Taiwan Ratings' Corporate Default & Rating Transition
Study 2004
2005/06/16
Susan
Chu, Serene Hsieh
Taiwan Ratings Corp.
is pleased to release its inaugural default and rating transition study,
which examines its ratings track record since it first assigned credit
ratings in 1998. The study shows that the performance of its ratings has
generally been in line with global norms, as evidenced by the observations
of Standard & Poor's Ratings Services. The study primarily measures
rating movements over time and provides a quantitative measure of ratings
performance, implying Taiwan Ratings' historical ability to predict the
likelihood of default.
The study covers solicited
issuer ratings, totally 183 entities, rated by Taiwan Ratings between
Jan. 1, 1998 and Dec. 31, 2004. The study also covers confidential ratings
and withdrawn ratings.
Taiwan Ratings' pool
of 183 credit ratings is statistically small and covers a short period,
implying that the data may not be well seasoned. The pool is small compared
with Standard & Poor's Asia ex-Japan study of 439 issuers ("Asia
ex-Japan Default and Rating Transition Study" published by Standard
& Poor's on Apr. 4, 2005)) and Standard & Poor's global study
of more than 10,000 issuers ("Annual Global Corporate Default Study"
published by Standard & Poor's on Jan. 26, 2005). Furthermore, Taiwan
Ratings' pool only covers ratings history data for seven years from year-end
1997 to year-end 2004 (see the methodology section for details of the
issuers included in this study), compared with 13 years (from year-end
1991 to year-end 2004) for Standard & Poor's Asia ex-Japan study and
24 years (from year-end 1980 to year-end 2004) for Standard &
Poor's global study. While the time to default averages about five years
by Standard & Poor's global norms, about half of Taiwan Ratings' issuer
ratings were not assigned until 2001.
Key
Findings
-
One default was recorded in 2001.
-
Improving economic and market factors
have helped strengthen rated issuers' credit profiles since 2002.
-
Taiwan Ratings' study generally mirrors
the observations of Standard & Poor's global transition studies.
Higher rated issuers tend to exhibit less rating volatility than their
lower rated counterparts.
-
The volatility of Taiwan Ratings' ratings
is, however, higher than Standard & Poor's global observations,
especially in the lower rating categories. This can be largely attributed
to Taiwan Ratings' small sample and short track record. Nevertheless,
Taiwan Ratings' average downgrade-to-upgrade ratio appears comparable
with Standard & Poor's observations.
Only
one default
There is just one
default record in Taiwan Rating's rated pool (see table 1), but this would
not count after adjusting for issuers not rated [N.R.] after rating withdrawn.
This issuer was rated by Taiwan Ratings in 1999, it withdrew its ratings
in 2000, and it defaulted in 2001. The result partly reflects the global
norm by Standard & Poor's that lower ratings tend to have a higher
likelihood of default. However, as this is the only default in Taiwan
Ratings' pool, the default ratios by Taiwan Ratings could further develop.
Table 1 Taiwan Cumulative Average Default
Rates, 1999-2004 (%)
|
|
ˇXTime HorizonˇX
|
Rating
category
|
Year 1
|
Year 2
|
Year 3
|
Year 4
|
Year 5
|
Year 6
|
twAAA
|
0.00
|
0.00
|
0.00
|
0.00
|
0.00
|
0.00
|
twAA
|
0.00
|
0.00
|
0.00
|
0.00
|
0.00
|
0.00
|
twA
|
0.00
|
0.00
|
0.00
|
0.00
|
0.00
|
0.00
|
twBBB
|
0.00
|
0.00
|
0.00
|
0.00
|
0.00
|
0.00
|
twBB
|
0.00
|
0.00
|
0.00
|
0.00
|
0.00
|
0.00
|
twB
|
0.00
|
5.26
|
5.26
|
5.26
|
5.26
|
N/A
|
twCCC/twCC
|
0.00
|
0.00
|
0.00
|
0.00
|
N/A
|
N/A
|
All
rated
|
0.00
|
0.24
|
0.24
|
0.24
|
0.24
|
0.24
|
N/A--not
applicable (no issuer ratings in that category at that time).Source:
Standard & Poor's CreditPro ® 6.6. and Taiwan Ratings'
database
|
One possible reason
for Taiwan Ratings' limited default record is that about 70% of the pool
consists of financial institutions (see table 2), which have received
direct and indirect support from the Taiwan government. Also, the first
group of manufacturing companies that were assigned ratings by Taiwan
Ratings generally had strong financial profiles. Taiwan Ratings only expanded
most of its ratings coverage of manufacturers since 2001 and so the pool
has not had time to season. The proportion of higher rated companies has
been on the rise since 2002 in line with improving economic and market
factors (see table 3).
