SUMMARY
The year 2016 was a surprising year for many market participants. The year started with a slump in oil prices, followed by the United Kingdom (UK) exit from the European Union (Brexit), and finished with the unexpected victory of Mr. Donald Trump in the United States (US) presidential election. The global economy recovered gradually and the Brexit did not worsen the British economy as much as people think. Fuel prices increased during the year, from a trough of less than 30 US$/barrel at the beginning of 2016 to more than 50 US$/barrel at the end of 2016. The International Monetary Fund (IMF) forecast the world gross domestic product (GDP) growth for 2017 at 3.4% year-on-year (y-o-y), supported by stronger growth in the economies of the US and China.
The Thai economy improved slightly during the year due to a recovery in prices of agricultural products and a boom in the tourism sector. GDP growth in 2016 was expected to be around 3% y-o-y, increasing from 2.8% in 2015. However, small- and medium-sized enterprises still faced the challenges from slowdowns in several export markets, especially China. The Thai government tried to boost the domestic economy by speeding up the bidding processes for several infrastructure projects, launching tax rebate schemes for first-time homebuyers, and providing extra tax deductions. For 2017, tourism and government spending on infrastructure projects remain the key growth drivers.
In 2016, TRIS Rating rated and announced the ratings of 146 companies to the public. There were 17 new issuers, including one company that emerged from default. Two issuers withdrew their ratings during the year, bringing the number of outstanding issuers at the end of 2016 to stand at 143. The one-year stability rate of publicly announced ratings in 2016 (excluding new issuers, rating withdrawals, and defaults) was 82.5%, a slight drop from 83.3% in the prior year. There were 13 upgrades, eight downgrades, one default, five changes in rating outlook and one positive CreditAlert. Although the upgrades again outpaced the downgrades, the ratio of the downgrades to the upgrades increased significantly to 0.62, from 0.46 in 2015. As one company defaulted in 2016, the cumulative number of defaulters since 1994 increased to 19 (15 issuers defaulted while still having ratings with TRIS Rating; the remaining four issuers defaulted after withdrawing their ratings). However, due to the larger sample size, the one-, two-, and three-year cumulative default rates in 2016 declined slightly to 1.2%, 2.7%, and 3.9% compared with 1.3%, 2.8%, and 4.2%, respectively, in 2015. The “A” and “BBB” categories remain the largest proportion of the ratings, accounting for almost 80% of total rated issuers.
The value of outstanding long-term corporate debentures at the end of 2016 was Bt2.486 trillion, increasing by almost 20% y-o-y. Due to the availability of low-cost funds, several companies turned to use bonds as a source of financing. The portion of unrated bonds (including bonds issued by both rated and non-rated issuers) increased significantly, lifting to around 24% from 11% in 2015. Bank deposit rates remained low, prompting high net worth investors to seek higher yields despite the higher risk. The defaults of some unrated bills of exchange, starting in late 2016, continuing into the beginning of 2017, negatively impacted the bond market sentiment. However, the impact should be limited and the market should return to normal soon. TRIS Rating expects the total value of bond issuances in 2017 will be at the same level as last year. The value of new corporate bonds issued and registered with the Thai Bond Market Association (ThaiBMA) in 2016 totaled Bt772,300 milion, up 41.2% y-o-y. The banking, residential property development, commerce, food and agribusiness, and telecom sectors accounted for more than 50% of the total value of the bonds issued in 2016.
RATING ACTIONS IN 2016
There was quite a significant number of rating activities in 2016. TRIS Rating publicly announced the ratings of 146 companies, of which 17 were new clients (including one company which emerged from a default in late 2016). The number of corporate issuers was 106, while the number of financial institution (FI) issuers was 40. Only two companies withdrew their ratings during the year. There were 13 upgrades, eight downgrades, and one default. There were five changes in outlook (three downwards and one upward), and one neutral (changed from “developing” to “stable” outlook). One issuer was assigned a “Positive CreditAlert”. Seven of the upgrades were corporate issuers, distributed across a number of industry sectors. The remaining six upgrades were financial institutions. All downgrades were corporate issuers. Although the number of upgrades outpaced the number of downgrades, the downgrade to upgrade ratio increased significantly, rising from 0.08 in 2014 to 0.46 in 2015 and 0.62 in 2016. The outlooks of two issuers were revised downward and one was revised upward. The one-year stability rate of publicly announced ratings in 2016 (excluding new issuers, rating withdrawals, and defaults) was a 82.5%, slightly dropping from 83.3% last year.
