Taiwan
Ratings' 2006 Default And Rating Transition Study
2007/03/21
Analysts:
|
Chun
Huang, CFA
Serene Hsieh, CPA
Susan Chu
Daisuke Fukutomi |
Coverage
Taiwan Ratings Corp.'s default and rating transition study examines the
track record of ratings rated by Taiwan Ratings since it first assigned
credit ratings in 1998. The study shows that the rating performance has
been broadly similar to Standard & Poor's Ratings Services' global
experience, however, rating movements have been more volatile, especially
at lower rating levels. The study primarily measures rating movements
over time and provides a quantitative measure of rating performance, implying
Taiwan Ratings' historical ability to predict the likelihood of default.
This report covers
208 solicited issuer credit ratings rated by Taiwan Ratings between 1998
and 2006, inclusive. The study analyzes the rating performance of Taiwan-based
obligors, which include industrials, utilities, insurance companies, financial
holding companies, banks, securities firms, and other financial institutions.
The study includes nonconfidentially and confidentially rated entities,
as well as those whose ratings were withdrawn after being assigned.
Key Findings
- The credit quality
of rated obligors in Taiwan was relatively stable in 2006, with M&A
as the major driver of change. M&A are expected to continue to drive
credit profile changes in 2007, but consolidation activity, especially
for financial services companies, is likely to be muted. The credit
quality of firms not directly involved in M&A is expected to remain
relatively stable.
- Although the default
experience in Taiwan's rated pool is likely to develop over a few more
business cycles, the study has supported a positive correlation between
rating levels and default probability. A higher rating implies a lower
historic default rate and vice versa.
- Taiwan Ratings'
rating transition over 1998-2006 broadly mirrors Standard & Poor's
global study over 1981-2006, which reveals that higher rated issuers
exhibit higher stability than their lower rated counterparts. However,
Taiwan Ratings' rating transition tends to be faster and more volatile,
especially in the lower rating categories because of the evolving credit
profiles of Taiwan issuers in recent years and the statistical limitations
of a smaller sample and shorter rating history.
Credit Trends In
Taiwan
The credit quality
of rated obligors was relatively stable in 2006, reflecting the island's
generally stable economic conditions. M&A or alliances accounted for
slightly over half of the rating changes on financial services companies,
which made up about 67% of the rated sample.
The relatively stable
conditions in 2006 represent a slight change from the rapid improvement
in credit quality seen in 2002-2005. During the 2002-2005 period, many
financial institutions that were severely hit in the previous credit cycle
improved their risk management mechanisms and engaged in consolidation.
Many formed or joined financial holding company groups. The credit quality
of weaker financial institutions accordingly rose on the back of the reallocation
of resources among group members.
As a result of this
factor, as well as the growing number of new credits rated 'twA' or above
(see table 1), the majority of issuers in Taiwan continued to be rated
'twA' or above at the end of 2006. The share of 'twA' or above ratings
inched up to about 81%, compared with a significantly lower 49% at the
end of 2003 (see chart 1).
Overall credit conditions
for both industrial companies and financial institutions are expected
to be stable in 2007. Taiwan Ratings expects rating movements to be largely
driven by M&A and strategic alliances in the financial services industry.
However, the pace is expected to be slower than in previous years.
Table
1
|
Rating
Classification Of New Issuers
|
|
Initial
rating (%)
|
Year
|
twAAA
|
twAA
|
twA
|
twBBB
|
twBB
|
twB
|
twCCC/CC
|
1998
|
6.06
|
6.06
|
15.15
|
48.48
|
24.24
|
0.00
|
0.00
|
1999
|
3.70
|
18.52
|
18.52
|
25.93
|
18.52
|
14.81
|
0.00
|
2000
|
3.57
|
10.71
|
14.29
|
21.43
|
39.29
|
10.71
|
0.00
|
2001
|
4.00
|
12.00
|
28.00
|
28.00
|
28.00
|
0.00
|
0.00
|
2002
|
2.86
|
20.00
|
40.00
|
2.86
|
20.00
|
14.29
|
0.00
|
2003
|
0.00
|
23.53
|
5.88
|
11.76
|
47.06
|
11.76
|
0.00
|
2004
|
0.00
|
6.67
|
40.00
|
20.00
|
26.67
|
6.67
|
0.00
|
2005
|
6.67
|
26.67
|
33.33
|
20.00
|
13.33
|
0.00
|
0.00
|
2006
|
11.11
|
44.44
|
22.22
|
22.22
|
0.00
|
0.00
|
0.00
|
%
of total
|
3.85
|
15.87
|
24.04
|
22.60
|
26.44
|
7.20
|
0.00
|
Source:
Standard & Poor's Global Fixed Income Research. Standard &
Poor's CreditPro® ®7.51.