Table 2 Taiwan Rating Classification of New
Issuers
|
|
-- Sector --
|
Year
|
Financial Institutions
|
Industrials & Utilities
|
Total
|
1998
|
31
|
2
|
33
|
1999
|
22
|
6
|
28
|
2000
|
24
|
5
|
29
|
2001
|
11
|
15
|
26
|
2002
|
27
|
9
|
36
|
2003
|
8
|
9
|
17
|
2004
|
6
|
8
|
14
|
Total
|
129
|
54
|
183
|
% of total
|
70.5
|
29.5
|
100.0
|
Source: Standard & Poor's CreditPro® 6.6. and
Taiwan Ratings' database
|
Table 3 Taiwan Issuer Credit Ratings at Year
End, 1998-2004 (%)
|
Rating category
|
1998
|
1999
|
2000
|
2001
|
2002
|
2003
|
2004
|
Weighted average
|
twAAA
|
6.1
|
5.0
|
4.7
|
4.7
|
4.5
|
4.4
|
5.9
|
4.9
|
twAA
|
6.1
|
11.7
|
10.6
|
11.2
|
17.3
|
22.8
|
27.4
|
17.6
|
twA
|
21.2
|
18.3
|
17.6
|
19.6
|
24.1
|
20.6
|
39.3
|
24.2
|
twBBB
|
42.4
|
35.0
|
28.2
|
29.0
|
25.6
|
25.0
|
15.6
|
26.0
|
twBB
|
24.2
|
23.3
|
31.8
|
30.8
|
21.1
|
21.3
|
8.9
|
21.9
|
twB
|
0.0
|
6.7
|
5.9
|
3.7
|
4.5
|
2.9
|
3.0
|
3.9
|
twCCC/twCC
|
0.0
|
0.0
|
1.2
|
0.9
|
3.0
|
2.9
|
0.0
|
1.5
|
Total
|
100.0
|
100.0
|
100.0
|
100.0
|
100.0
|
100.0
|
100.0
|
100.0
|
Source: Standard & Poor's CreditPro® 6.6.
|
Rating appropriateness
is best determined after a few business cycles and on a sizeable pool
of issuers. In light of Taiwan's increasing deregulation and market liberalization,
Taiwan Ratings expects to see the development of more mature financial
and capital markets. The transition to greater market discipline may possibly
result in defaults by fundamentally weaker companies. Defaults are part
of the process of market efficiency as demonstrated in the developed economies
of North America and Europe.
Taiwan
Ratings and Standard & Poor's performance correlation
Taiwan Ratings' ratings
system is primarily based on the methodology and criteria used by Standard
& Poor's, with minor adjustments made to better reflect domestic conditions.
Taiwan Ratings uses a different rating scale from Standard & Poor's.
Taiwan Ratings' rating
transition study (see table 4) supports Standard & Poor's global observations
(see table 5 and table 6) that higher credit ratings tend to be more stable
than lower ratings. For example, there is a 95% (after adjusting for N.R.)
possibility for ratings in the category of 'twAA' to remain unchanged
over a one year period (see the methodology section for the definition
of transition analysis).
