SUMMARY
In 2019, TRIS Rating rated and publicly announced the ratings of 216 issuers. The issuers can be categorized as 163 non-financial institutions (non-FI), 46 financial institutions (FI), and three structured finance issuers. The four remaining issuers were in the “Government” segment, covering one sovereign, one local government, and two supranational organizations.
However, this study does not cover structured finance issuers and issuers in the Government segment. Thus, the corporate default study included 201 issuers (excluding eight non-FI issuers that issued only guaranteed bonds to which we did not assign shadow ratings), covering 155 non-financial companies and 46 FIs (including three FI issuers that we announced only the issue ratings and assigned shadow ratings to the issuers).
There was one default in 2019. However, the default happened after the company had withdrawn its rating in 2018. Therefore, this issuer is not included in the one-year rating transition study but is included in the two-, and subsequent-years rating transition studies. The 201 issuers in 2019 included nine new issuers and five withdrawal issuers. The one-year stability rate of publicly announced ratings in 2019 (excluding nine new issuers and five withdrawers) was 82.4%, a 4.8% decrease from the prior year.
Rating actions during the year included 18 upgrades and 15 downgrades. The ratio of downgrades to upgrades was 0.83 times, down from 1.63 times in 2018. There were 24 changes in rating outlook, six upwards, 16 downwards, and two neutrals. Seven companies were placed on CreditAlert during the year, comprising one “positive”, one “developing” and five “negative” CreditAlerts. One “positive”, one “developing”, and two “negative” CreditAlerts were resolved during the year. The “positive” CreditAlert received an upgrade in rating, the “developing” CreditAlert was resolved to “stable” with no change in rating, and the two “negative” CreditAlerts received rating downgrades. Thus, three “negative” CreditAlert companies remained at the end of 2019.
As one company defaulted in 2019 (after withdrawing its rating in 2018), the cumulative number of defaulters since 1994 has increased to 22 (17 issuers defaulted while still having ratings with TRIS Rating; the remaining five issuers defaulted after withdrawing their ratings). The one-, two-, and three-year cumulative default rates during 1994-2019 improved slightly to 0.98%, 2.14%, and 3.10% from 1.11%, 2.33%, and 3.41%, respectively, during 1994-2018.
The size of the Thai bond market is growing over time. The value of outstanding long-term corporate debentures at the end of 2019 was Bt3.37 trillion, increasing by 11.18% year-on-year (y-o-y). The proportion of non-rated bonds to total outstanding bonds remained flat at around 13.64% from 13.73% in 2018.
TRIS Rating expects the total amount of bond issuances in 2020 will not change much from the previous year. In 2019, new corporate bonds issued and registered with the Thai Bond Market Association (ThaiBMA) amounted to Bt1.03 trillion, up 23.5 % y-o-y. Unrated bonds accounted for 16.60% of the total amount of bonds issued in 2019, declining from 18.60% in 2018. Issuers in five industries, financial institutions, real estate developers, real estate investment trusts (REIT), regulated utilities, as well as telecommunication and cable, together issued almost 70% of total bond issuances in 2019.
CORPORATE DEFAULT STUDY
RATING ACTIONS IN 2019
The corporate default study is based on 201 issuers, including 155 non-financial companies and 46 FIs. There were 18 upgrades and 15 downgrades. The upgrades comprised 10 from non-FI and eight from FI issuers. Only one FI issuer was downgraded. The downgrade to upgrade ratio decreased to 0.83 times in 2019 from 1.63 times in 2018.
The one-year stability rate of publicly announced ratings in 2019 (excluding new issuers, rating withdrawals, and defaults) was 82.4%, decreasing by 4.8% from 2018. There were 24 changes in outlook. Six issuers received upward revisions and 16 issuers received downward outlook revisions. We also resolved the developing CreditAlerts assigned to two issuers last year with “stable” outlooks. There were seven CreditAlerts issued during the year. Four were resolved within the year and three remained “negative” CreditAlerts.
• Ratings were mainly in the “A” and “BBB” categories
At the end of 2019, companies rated in the “A” and “BBB” categories made up the largest proportion of
TRIS Rating’s portfolio, accounting for 37.76% and 38.27% of publicly announced ratings (excluding withdrawals and defaults), respectively. The ratings of nine new issuers were distributed across several rating categories: four “BBB”, two “A”, one “AA, and two “AAA” ratings. 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 2019, 14 issuers were rated below “BBB-”, accounting for 7.14% 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 1994-2019 improved slightly from the period 1994-2018. The one-, two-, and three-year cumulative default rates during 1994-2019 improved to 0.98%, 2.14%, and 3.10% from 1.11%, 2.33%, and 3.41%, respectively, during 1994-2018.
Corporate Rating Transitions (1994-2019)
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 94.44%.
The rating stability of the investment grade companies exceeded 90%. For the “A” rating category, 95.14% of the issuers in this category had their ratings maintained at this level in 2019. Around 3.11% of the “A” rated issuers were upgraded to “AA”, while 1.62% 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 2019, there were 13 “AAA” and 20 “AA” rated issuers, increasing from 11 issuers and 18 issuers, respectively, in 2018. Provincial Electricity Authority (PEA) and PEA ENCOM International Co., Ltd. (PEA ENCOM) were new issuers assigned “AAA” ratings in 2019.
As credit ratings should reflect risk of default, 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 FIs 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 rating performance or rating 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 1,726 observations of issuers rated by TRIS Rating during 1994-2019. 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 1,726 observations of issuers rated by TRIS Rating during 1994-2019. 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 the 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 1,726 observations of issuers rated by TRIS Rating during 1994-2019, there were 17 observations in which an issuer defaulted in a one-year observation period. The default rate was 0.98%, a slight decline from 1.10% during 1994-2018. From the CAP curve, issuers rated at “BBB+” category and below represent 42.7% 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 1994-2019, is equal to 0.57, slightly lower than 0.58 obtained in the previous assessment covering 1994-2018. 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 (2009-2019), the accuracy ratio improves to 0.73. There were 1,178 observations in this cohort and only three observations defaulted during this period. This implies an overall default rate of 0.25%, leaving the remaining 99.75% of the observations with no defaults.
STRUCTURED FINANCE DEFAULT STUDY
There were only seven structured finance transactions rated by TRIS Rating. However, four were fully guaranteed by the originators and one transaction was partially guaranteed by the originator. These transactions are not included in this study. The two remaining transactions are 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”.
TRIS Rating Co., Ltd.
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