In 2017, TRIS Rating publicly rated and announced the ratings of 172 companies or issuers. There were 29 new issuers. Four issuers withdrew their ratings during the year and one defaulted, bringing the number of outstanding issuers to 167 at the end of 2017. The one-year stability rate of publicly announced ratings in 2017 (excluding new issuers and rating withdrawals during 2017) was 87.1%, a 4.4% increase from the prior year.
Rating activities during the year included nine upgrades and nine downgrades (including one default). The ratio of downgrades to upgrades was one, increased from 0.69 in 2016. There were eight changes in rating outlook, six upwards and two downwards. Four companies were placed on CreditAlert during the year, comprising two “developing” CreditAlerts and two “negative” CreditAlerts. The two “developing” CreditAlerts resolved to “stable” outlooks within the year. Thus, only two “negative” CreditAlerts remained at the end of 2017.
As one company defaulted in 2017, the cumulative number of defaulters since 1994 has increased to 20 (16 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 2017 improved slightly to 1.16%, 2.60%, and 3.71% from 1.21%, 2.65%, and 3.90%, respectively, in 2016. The “A” and “BBB” categories remained the largest proportion of the ratings, accounting for 84% of total rated issuers.
The prospect of interest rate rise in the medium term continued to be the key driver for growth in the Thai bond market, as issuers aimed to lock in low interest rates. The value of outstanding long-term corporate debentures at the end of 2017 was Bt2.673 trillion, increasing by 7.5% year-on-year (y-o-y). The portion of non-rated bonds to total outstanding bonds remained at around 15%.
TRIS Rating expects the total value of bond issuances in 2018 will grow around 3%-5% from last year. The value of new corporate bonds issued and registered with the Thai Bond Market Association (ThaiBMA) in 2017 totaled Bt800,661 million, up 3.7% y-o-y. The value of unrated bonds accounted for 23.63% of the total bonds issued in 2017. The banking, leasing, residential property development, commerce, and construction material sectors accounted for more than 50% of the total value of the bonds issued in 2017.
The risk of investing in bills of exchange (B/E) that are mostly unrated short-term debt obligations had been highlighted by the defaults by a number of B/E issuers in 2017. Unrated debt issuers have found it increasingly difficult to raise fund in the debt market. As a result, we have seen an influx of prospective debt issuers seeking for credit rating services in 2017. The number of companies newly rated by TRIS Rating in 2017 was 29, almost doubled from the prior year. Only four companies withdrew their ratings, and one defaulted on its bonds and bank loans.
At the end of 2017, TRIS Rating publicly announced the ratings of 167 companies. The number of corporate issuers was 125, while the number of financial institution (FI) issuers was 42. There were nine upgrades and nine downgrades (including one default). Seven of the upgrades were corporate issuers, distributed across a number of industry sectors. All of the downgrades were corporate issuers. The downgrade (including default) to upgrade ratio increased significantly, rising from 0.69 in 2016 to 1 in 2017.
The one-year stability rate of publicly announced ratings in 2017 (excluding new issuers and rating withdrawals, and defaults) was 87.1%, increasing 4.4% from 2016. There were eight changes in outlook (six upwards and two downwards). There were four CreditAlerts issued during the year, two were resolved within the year and two remained at “Negative CreditAlert”.
• Ratings were mainly in the “A” and “BBB” categories
At the end of 2017, companies rated in the “A” and “BBB” categories remained the largest proportion of
TRIS Rating’s portfolio, accounting for 38.32% and 39.52% of publicly announced ratings (excluding withdrawals and defaults), respectively. The ratings of 29 new issuers were distributed in various rating categories but mainly in the “BBB” and “A” categories. There were 12 “A” ratings, 10 “BBB”, one “AA”, and one “AAA”, and the remaining five 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. Five and six issuers were assigned ratings below the “BBB-” rating category in 2017 and 2016, respectively, increasing from only two issuers in 2015.
• Cumulative default rates improved slightly
The average cumulative default rates for each rating category are calculated to estimate the probability of default during a specified time period after a company is rated. As credit ratings should reflect default risk, the higher the rating, the lower the probability of default. 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.