Taiwan Ratings' higher
rated categories appear extremely stable, but Taiwan Ratings' scale registered
faster rating movements in the lower rating categories compared with Standard
& Poor's scale. This is largely a result of the smaller number of
issuers and shorter study period in Taiwan Ratings' study compared with
Standard & Poor's Asia ex Japan and global transition studies. Statistically,
a smaller number of observations and a shorter time period may potentially
contribute to wider deviations of estimation from the findings of the
larger number of observations. The higher volatility in Taiwan Ratings'
lower rating categories also reflects the characteristics of a domestic
rating, which have finer gradations and thus make Taiwan Ratings' ratings
more sensitive to changes in the credit profiles of rated issuers.
Table 4 Taiwan Average One-Year N.R.-Adjusted
Transition Rates, 1999-2004 (%)
|
|
--- Rating category at year-end (%) --
|
Rating category at start of year
|
twAAA
|
twAA
|
twA
|
twBBB
|
twBB
|
twB
|
twCCC/twCC
|
twAAA
|
96.2
|
3.9
|
0.0
|
0.0
|
0.0
|
0.0
|
0.0
|
twAA
|
2.4
|
95.1
|
2.4
|
0.0
|
0.0
|
0.0
|
0.0
|
twA
|
0.0
|
13.8
|
83.5
|
2.8
|
0.0
|
0.0
|
0.0
|
twBBB
|
0.0
|
0.7
|
19.2
|
77.4
|
2.7
|
0.0
|
0.0
|
twBB
|
0.0
|
0.0
|
1.7
|
21.4
|
75.2
|
0.9
|
0.9
|
twB
|
0.0
|
0.0
|
0.0
|
0.0
|
17.7
|
64.7
|
17.7
|
twCCC/twCC
|
0.0
|
0.0
|
0.0
|
0.0
|
40.0
|
0.0
|
60.0
|
N.R.-issuer not rated after rating withdrawn.
Source: Standard & Poor's CreditPro® 6.6. and
Taiwan Ratings' database
|
Table 5 Asia ex-Japan Average One-Year N.R.-Adjusted
Transition Rates, 1992-2004 (%)
|
|
--- Rating category at year-end (%) --
|
Rating category at start of year
|
AAA
|
AA
|
A
|
BBB
|
BB
|
B
|
CCC/CC
|
D
|
AAA
|
87.5
|
12.5
|
0.0
|
0.0
|
0.0
|
0.0
|
0.0
|
0.0
|
AA
|
2.4
|
80.5
|
14.6
|
0.0
|
0.0
|
2.4
|
0.0
|
0.0
|
A
|
0.0
|
2.2
|
88.0
|
7.7
|
0.9
|
1.3
|
0.0
|
0.0
|
BBB
|
0.0
|
0.0
|
3.3
|
83.9
|
9.9
|
2.4
|
0.3
|
0.3
|
BB
|
0.0
|
0.0
|
0.0
|
5.1
|
89.3
|
2.8
|
2.1
|
0.7
|
B
|
0.0
|
0.0
|
0.4
|
0.0
|
10.7
|
81.9
|
4.1
|
2.9
|
CCC/CC
|
0.0
|
0.0
|
0.0
|
0.0
|
0.0
|
10.3
|
66.7
|
23.1
|
N.R.-issuer not rated after rating withdrawn.
Source: Standard & Poor's CreditPro® 6.6.
|
Table 6 Global Average One-Year N.R.-Adjusted
Transition Rates, 1981-2004 (%)
|
|
--- Rating category at year-end (%) --
|
Rating category at start of year
|
AAA
|
AA
|
A
|
BBB
|
BB
|
B
|
CCC/CC
|
D
|
AAA
|
91.7
|
7.7
|
0.5
|
0.1
|
0.1
|
0.0
|
0.0
|
0.0
|
AA
|
0.6
|
90.5
|
8.1
|
0.60
|
0.1
|
0.1
|
0.0
|
0.0
|
A
|
0.1
|
2.2
|
91.3
|
5.8
|
0.4
|
0.2
|
0.0
|
0.0
|
BBB
|
0.0
|
0.2
|
4.1
|
89.7
|
4.7
|
0.8
|
0.2
|
0.3
|
BB
|
0.0
|
0.1
|
0.4
|
5.8
|
83.4
|
8.1
|
1.0
|
1.3
|
B
|
0.0
|
0.1
|
0.2
|
0.3
|
5.8
|
82.5
|
4.8
|
6.2
|
CCC/CC
|
0.1
|
0.0
|
0.4
|
0.5
|
1.5
|
11.2
|
54.8
|
32.4
|
N.R.-Entity not rated after rating withdrawn.
