Default Statistics and Rating Transition Rates in 2018

SUMMARY

In 2018, TRIS Rating publicly rated and announced the ratings of 209 issuers. The issuers can be categorized as 155 non-financial companies, 46 financial institutions, and four structured finance issuers. The four remaining issuers were one sovereign, one local government, and two supranational organizations.

The corporate default study included 196 issuers, covering 150 non-financial companies and 46 financial institutions (including four issuers that we assigned shadow ratings). In this study, we excluded five issuers that issued only guaranteed bonds and we did not assign shadow ratings to these issuers. There were 29 new issuers (including one issuer that we assigned a shadow rating). Three issuers withdrew their ratings during the year (excluding one issuer that defaulted in 2017 and withdrew the rating in 2018). There was one default in 2018, bringing down the number of outstanding corporate issuers to 192 at the end of 2018. The one-year stability rate of publicly announced ratings in 2018 (excluding new issuers and rating withdrawals during 2018) was 87.2%, a 0.1% increase from the prior year.

Rating activities during the year included eight upgrades and 13 downgrades (including one default). The ratio of downgrades to upgrades was 1.63, up from 1 in 2017. There were 15 changes in rating outlook, six upwards, eight downwards, and one developing.

Four companies were placed on CreditAlert during the year, comprising three “developing” and one “negative” CreditAlerts. One “developing” and one “negative” CreditAlerts were resolved to “stable” outlooks during the year. One “developing” CreditAlert was resolved to a “developing” outlook. Thus, only one “developing” CreditAlert remained at the end of 2018.

As one company defaulted in 2018, the cumulative number of defaulters since 1994 has increased to 21 (17 issuers defaulted while still having ratings with TRIS Rating; the remaining four issuers defaulted after withdrawing their ratings). The one-, two-, and three-year cumulative default rates during 1994-2018 improved slightly to 1.11%, 2.33%, and 3.41% from 1.16%, 2.60%, and 3.71%, respectively, during 1994-2017.

The size of the Thai bond market is growing over time. The value of outstanding long-term corporate debentures at the end of 2018 was Bt3.03 trillion, increasing by 13.42% year-on-year (y-o-y). The portion of non-rated bonds to total outstanding bonds decreased to around 13.73% from 15.05% in 2017.

TRIS Rating expects the total amount of bond issuances in 2019 will grow by 1%-3% from last year. In 2018, the amount of new corporate bonds issued and registered with the Thai Bond Market Association (ThaiBMA) was Bt837,549 million, up 4.61% y-o-y. The amount of unrated bonds accounted for 18.60% of the total bonds issued in 2018, declining from 23.63% in 2017. Issuers in four industries, financial institutions, real estate developers, real estate investment trusts (REIT), and food and agribusiness, issued for almost 60% of total bond issuances in 2018.

CORPORATE DEFAULT STUDY

RATING ACTIONS IN 2018

The corporate default study was based on 196 issuers, including 150 non-financial companies and 46 financial institutions. There were eight upgrades and 13 downgrades (including one default). Five of the upgrades were corporate issuers, distributed across a number of industry sectors. Eleven of the downgrades were corporate issuers. The downgrade (including default) to upgrade ratio increased to 1.63 in 2018 from 1 in 2017.

The one-year stability rate of publicly announced ratings in 2018 (excluding new issuers, rating withdrawals, and defaults) was 87.2%, increasing 0.1% from 2017. There were 15 changes in outlook (six upwards, eight downwards, and one developing). There were four CreditAlerts issued during the year. Three were resolved within the year and one remained a “developing” CreditAlert.

• Ratings were mainly in the “A” and “BBB” categories

At the end of 2018, companies rated in the “A” and “BBB” categories remained the largest proportion of

TRIS Rating’s portfolio, accounting for 38.02% and 40.10% of publicly announced ratings (excluding withdrawals and defaults), respectively. The ratings of 29 new issuers were distributed across several rating categories but mainly in the “BBB” and “A” categories. There were two “BB”, 15 “BBB”, 10 “A”, and two “AA” 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 has increased over time. At the end of 2018, there were 13 issuers rated below “BBB-”, accounting for 6.77% of publicly announced ratings (excluding withdrawals and defaults).

• Cumulative default rates improved slightly

We calculated the average cumulative default rates for each rating category to estimate the probability of default during a specified time period after a company was rated. Due to an increase in the sample size, the one-, two-, and three-year average cumulative default rates during 1994-2018 improved slightly during 1994-2017. The one-, two-, and three-year cumulative default rates during 1994-2018 improved to 1.11%, 2.33%, and 3.41% from 1.16%, 2.60%, and 3.71% during 1994-2017, respectively.

Corporate Rating Transitions (1994-2018)

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. For example, the stability rate for the “AAA” issuers is 93.02%.