Due to the larger sample size and only one default in 2017, the one-, two-, and three-year average cumulative default rates improved slightly from 2016. The one-, two-, and three-year cumulative default rates in 2017 improved to 1.16%, 2.60%, and 3.71% from 1.21%, 2.65%, and 3.90% in 2016, respectively.
Corporate Rating Transitions between 1994 and 2017
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 for the “AAA” issuers is 91.18%.
The rating stability of the companies rated “A” and “AA” exceeded 90%. For the “A” rating category, 94.55% of the issuers in this category had their ratings maintained at this level in 2017. Around 3.31% of the “A” rated issuers were upgraded to “AA”, while 1.98% were downgraded to “BBB”. However, the rating stability of the “AAA” rated issuers was lower than the rating stability of the “AA” and “A” rated issuers. This was due to the relatively small sample size of issuers in the “AAA” rating category. In 2017, there were nine “AAA” rated issuers, increasing from eight issuers in 2016. The Electricity Generating Authority of Thailand (EGAT) was the only new issuer assigned the “AAA” rating.
Structured Finance Rating Transitions between 1999 and 2017
Due to the relatively small number of structured finance transactions in the Thai bond market, TRIS Rating has rated only seven transactions. However, four 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 “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 service payment agreement from the Treasury Department. The rating of the second transaction has been maintained at “AAA”.
Appendix I
1. Methodology and Definitions
1.1 Definition of Default
TRIS Rating assigns a “Default” or “D” rating to an entity or a company on the date the entity or the company misses a payment of a financial obligation, according to the terms and conditions stipulated in the borrowing agreement, irrespective of whether the financial obligation issue is rated or unrated.
1.2 Cumulative Default Rates
The default rate is the number of defaulted issuers as a percentage of the total number of issuers in each rating category. Therefore, the default rate represents the default probability of companies in each particular rating category. The cumulative default rate tends to rise over time.
The three-year cumulative default rate of any particular rating category is the probability that the companies rated in that category will default within three years. The average three-year cumulative default rate is computed by subtracting the average three-year cumulative survival rate from 100%. The average three-year cumulative survival rate is derived by multiplying the first-year survival rate by the second-year rate and the third-year rate. The survival rate for any given year is calculated by subtracting the default rate of that year from 100%.
1.3 Rating Transition Rates
The rating transition rate is the percentage of issuer rating changes from a particular rating category at the beginning of a given year to another rating category by the end of that year. To compute a one-year rating transition rate, issuers rated in each rating category at the beginning of the year are tracked for any rating changes by the end of the year.
2. Scope
2.1 Credit ratings include:
Corporate Ratings
2.1.1 For corporate ratings, the ratings used are the ratings of entities (companies or issuers) rather than ratings of the debenture issues (or debentures). The reason is to simplify the default rate calculation process, particularly in cases in which a company has issued several debentures. The different debenture issues might receive different ratings due to different priorities of claims and different expected losses in the case of default.
2.1.2 When TRIS Rating assigns a public rating to a debenture issue but the issuer rating is not publicly announced, the rating of the issuer will be assigned internally and used in the calculations. Typically, the issuer will receive the same rating as the rating of its senior unsecured debentures. One exception is when the issuer has a substantial portion of secured debts that might put the holders of senior unsecured debentures (or unsecured debts) in a disadvantageous position in the event of default. In such a case, the issuer rating might be one or two notches higher than the rating of its senior unsecured debts.
2.1.3 A debenture that is fully or partially guaranteed by a parent company or a group of guarantors may receive a rating higher than the stand-alone rating of the issuer. In this case, TRIS Rating will assign, for internal use only, a stand-alone rating to the issuer and will use this rating for the subsequent calculations.
2.1.4 The period of analysis covers ratings from the first year of TRIS Rating’s operation in 1993 until year-end 2017. The number of rated companies at the end of each year will be recorded as the static pool of the following year. For example, rated clients at the end of 1993 are recorded as the 1994 pool.