Source: Standard & Poor's CreditPro® 6.6.
|
It should be noted
that Taiwan Ratings conducted large-scale rating adjustments after the
completion of a major portfolio review in December 2004. In particular,
significant rating adjustments were made to financial institutions, as
their risk profiles had improved beyond Taiwan Ratings' original expectations,
mainly as a result of accelerating integration within financial holding
company groups, improvements in risk management, and continuing indirect
system support. As a result, unlike global observations where transition
rates generally move toward lower categories at lower ratings, the overall
transition rates for lower ratings (or even most categories) in Taiwan
Ratings' pool tended to move up rather than down.
Higher rating volatility
in Taiwan Ratings' pool is reiterated in the frequency of annual rating
changes, which ranged between 10% and 70% in 1999-2004 and averaged 40%
in the period (see table 7). This contrast with the annual rating changes
in Standard & Poor's global pool, which ranged between 20% and 30%
in 1981-2004 and averaged 28% in the period (see table 9). Standard &
Poor's Asia ex Japan study also highlighted higher rating volatility,
which was offset to some extent by its larger pool and longer length of
observation (see table 8). The high ratio of annual rating changes in
Taiwan Ratings' pool also reflects the large-scale rating adjustments
conducted in December 2004. Nevertheless, the downgrade-to-upgrade ratio
for Taiwan Ratings' pool averaged 1.4x for 1999-2004, which is comparable
to Standard & Poor's regional and global observations.
Table 7 Taiwan Summary of Annual Rating Changes*,
1999-2004 (%)
|
Year
|
Issuers as at Jan. 1
|
Upgrades (%)
|
Downgrades (%)
|
Defaults (%)
|
Withdrawn ratings (%)
|
Changed ratings (%)
|
Unchanged ratings (%)
|
Downgrade/ upgrade ratio
|
1999
|
33
|
6.1
|
0.0
|
0.0
|
3.0
|
9.1
|
90.9
|
0.0
|
2000
|
60
|
3.3
|
11.6
|
0.0
|
6.7
|
21.7
|
78.3
|
3.5
|
2001
|
85
|
2.4
|
11.8
|
0.0
|
4.7
|
18.8
|
81.2
|
5.0
|
2002
|
107
|
18.7
|
17.8
|
0.0
|
9.4
|
45.8
|
54.2
|
1.0
|
2003
|
133
|
16.5
|
3.8
|
0.0
|
10.5
|
30.8
|
69.2
|
0.2
|
2004
|
136
|
58.8
|
2.9
|
0.0
|
10.3
|
72.1
|
27.9
|
0.1
|
Weighted average (1999-2003)
|
|
11.5
|
9.8
|
0.0
|
7.9
|
29.2
|
70.8
|
1.8
|
Weighted average (1999-2004)
|
|
23.1
|
8.1
|
0.0
|
8.5
|
39.7
|
60.3
|
1.4
|
* This table compares the net change in ratings from
the first to the last day of each year. All intermediate ratings are disregarded.
