MARC Ratings today published its 2022 Annual Corporate Default and Ratings Transition Study which tracks corporate ratings assigned by the rating agency since its inception in 1996 through 2022. This is MARC Ratings’ 18th Annual Corporate Default and Ratings Transition Study.
In 2022, MARC Ratings’ corporate portfolio recorded two rating downgrades and two upgrades. When compared to 2021’s four downgrades and three upgrades, it suggests improving credit quality given the better downgrade-to-upgrade ratio of 1.0x versus 1.3x previously. With this, 2022’s annual corporate downgrade rate fell to a four-year low of 2.2% (2021: 4.8%), well below the long-term average of 5.7%. The annual corporate upgrade rate also dropped to 2.2% versus 3.6% in the preceding year and the long-term average of 4.9%.
For the first time in four years, MARC Ratings’ corporate portfolio recorded two rating defaults in 2022. As a result, the annual corporate default rate came in at 2.2%, slightly above the long-term average of 1.8%. The two defaulting issuers had been rated C — i.e., at the lowest non-default high-yield category — at the start of 2022. Their subsequent defaults unsurprisingly pushed the high-yield category’s long-term average default rate higher to 8.0% (2000-2021 average: 7.4%). Meanwhile, the long-term average default rate for the investment-grade category remained unchanged at 0.7%.
As affirmations dominated rating actions in MARC Ratings’ corporate portfolio in 2022, the ratings stability rate edged higher to 93.3% (2021: 91.6%). It is worth noting that MARC Ratings’ corporate portfolio ratings stability rate has consistently clocked above 90.0% since 2013. This is due to the dominance of investment-grade issuers with inherently higher credit strength, as opposed to high-yield issuers that suffer from rating volatility.
Meanwhile, ratings accuracy improved in 2022 as all defaults came from the C rating category. The long term (1998–2022) ratings accuracy ratio came in at 73.6%, marginally higher than the 71.0% recorded in the 1998–2021 period. This implies that MARC Ratings’ corporate portfolio ratings methodology has been consistently effective in rank ordering credit risk in predicting defaults.
We envisage corporates in MARC Ratings’ rating universe continuing predominantly on stable ratings trajectories given the high concentration of investment-grade issuers. While the balance of risks remains tilted to the downside, these issuers enjoy sufficiently strong buffers against shocks that include pressure on cash flow due to slower growth, protracted cost pressure, and tighter financing conditions.