Structured Finance Ratings
2.1.5 TRIS Rating also provides the one-year rating transition rates of structured finance securities. For the ratings of structured finance securities, TRIS Rating uses the ratings of the debentures or a series of debentures issued under the same program.
2.1.6 TRIS Rating will include rating transition rates of structured finance securities, e.g., asset-backed securities (ABS), collateralized debt obligations (CDO), commercial mortgage-backed securities (CMBS), and residential mortgage-backed securities (RMBS).
2.2 Credit ratings exclude:
2.2.1 Ratings that are not publicly announced
Ratings assigned by TRIS Rating can be categorized into those that are publicly announced and those that are kept private, based on issuers’ wishes. In the case that only an issue rating is announced, TRIS Rating will include the issuer rating in the study but will not reveal the rating of that issuer to the public.
2.2.2 Selected structured finance ratings
This category includes ratings of project finance instruments, such as Khanom Electricity Generating
Co., Ltd. (KEGCO), and partially- or fully-guaranteed debentures.
2.2.3 Local government ratings
This category includes the rating of Bangkok Metropolitan Administration (BMA).
2.2.4 Ratings that are withdrawn in the specific period
A company that was initially rated by TRIS Rating in mid-1994 but withdrew its rating in 1997 will be included in the static pools for 1995 and 1996 but not for 1997.
2.2.5 Supranational and sovereign ratings
This category includes the rating of the Lao People’s Democratic Republic (Lao PDR) and Credit Guarantee and Investment Facility (CGIF).
2.3 Data Used to Calculate Default Rates
Static pools are established to represent the sample groups. In any given year, a static pool includes all entities with active ratings at the beginning of a year that remain rating clients at the end of that year. For example, there were 20 issuers rated by TRIS Rating on 1 January 1995 and all 20 issuers remained clients through 31 December 1995. The 1995 static pool comprises 20 issuers. The default record of these 20 issuers is tracked in each subsequent year.
In any given year, the pool is static because no issuer is taken out of the pool even though the issuer may subsequently withdraw its rating. For example, Dhana Siam Securities Co., Ltd. (DS) was initially rated in 1993 but withdrew its rating in 1997, shut down operations, and then defaulted on 14 August 1998. In this circumstance, DS was included in the static pool for 1994, 1995, and 1996, but not for 1997. The subsequent default of DS in 1998 was counted as a two-year default for the 1996 static pool, a three-year default for the 1995 static pool, and a four-year default for the 1994 static pool.
3. Database Limitations
The corporate debenture market in Thailand is in the developing stage. Generally, the total value of corporate bonds outstanding in 2017 accounted for about 15%-20% of gross domestic product (GDP) compared with a ratio of bank loans to GDP of almost 100%. The Thai bond market is largely dominated by debt instruments issued by the government, the Bank of Thailand (BOT), and state enterprises. These debt instruments are not required by law to have credit ratings. As a result, the number of TRIS Rating’s clients is considerably less than the numbers of clients of the long-established international rating agencies.
One problem with the limited sample size is that it exaggerates the default rate statistics, as the number of observations in each rating category is used as the denominator to calculate the default rate. Thus, the fewer the observations in any particular rating category, the higher the default rate.
4. Impact of the Financial Crisis on the Cumulative Default Rates
The financial crisis in 1997 and 1998 forced the government to shift to a managed float exchange rate system. This action raised the value of foreign denominated debts in terms of local currency and, thus, the credit risk of many financial and non-financial companies. As shown in Table 3, the annual default rates of the companies rated by TRIS Rating in 1997 and 1998 were unusually high at 35% and 30%, respectively. The annual default rate of 33% in the “AA” rating category in 1997 was the result of a default by a financial institution that was ordered by the BOT to cease operations. The default rate is thus overstated because of the relatively small number of rated issuers in that particular rating category. In 1997, there were only three companies in the “AA” rating category and 10 companies rated “BBB”. The default of one company rated “AA” and five companies rated “BBB” made the annual default rates equal to 33% and 50% in these two rating categories in 1997. Moreover, five out of six defaulting issuers in 1997 were finance companies that defaulted after they were ordered to stop operations by the BOT.
Appendix II