Source: Standard & Poor's CreditPro® 6.6. and
Taiwan Ratings' database
|
Table 8 Asia ex Japan Summary of Annual Rating
Changes*, 1992-2004 (%)
|
Year
|
Issuers as of Jan. 1
|
Upgrades (%)
|
Downgrades (%)**
|
Defaults (%)
|
Withdrawn ratings (%)
|
Changed ratings (%)
|
Unchanged ratings (%)
|
Downgrade/ upgrade ratio
|
1992
|
1
|
0.0
|
0.0
|
0.0
|
0.0
|
0.0
|
100.0
|
0.0
|
1993
|
6
|
0.0
|
0.0
|
0.0
|
0.0
|
0.0
|
100.0
|
0.0
|
1994
|
14
|
7.1
|
0.0
|
0.0
|
0.0
|
7.1
|
92.9
|
0.0
|
1995
|
33
|
12.1
|
3.0
|
0.0
|
3.0
|
18.2
|
81.8
|
0.3
|
1996
|
42
|
9.5
|
2.4
|
0.0
|
7.1
|
19.1
|
81.0
|
0.3
|
1997
|
71
|
4.2
|
31.0
|
1.4
|
4.2
|
40.9
|
59.2
|
7.3
|
1998
|
125
|
4.0
|
45.6
|
7.2
|
11.2
|
68.0
|
32.0
|
11.4
|
1999
|
126
|
3.2
|
12.7
|
4.8
|
15.1
|
35.7
|
64.3
|
4.0
|
2000
|
156
|
8.3
|
3.9
|
1.3
|
5.1
|
18.6
|
81.4
|
0.5
|
2001
|
165
|
8.5
|
4.9
|
2.4
|
6.1
|
21.8
|
78.2
|
0.6
|
2002
|
175
|
18.3
|
13.7
|
0.6
|
6.9
|
39.4
|
60.6
|
0.8
|
2003
|
246
|
9.8
|
5.3
|
0.0
|
7.7
|
22.8
|
77.2
|
0.5
|
2004
|
275
|
18.2
|
2.9
|
0.0
|
4.7
|
25.8
|
74.2
|
0.2
|
Weighted
average
|
|
9.0
|
12.8
|
2.0
|
7.7
|
31.4
|
68.6
|
2.5
|
*This table compares the net change in ratings from
the first to the last day of each year. All intermediate ratings
are disregarded.
** excludes downgrades to 'D', which are shown separately
in the default column.
|
Source: Standard & Poor's Asia ex-Japan Default
and Rating Transition Study 2004
|
Table 9 Global Summary of Annual Rating Changes*,
1981-2004 (%)
|
Year
|
Issuers as at Jan. 1
|
Upgrades (%)
|
Downgrades (%)**
|
Defaults (%)
|
Withdrawn ratings (%)
|
Changed ratings (%)
|
Unchanged ratings (%)
|
Downgrade/ upgrade ratio
|
1981
|
1,394
|
9.97
|
12.98
|
0.14
|
2.01
|
25.11
|
74.89
|
1.30
|
1982
|
1,442
|
5.96
|
12.76
|
1.18
|
5.20
|
25.10
|
74.90
|
2.14
|
1983
|
1,475
|
7.12
|
11.66
|
0.81
|
5.69
|
25.29
|
74.71
|
1.64
|
1984
|
1,578
|
10.96
|
10.08
|
0.89
|
4.31
|
26.24
|
73.76
|
0.92
|
1985
|
1,650
|
7.82
|
13.64
|
1.09
|
4.30
|
26.85
|
73.15
|
1.74
|
1986
|
1,880
|
7.23
|
15.90
|
1.70
|
6.86
|
31.70
|
68.30
|
2.20
|
1987
|
2,037
|
7.07
|
11.78
|
0.93
|
9.43
|
29.21
|
70.79
|
1.67
|
1988
|
2,125
|
9.04
|
11.86
|
1.41
|
7.91
|
30.21
|
69.79
|
1.31
|
1989
|
2,170
|
9.54
|
10.97
|
1.52
|
7.88
|
29.91
|
70.09
|
1.15
|
1990
|
2,161
|
6.25
|
15.32
|
2.59
|
6.39
|
30.54
|
69.46
|
2.45
|
1991
|
2,109
|
6.07
|
14.46
|
3.13
|
3.46
|
27.12
|
72.88
|
2.38
|
1992
|
2,210
|
9.50
|
11.36
|
1.36
|
4.03
|
26.24
|
73.76
|
1.20
|
1993
|
2,418
|
8.40
|
9.10
|
0.54
|
8.23
|
26.26
|
73.74
|
1.08
|
1994
|
2,683
|
6.93
|
9.21
|
0.60
|
4.73
|
21.47
|
78.53
|
1.33
|
1995
|
3,070
|
9.06
|
9.25
|
0.94
|
4.14
|
23.39
|
76.61
|
1.02
|
1996
|
3,347
|
9.32
|
7.11
|
0.48
|
7.35
|
24.26
|
75.74
|
0.76
|
1997
|
3,672
|
8.69
|
7.60
|
0.60
|
8.80
|
25.68
|
74.32
|
0.87
|
1998
|
4,178
|
7.18
|
11.37
|
1.27
|
7.97
|
27.79
|
72.21
|