|
Ratings Are A Good
Indicator Of Default Probability
Despite a smaller
sample and shorter time frame compared with Standard & Poor's Global
Corporate Default Study of over 12,000 obligors and stretching over a
period of more than 20 years, this study does support a positive correlation
between rating levels and default probability. Higher ratings have a lower
probability of default (see table 2).
The only issuer that
defaulted in 2006 was Taitung Business Bank. The bank was placed under
regulatory supervision after failing to recapitalize. For the purpose
of this study, financial institutions that are placed under regulatory
supervision are classified as having defaulted. Placing a financial institution
under regulatory supervision, or 'twR', does not necessarily indicate
a default event, but the regulator may have the power to favor one class
of obligations over others or pay some obligations and not others.
This brings the total
number of defaults in Taiwan's entire nine-year pool to four, consisting
of three financial institutions and one industrial company. All four defaulters
were rated at 'twBBB' or below.
The three stressed
financial institutions were eventually placed under regulatory supervision,
which accordingly resulted in a high level of protection for most of their
financial obligations. This highlights the regulator's strong commitment
to maintaining a stable domestic financial system. The default ratio in
2007 will be impacted by the placement of two further banks--Enterprise
Bank of Hualien and Chinese Bank--under regulatory supervision at the
beginning of the year. Prior to regulatory intervention, these two banks
were rated at 'twBB' and 'twBBB-', respectively. The outlook on both entities
was negative.
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 result in defaults by fundamentally
weaker issuers. Defaults are a by-product of market efficiency, as seen
in the developed economies of North America and Europe.
The study's findings
are partly qualified by Taiwan Ratings' issuer rating pool being statistically
smaller, set over a shorter period, and relatively undiversified. For
a small sample, a single default may significantly alter the results,
as in the case of the 'twB' category in table 2. Furthermore, about half
of the issuer ratings have been assigned by Taiwan Ratings for less than
five years, which is the average length of time for an issuer to default,
according to Standard & Poor's global study. A large part of the rating
pool is not yet well seasoned. Rating appropriateness is best determined
after a few business cycles and set on a sizeable as well as diversified
pool of issuer ratings.
Table
2
|
Taiwan
Cumulative Average Default Rates, 1999-2006 (%)
|
Rating
|
Y1
|
Y2
|
Y3
|
Y4
|
Y5
|
Y6
|
Y7
|
Y8
|
twAAA
|
0.00
|
0.00
|
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
|
0.00
|
0.00
|
twA
|
0.00
|
0.00
|
0.00
|
0.00
|
0.00
|
0.00
|
0.00
|
0.00
|
twBBB
|
0.51
|
1.07
|
1.07
|
1.07
|
1.07
|
1.07
|
1.07
|
1.07
|
twBB
|
1.26
|
1.93
|
1.93
|
1.93
|
1.93
|
1.93
|
1.93
|
1.93
|
twB
|
0.00
|
3.70
|
8.08
|
8.08
|
15.15
|
24.58
|
43.43
|
N.A.
|
twCCC/CC
|
0.00
|
0.00
|
10.00
|
25.00
|
25.00
|
25.00
|
N.A.
|
N.A.
|
All
Rated
|
0.36
|
0.80
|
1.17
|
1.41
|
1.76
|
2.32
|
3.39
|
3.39
|
Source:
Standard & Poor's Global Fixed Income Research. Standard &
Poor's CreditPro® 7.51.
|
The scarcity of defaults
can be attributed to credit ratings in Taiwan still being in a development
phase and the preponderance of financial services entities in the ratings
pool. In Standard & Poor's experience, issuers with stronger credit
profiles tend to solicit ratings in the early years when credit ratings
are introduced into a market. This tendency reduces the likelihood of
default occurring during the early years of a study. Furthermore, about
67% of Taiwan Ratings' rating pool consists of financial services entities
(see table 3), which are overseen by the government. Regulatory oversight
tends to ensure that, barring major systemic shocks, financial institutions
exhibit a lower risk of default than would otherwise be the case. The
default rate of Standard & Poor's global rated pool of financial institutions
and insurance companies not surprisingly is lower on average than for
industrials (see table 4).