The rating stability of the companies rated “BBB”, “A”, and “AA” exceeded 90%. For the “A” rating category, 94.76% of the issuers in this category had their ratings maintained at this level in 2018. Around 3.29% of the “A” rated issuers were upgraded to “AA”, while 1.80% were downgraded to “BBB”. However, the rating stability of the “AAA” and “AA” rated issuers were lower than the rating stability of the “A” rated issuers. This was due to the relatively small sample size of issuers in both rating categories. In 2018, there were 11 “AAA” and 18 “AA” rated issuers, increasing from nine issuers and 17 issuers, respectively, in 2017. DBS Vickers Securities (Thailand) Co., Ltd. and Mega International Commercial Bank PLC were new issuers assigned “AAA” ratings in 2018.

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.

One-Year Relative Corporate Ratings Performance

To measure the relative accuracy of ratings assigned by TRIS Rating, we focus on the relation between credit ratings (ranked from the highest rating, “AAA”, to the lowest, “C”) and the default rates of issuers in each rating category. Normally, a higher-rated entity should have a lower default probability relative to a lower-rated entity.

TRIS Rating measures ratings performance or ratings accuracy by plotting the cumulative proportion of a universe of rated issuers (ordered from the lowest rating, “C”, to the highest rating, “AAA”) against the cumulative proportion of defaulted issuers across all rating categories, which are also ranked from the lowest to the highest rating. This curve is called the cumulative accuracy profile (CAP) curve, also known as the Lorenz curve.

Chart 4 depicts the one-year relative corporate ratings performance, based on 1,539 observations of issuers rated by TRIS Rating during 1994-2018. The upper curve (as represented by the left end of the horizontal axis), or the ideal curve, is derived from the assumption that defaults occur only among the lowest-rated entities. The middle curve, or the CAP curve, is derived from the actual default rate of each rating category, drawing from the 1,539 observations of issuers rated by TRIS Rating during 1994-2018. The lower curve is a random curve. The random curve assumes that the assigned ratings have no relation with the default rates. Therefore, the cumulative percentage share of defaulters grows at the same rate as the cumulative percentage share of rated issuers. Generally, the closer the CAP curve resembles the ideal curve, the greater the accuracy of the rating model.

The CAP curve is based to calculate the accuracy ratio or the Gini coefficient. The closer the accuracy ratio is to one, the greater rating accuracy it reflects of the rating model. The formula used to calculate the accuracy ratio is:

Accuracy ratio = area between CAP curve and random curve (Y)/area between ideal curve and random curve (X+Y)

If the credit ratings have no correlation with the defaulting cohorts, the CAP will resemble the random curve and the accuracy ratio will be equal to zero (0). On the contrary, if all defaults are concentrated among the lowest-rated issuers, the CAP curve will resemble the ideal curve and the accuracy ratio should be equal or close to one (1). If the accuracy ratio equals to one the assigned ratings are perfectly accurate.

From the 1,539 observations of issuers rated by TRIS Rating during 1994-2018, there were 17 observations in which an issuer defaulted in a one-year observation period. The default rate was 1.10%, a slight decline from 1.16% during 1994-2017. From the CAP curve, issuers rated below the “BBB+” category represent 42.3% of the overall observations. However, 88.2% of all defaulters (15 out of 17 defaulters) were in this group.

The accuracy ratio, calculated from the observations during 1994-2018, is equal to 0.58, slightly higher than 0.56 obtained in the previous assessment covering 1994-2017. The relatively low accuracy ratios are attributed to two main reasons: the small number of observations and the financial crisis faced by all issuers in 1997. There were 12 defaults during 1997-2000 and one defaulter was rated at “AA-”.

If we use the observations during the last 10 years (2008-2018), the accuracy ratio improves to 0.75. There were 1,059 observations in this cohort and only three observations defaulted during this period. This implies an overall default rate of 0.28%, leaving the remaining 99.72% of the observations with no defaults.

Appendix I

1. Methodology and Definitions

1.1 Definition of Default

TRIS Rating assigns a “Default (D)” or “Selective Default (SD)” 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 the issuer rating changing 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 calendar 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 In the case that the issuer wants to publicly announce only its issue rating, TRIS Rating may also assign a shadow rating to the issuer. The shadow rating is assigned internally and used in this default study. 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 ratings of its senior unsecured debts. If a debenture that is fully or partially guaranteed by a parent company or a group of guarantors, the issue rating is usually higher than the stand-alone rating of the issuer. In this case, TRIS Rating will assign, for internal use only, a shadow rating to the issuer and will use this rating for the subsequent calculations.

2.1.3 The period of analysis covers ratings from the first year of TRIS Rating’s operation in 1993 until year-end 2018. The number of rated companies at the end of each year will be recorded as the static pool for the following year. For example, rated clients at the end of 1993 are recorded as the 1994 pool.

Structured Finance Ratings

2.1.4 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.

2.1.5 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 where 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 had remained clients through 31 December 1995. The 1995 static pool comprised 20 issuers. The default records of these 20 issuers are 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. 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, TRIS Rating has considerably fewer clients than the long-established international rating agencies.

One problem with the limited sample size is that it exaggerates the default rate statistics because 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. The credit risks of many financial and non-financial companies rose significantly as a result. 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 Bank of Thailand (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.

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