1.58
|
1999
|
4,599
|
5.63
|
10.72
|
2.13
|
9.02
|
27.51
|
72.49
|
1.90
|
2000
|
4,754
|
6.63
|
11.65
|
2.27
|
7.05
|
27.60
|
72.40
|
1.76
|
2001
|
4,851
|
5.65
|
15.07
|
3.69
|
7.19
|
31.60
|
68.40
|
2.67
|
2002
|
4,888
|
5.18
|
18.25
|
3.52
|
6.59
|
33.53
|
66.47
|
3.53
|
2003
|
4,951
|
6.48
|
13.84
|
1.84
|
7.37
|
29.53
|
70.47
|
2.13
|
2004
|
5,189
|
8.58
|
7.03
|
0.69
|
6.98
|
23.28
|
76.72
|
0.82
|
Weighted
average
|
|
7.41
|
11.72
|
1.64
|
6.76
|
27.53
|
72.47
|
1.71
|
*This table compares the net change in ratings from
the first to the last day of each year. All intermediate ratings
are disregarded. **;Excludes downgrades to 'D', shown separately
in the default column.
|
Source: Standard & Poor's Asia ex-Japan Default
and Rating Transition Study 2004
|
Rating
transition implications for defaults
As Taiwan Ratings
continues to develop its rating performance evaluation, including rated
pool size and rating history, the default and rating transition of Taiwan
Ratings' scale is likely to move more towards the Standard & Poor's
norm. However, more economic or business cycle tests may occur before
rating performance of Taiwan Ratings' scale move towards the international
experience.
Based on Standard
& Poor's historic observations, cumulative default rates may be projected
into the future, based on the assumption that the rating transition rates
are stable. Based on Standard & Poor's observations, the one-year
default rate column of 'cumulative average default rates table (see table
11)' is equivalent to the D (default) column of 'one-year transition rate'
(see table 10), while the three-year default rate column of 'cumulated
average default rates table' is about the level of the D (default) column
of 'three-year transition rate'. The slight difference in results between
the two tables mainly stems from the different static pools used to calculate
transition to default and cumulative average default rates. Cumulative
average default rates are the summary of all static pools, while the number
of pools used in the average transition rate is limited by the transition's
time horizon.
Table 10 Global Average One-Year & Three-Year
Transition Matrices, 1981-2004 (%)
|
|
One-Year Transition Rates
|
From/To
|
AAA
|
AA
|
A
|
BBB
|
BB
|
B
|
CCC/CC
|
D
|
N.R.
|
AAA
|
87.44
|
7.37
|
0.46
|
0.09
|
0.06
|
0.00
|
0.00
|
0.00
|
4.59
|
AA
|
0.60
|
86.65
|
7.78
|
0.58
|
0.06
|
0.11
|
0.02
|
0.01
|
4.21
|
A
|
0.05
|
2.05
|
86.96
|
5.50
|
0.43
|
0.16
|
0.03
|
0.04
|
4.79
|
BBB
|
0.02
|
0.21
|
3.85
|
84.13
|
4.39
|
0.77
|
0.19
|
0.29
|
6.14
|
BB
|
0.04
|
0.08
|
0.33
|
5.27
|
75.73
|
7.36
|
0.94
|
1.20
|
9.06
|
B
|
0.00
|
0.07
|
0.20
|
0.28
|
5.21
|
72.95
|
4.23
|
5.71
|
11.36
|
CCC/CC
|
0.08
|
0.00
|
0.31
|
0.39
|
1.31
|
9.74
|
46.83
|
28.83
|
12.52
|
|
Three-Year Transition Rates
|
From/To
|
AAA
|
AA
|
A
|
BBB
|
BB
|
B
|
CCC/CC
|
D
|
N.R.
