructuring process. Excluding the Selangor water sector-related issuers, the downgrade rate stands at 6.1%.

 

Amidst the rebound in the global economy, the number of corporate fallen angels (formerly investment grade issuers who have been downgraded to BBB and lower) fell to three issuers from
ten issuers recorded in 2009, translating to a fallen angel rate of 2.6%, compared to 7.5% in the previous year.

 

Going into 2011, MARC expects the corporate default rate to decline below the long-run issuer-weighted average of 2.6% on continuous improvement in the level of economic activity which
should further translate to an easing operating environment among corporations. Additionally, the agency is also of the view that the return of confidence among investors seen post-global
financial crisis should translate to higher demand for relatively riskier asset classes, including corporate bonds.  

 

MARC’s base case 2011 annual corporate default rate is projected at 1.9%, premised on the agency’s view of continuous improvement in economic activity going forward as reflected
in MARC’s gross domestic product (GDP) growth forecast of 5.3% for 2011.  

 

For a copy of MARC’s 2010 corporate default and transition study, please visit MARC’s website at 
www.marc.com.my.

 

Contacts: 
Wan Murezani Mohamad, +603-2082 2232 / wan@marc.com.my, 
Thong Chui Yee, +603-2082 2257 / chuiyee@marc.com.my.