Table
3
|
New
Issuer Sector Breakdown
|
|
Financial
institutions
|
Industrials
and utilities
|
Total
|
1998
|
31
|
2
|
33
|
1999
|
21
|
6
|
27
|
2000
|
23
|
5
|
28
|
2001
|
10
|
15
|
25
|
2002
|
27
|
8
|
35
|
2003
|
8
|
9
|
17
|
2004
|
6
|
9
|
15
|
2005
|
7
|
8
|
15
|
2006
|
5
|
4
|
9
|
Total
|
138
|
66
|
204
|
%
of total
|
67.6
|
32.4
|
100.0
|
Source:
Standard & Poor's Global Fixed Income Research. Standard &
Poor's CreditPro® 7.51.
|
Table
4
|
Annual
Default Rates By Industry (%)
|
Year
|
Aerospace
/ automotive / capital goods / metal
|
Consumer
/ service sector
|
Energy
and natural resources
|
Financial
institutions
|
Forest
and building products / homebuilders
|
Health
care / chemicals
|
High
tech / computers / office equipment
|
1995
|
0.00
|
3.72
|
0.68
|
0.51
|
2.54
|
1.09
|
1.03
|
1996
|
0.99
|
1.87
|
0.61
|
0.00
|
0.00
|
0.00
|
0.00
|
1997
|
0.89
|
2.43
|
0.00
|
0.28
|
0.00
|
0.47
|
0.90
|
1998
|
1.03
|
3.30
|
1.41
|
1.22
|
1.16
|
2.07
|
0.00
|
1999
|
3.85
|
3.13
|
5.00
|
0.25
|
1.56
|
3.09
|
1.20
|
2000
|
3.86
|
5.29
|
0.88
|
0.12
|
3.61
|
4.30
|
4.14
|
2001
|
9.56
|
6.00
|
1.73
|
1.43
|
4.32
|
4.18
|
4.71
|
2002
|
5.43
|
2.94
|
3.32
|
0.74
|
4.92
|
1.80
|
1.75
|
2003
|
3.55
|
3.06
|
1.18
|
0.30
|
1.12
|
2.47
|
2.21
|
2004
|
2.28
|
1.59
|
0.78
|
0.09
|
1.60
|
0.32
|
0.00
|
2005
|
1.53
|
1.02
|
0.36
|
0.09
|
0.49
|
0.86
|
0.00
|
2006
|
1.31
|
0.68
|
0.00
|
0.00
|
1.41
|
0.28
|
0.50
|
Source:
Standard & Poor's Global Fixed Income Research. Standard &
Poor's CreditPro® 7.51. Includes investment-grade and speculative-grade
rated entities.
|
Taiwan's Rating
Transitions Largely Mirror Global And Regional Rating Behavior
The results of Taiwan Ratings' transition study largely mirror Standard
& Poor's global and regional observations that higher rated issuers
tend to exhibit less ratings volatility than their lower rated counterparts.
For instance, table 5 shows that the probability that a Taiwan issuer
rated 'twAA' at the beginning of a year will still be rated 'twAA' at
the end of the year is 93.3%, whereas the probability that an issuer rated
'twBB' at the beginning of a year will be rated 'twBB' at the end of the
year is only 61.6%. The probability that a global issuer rated 'AA' will
retain this rating after one year is 87.3%, whereas the probability that
a global issuer rated 'BB' will retain this rating after one year is only
75.7%. The same relationship holds true among the Asia ex-Japan rated
issuers.
Taiwan Ratings' higher
rated categories appear extremely stable, however, its lower rated categories
registered faster rating movements than Standard & Poor's global and
regional rated pools, as a result of its issuer rating pool being statistically
small and set over a short period, as well as the volatility inherent
in smaller and/or weaker financial institutions. Caution must be used
in interpreting the higher stability rates associated with the 'twCCC/CC'
rating category relative to the 'twB' rating category in light of the
extremely small sample size. Also, the relatively high number of withdrawals
diluted the rating stability at the 'twB' rating category.
Taiwan Ratings' study
has a smaller number of issuers (208 entities as of the end of 2006) and
a shorter study period (1999-2006) in comparison with the global (12,293
entities; 1981-2006) and the Asia ex-Japan (582 entities; 1988-2006) 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 domestic ratings, which have finer gradations and thus make Taiwan
Ratings' ratings more sensitive to changes in the credit profiles of rated
issuers.