• Ratings are mainly in the “A” and “BBB” categories
At the end of 2016, companies rated in the “A” and “BBB” categories remained the largest proportion of TRIS Rating’s portfolio, accounting for 37.1% and 42.7% of publicly announced ratings (excluding withdrawals and defaults), respectively. Out of 17 new issuers, 10 received “BBB” ratings, three received “A” ratings, two received “AAA” rating, and the remaining two issuers received non-investment grade ratings. The issuers rated in the lower ranges (i.e., “BB”, “B”, and “C”) have consistently comprised a small portion of the rated companies. However, the number of issuers in these categories increased over time. In 2016, six issuers were assigned ratings below the “BBB-” rating category, increasing from only two issuers in 2015. There was one issuer that emerged from default status after the issuer resumed making payments on the outstanding bills of exchange.
Despite the relatively small number of non-investment grade issuers, the portion of bonds issued by non-rated issuers rose significantly. Some investors are willing to take more risk by investing in non-rated bonds to get higher yields. The portion of unrated bonds ((including bonds issued by both rated and non-rated issuers) to total outstanding bonds increased significantly to around 24% in 2016 from 11% in 2015 and 7% in 2014.
• Cumulative default rates declined
The average cumulative default rates for each rating category were calculated to estimate the probability of default during a specified time period after a company is rated. As credit ratings should reflect the default risk, the higher the rating, the lower the probability of default should be. However, due to both the small sample size and the severe, widespread financial crisis which hit financial institutions in 1997, the default rate of the “AA” rating category is abnormally higher than the default rate of the “A” rating category.
Since there were no defaults in 2015, the one-, two-, and three-year average cumulative default rates improved in all rating categories. The one-, two-, and three-year cumulative default rates in 2016 declined slightly to 1.2%, 2.7%, and 3.9% from 1.3%, 2.8%, and 4.2% in 2015, respectively.
Corporate Rating Transitions between 1994 and 2016
A rating transition is the probability of a given issuer rating moving to another rating category within a specified time period. Generally, the ratings of investment-grade issuers are more likely to remain at the same level over a one-year period than the ratings of non-investment grade issuers. The highlighted cells in Table 5 contain the stability rates of each rating category, e.g., the stability rate is 88.5% for the “AAA” issuers.
The rating stability of the companies rated “A” and “AA” exceeded 90%. For the “A” rating category, 94.4% of the issuers in this category had their ratings maintained at this level in 2015. Around 3.4% of the “A” rated issuers were upgraded to “AA” while 2% were downgraded to “BBB”. However, the rating stability of the “AAA” rated issuers was lower than the rating stability values of the “AA” and “A” rated issuers. This was due to the relatively small sample size of issuers in the “AAA” rating category. In 2016, there were eight “AAA” rated issuers, increasing from six issuers in 2015. Two new rated issuers were assigned “AAA” ratings: Government Savings Bank (GSB) and Krungsriayudhya Card Co., Ltd.
Structured Finance Rating Transitions between 1999 and 2016
Due to the relatively few number of structured finance transactions in the Thai bond market, TRIS Rating has rated only seven transactions. However, four of them were fully guaranteed by the originators and one transaction was partially guaranteed by the originator. Thus, they are not included in this study. The two remaining transactions comprise LSPV Co., Ltd. and DAD SPV Co., Ltd. The first transaction, LSPV Co., Ltd., involved an inventory securitization. This issue was rated at “A-” in 1999 and was fully redeemed in 2002. The second transaction, DAD SPV Co., Ltd., is a securitization program backed by a 30-year lease and services payments agreement from the Treasury Department. The rating of the second transaction has been maintained at “AAA”.