|
AAA
|
68.00
|
17.31
|
2.43
|
0.40
|
0.09
|
0.03
|
0.00
|
0.03
|
11.70
|
AA
|
1.43
|
64.99
|
18.69
|
2.30
|
0.41
|
0.28
|
0.02
|
0.09
|
11.79
|
A
|
0.12
|
4.91
|
66.08
|
12.15
|
1.64
|
0.68
|
0.11
|
0.25
|
14.06
|
BBB
|
0.08
|
0.60
|
9.22
|
59.62
|
8.48
|
2.52
|
0.57
|
1.49
|
17.42
|
BB
|
0.03
|
0.22
|
1.05
|
11.81
|
42.89
|
11.72
|
1.72
|
6.73
|
23.84
|
B
|
0.01
|
0.09
|
0.51
|
1.23
|
10.14
|
37.18
|
4.34
|
18.96
|
27.55
|
CCC/CC
|
0.10
|
0.00
|
0.50
|
1.21
|
2.52
|
12.98
|
13.58
|
44.77
|
24.35
|
Sources: Standard & Poor's Global Fixed Income Research;
Annual Global Corporate Default Study: Corporate Defaults Poised
to Rise in 2005; Standard & Poor's CreditPro® 7.0.
|
Table
11 Global Cumulative Average Default Rates, 1981-2004 (%)
|
|
ˇXTime HorizonˇX
|
Rating category
|
Year 1
|
Year 2
|
Year 3
|
Year 4
|
Year 5
|
Year 6
|
Year 7
|
AAA
|
0.00
|
0.00
|
0.03
|
0.06
|
0.10
|
0.17
|
0.24
|
AA
|
0.01
|
0.04
|
0.09
|
0.19
|
0.30
|
0.41
|
0.54
|
A
|
0.04
|
0.13
|
0.24
|
0.40
|
0.61
|
0.84
|
1.11
|
BBB
|
0.29
|
0.81
|
1.40
|
2.19
|
2.99
|
3.73
|
4.34
|
BB
|
1.20
|
3.58
|
6.39
|
8.97
|
11.25
|
13.47
|
15.25
|
B
|
5.71
|
12.49
|
18.09
|
22.37
|
25.40
|
27.77
|
29.76
|
CCC/CC
|
28.83
|
37.97
|
43.52
|
47.44
|
50.85
|
52.13
|
53.39
|
Investment grade
|
0.11
|
0.31
|
0.55
|
0.86
|
1.20
|
1.53
|
1.84
|
Noninvestment grade
|
4.91
|
9.76
|
14.05
|
17.52
|
20.22
|
22.46
|
24.32
|
All rated
|
1.64
|
3.29
|
4.78
|
6.04
|
7.08
|
7.97
|
8.71
|
Source: Standard & Poor's Global Fixed Income Research;
"Annual Global Corporate Default Study: Corporate Defaults
Poised to Rise in 2005"; Standard & Poor's CreditPro
® 7.0.
|
There is a major difference
in the implicit default risk between Standard & Poor's global scale
and Taiwan Ratings' scale, which is primarily positioned as the national
scale and does not reflect a degree of Taiwan's sovereign risk (rated
AA-/Negative/A-1+ by Standard & Poor's Rating Services).