Table
5
|
Average
One-Year Transition Rates (%)
|
Taiwan
Ratings' issuer ratings (1998-2006)
|
From/To
|
twAAA
|
twAA
|
twA
|
twBBB
|
twBB
|
twB
|
twCCC/CC
|
twD
|
N.R.
|
twAAA
|
93.02
|
4.65
|
0.00
|
0.00
|
0.00
|
0.00
|
0.00
|
0.00
|
2.33
|
twAA
|
2.45
|
93.25
|
1.23
|
0.00
|
0.00
|
0.00
|
0.00
|
0.00
|
3.07
|
twA
|
0.00
|
9.91
|
82.43
|
2.25
|
0.45
|
0.00
|
0.00
|
0.00
|
4.95
|
twBBB
|
0.00
|
0.51
|
15.15
|
70.71
|
2.02
|
0.00
|
0.00
|
0.51
|
11.11
|
twBB
|
0.00
|
0.00
|
1.26
|
15.09
|
61.64
|
0.63
|
0.63
|
1.26
|
19.50
|
twB
|
0.00
|
0.00
|
0.00
|
0.00
|
14.29
|
42.86
|
10.71
|
0.00
|
32.14
|
twCCC/CC
|
0.00
|
0.00
|
0.00
|
0.00
|
40.00
|
0.00
|
60.00
|
0.00
|
0.00
|
Global
issuer ratings (1981-2006)
|
From/To
|
AAA
|
AA
|
A
|
BBB
|
BB
|
B
|
CCC/CC
|
D
|
N.R.
|
AAA
|
88.34
|
7.84
|
0.47
|
0.09
|
0.09
|
0.00
|
0.00
|
0.00
|
3.17
|
AA
|
0.59
|
87.31
|
7.54
|
0.57
|
0.06
|
0.10
|
0.02
|
0.01
|
3.79
|
A
|
0.05
|
2.00
|
87.39
|
5.47
|
0.40
|
0.15
|
0.02
|
0.06
|
4.46
|
BBB
|
0.01
|
0.15
|
3.98
|
84.17
|
4.14
|
0.73
|
0.16
|
0.24
|
6.42
|
BB
|
0.03
|
0.06
|
0.22
|
5.18
|
75.71
|
7.20
|
0.84
|
1.07
|
9.69
|
B
|
0.00
|
0.05
|
0.18
|
0.30
|
5.78
|
72.77
|
4.10
|
4.99
|
11.83
|
CCC/CC
|
0.00
|
0.00
|
0.26
|
0.39
|
1.10
|
11.15
|
47.49
|
26.29
|
13.34
|
Asia
ex-Japan issuer ratings (1993-2006)
|
From/To
|
AAA
|
AA
|
A
|
BBB
|
BB
|
B
|
CCC/CC
|
D
|
N.R.
|
AAA
|
87.50
|
12.50
|
0.00
|
0.00
|
0.00
|
0.00
|
0.00
|
0.00
|
0.00
|
AA
|
1.56
|
84.38
|
12.50
|
0.00
|
0.00
|
1.56
|
0.00
|
0.00
|
0.00
|
A
|
0.00
|
2.37
|
89.05
|
5.62
|
0.30
|
0.89
|
0.00
|
0.00
|
1.78
|
BBB
|
0.00
|
0.00
|
7.20
|
79.00
|
6.20
|
1.60
|
0.20
|
0.40
|
5.40
|
BB
|
0.00
|
0.00
|
0.00
|
5.29
|
76.92
|
2.08
|
1.44
|
0.64
|
13.62
|
B
|
0.00
|
0.00
|
0.24
|
0.24
|
10.14
|
68.16
|
2.59
|
1.89
|
16.75
|
CCC/CC
|
0.00
|
0.00
|
0.00
|
0.00
|
0.00
|
14.93
|
53.73
|
11.94
|
19.40
|
Source:
Standard & Poor's Global Fixed Income Research. Standard &
Poor's CreditPro® 7.51. Note: N.R.--not rated.
|
Long-term rating transition
relationships (see table 6) remain true even when entities that are not
rated at some point during their rating history are removed from consideration.