Ratings
performance survey methodology
This study is based
on Taiwan Ratings' database of long-term issuer credit ratings. Taiwan
Ratings' credit rating is a current opinion of an obligor's creditworthiness
(that is, issuer, corporate, or counterparty credit rating), or the overall
capacity to meet specific financial obligations (that is, issue credit
ratings), relative to other obligors active in Taiwan's markets. Taiwan
Ratings' credit rating symbols are accompanied by a 'tw' prefix to denote
Taiwan and the rating scale focuses on Taiwan's financial markets. Taiwan
Ratings' rating scale does not address sovereign risk and is not directly
comparable to Standard & Poor's global scale.
Issuers
included in this study
The study analyzes
the rating histories of 183 long-term credit ratings from Dec. 31, 1997
to Dec. 31, 2004. These obligors include Taiwan industrials, utilities,
insurance companies, financial holding companies, banks, securities firms,
and other financial institutions. The global data presented in this report
refer the Standard & Poor's ratings histories of all 11,150 long-term
rated issuers rated by Standard & Poor's from Dec. 31, 1980 to Dec.
31, 2004. And the Asia ex-Japan data refers to Standard & Poor's ratings
histories of 439 long-term rated issuers rated by Standard & Poor's
from Dec. 31, 1991 to Dec. 31, 2004.
Static
pool methodology
Taiwan Ratings conducted
its default and transition study on the basis of groupings called static
pools. Static pools are formed by grouping issuers by rating category
at the beginning of each year covered by the study. Each static pool is
followed from that point forward. All companies included in the study
are assigned to one or more static pools.
Cumulative
average default rate calculation
A default is recorded
upon the first occurrence of a payment default on any financial obligation,
rated or unrated. Annual default rates were calculated for each static
pool. Cumulative default rates that average the experience of all static
pools were estimated. Weights are based on the number of issuers in each
static pool.
Transition
analysis
Transition rates compare
issuer ratings at the beginning of a time period with ratings at the end
of the period. To compute one-year rating transition rates by rating category,
the rating on each entity at the end of a particular year is compared
with the rating at the beginning of the same year. An issuer that is rated
for more than one year is counted as many times as the number of years
it is rated. For instance, an issuer continually rated from mid-1998 to
mid- 2003 would appear in the four consecutive one-year transition matrices
from 1999 to 2002. All 1999 static pool members still rated on Dec. 31,
2004, had six one-year transitions, while companies first rated between
Jan. 1, 2004, and Dec. 31, 2004 had only one.
Each one-year transition
matrix displays all the rating movements between categories from the beginning
of the year through to the year end. For each rating listed in the matrix's
left-most column, there are seven ratios listed in the rows, corresponding
to the ratings from 'twAAA' to 'twCCC/twCC'. For instance, table 4 shows
that of all 'twA' rated companies over the 1999-2004 time period, 83.5%
were rated the same at year-end, while 13.8% had been upgraded to 'twAA',
and 2.8% had been downgraded to 'twBBB', and so on.
Practical
application of transition rates
Rating transition
rates are useful to investors and credit professionals for whom rating
stability is important. For instance, investors restricted by regulations,
or inclined to hold top-grade bonds, may want to assess the likelihood
that Taiwan Ratings analysts continue to assign top ratings to their investments.
Conversely, investors buying high-yield bonds in the hope of profiting
from a rating upgrade would be able to gauge that expectation realistically.
The credit community
might also use rating transition information to help determine maturity
exposure limits or to measure credit risk in the context of value-at-risk
models. Cumulative default rates can be projected for any number of years
into the future, based on the assumption that the rating transition rates
are stable and follow a first-order Markov process. Rating transition
matrices can also be constructed to produce stressed default rates. Such
matrices are often used in the area of credit risk measurement.
N.R.-adjusted
transition rates
The difference between
an N.R-adjusted table and one that is not is that the former is based on
pools whose denominators have been gradually pared down by dropping those
obligors whose ratings have been withdrawn (set to N.R.). The number of
withdrawn ratings grows particularly large in the case of lower ratings
categories after just a few years. Little is known about obligors after
their ratings are set to N.R.
|
|