Table
6
|
Average
One-Year N.R.-Removed Transition Rates (%)
|
Taiwan
Ratings' issuer ratings (1998-2006)
|
From/To
|
twAAA
|
twAA
|
twA
|
twBBB
|
twBB
|
twB
|
twCCC/CC
|
twD
|
twAAA
|
95.24
|
4.76
|
0.00
|
0.00
|
0.00
|
0.00
|
0.00
|
0.00
|
twAA
|
2.53
|
96.20
|
1.27
|
0.00
|
0.00
|
0.00
|
0.00
|
0.00
|
twA
|
0.00
|
10.48
|
87.14
|
2.38
|
0.00
|
0.00
|
0.00
|
0.00
|
twBBB
|
0.00
|
0.57
|
17.05
|
79.55
|
2.27
|
0.00
|
0.00
|
0.57
|
twBB
|
0.00
|
0.00
|
1.57
|
18.90
|
77.17
|
0.79
|
0.79
|
0.79
|
twB
|
0.00
|
0.00
|
0.00
|
0.00
|
21.05
|
63.16
|
15.79
|
0.00
|
twCCC/CC
|
0.00
|
0.00
|
0.00
|
0.00
|
40.00
|
0.00
|
60.00
|
0.00
|
Global
issuer ratings (1981-2006)
|
From/To
|
AAA
|
AA
|
A
|
BBB
|
BB
|
B
|
CCC/CC
|
D
|
AAA
|
91.26
|
8.07
|
0.49
|
0.09
|
0.09
|
0.00
|
0.00
|
0.00
|
AA
|
0.62
|
90.78
|
7.82
|
0.60
|
0.06
|
0.10
|
0.02
|
0.01
|
A
|
0.05
|
2.09
|
91.47
|
5.73
|
0.42
|
0.16
|
0.02
|
0.06
|
BBB
|
0.01
|
0.16
|
4.23
|
90.01
|
4.41
|
0.76
|
0.17
|
0.24
|
BB
|
0.04
|
0.06
|
0.24
|
5.73
|
83.93
|
7.93
|
0.92
|
1.15
|
B
|
0.00
|
0.06
|
0.21
|
0.34
|
6.52
|
82.74
|
4.65
|
5.48
|
CCC/CC
|
0.00
|
0.00
|
0.30
|
0.45
|
1.28
|
12.94
|
55.38
|
29.65
|
Asia
ex-Japan issuer ratings (1993-2006)
|
From/To
|
AAA
|
AA
|
A
|
BBB
|
BB
|
B
|
CCC/CC
|
D
|
AAA
|
87.50
|
12.50
|
0.00
|
0.00
|
0.00
|
0.00
|
0.00
|
0.00
|
AA
|
1.56
|
84.38
|
12.50
|
0.00
|
0.00
|
1.56
|
0.00
|
0.00
|
A
|
0.00
|
2.41
|
90.66
|
5.72
|
0.30
|
0.90
|
0.00
|
0.00
|
BBB
|
0.00
|
0.00
|
7.63
|
83.69
|
6.57
|
1.69
|
0.21
|
0.21
|
BB
|
0.00
|
0.00
|
0.00
|
6.15
|
89.20
|
2.42
|
1.68
|
0.56
|
B
|
0.00
|
0.00
|
0.28
|
0.28
|
12.22
|
82.10
|
3.13
|
1.99
|
CCC/CC
|
0.00
|
0.00
|
0.00
|
0.00
|
0.00
|
18.87
|
67.92
|
13.21
|
Source:
Standard & Poor's Global Fixed Income Research. Standard &
Poor's CreditPro® 7.51.
|
Global observations
reveal that lower rated credits generally move toward lower categories,
however, lower rated credits (or even most categories) in Taiwan Ratings'
pool tended to move up rather than down. This is mainly a result of a
large-scale rating adjustment in December 2004, which was made to reflect
fundamental improvements beyond Taiwan Ratings' expectations at smaller/weaker
financial institutions.
The ratings in Taiwan
ratings' pool exhibited higher volatility than the ratings in Standard
& Poor's global pool. The frequency of annual rating changes in Taiwan
ranged between 12% and 72% in 1999-2006 and averaged 36% in the period
(see table 7). This contrasts with the annual rating changes in Standard
& Poor's global pool, which ranged between 24% and 34% in 1997-2006
and averaged 28% in the period (see table 8). 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 9). The high ratio of annual rating changes in Taiwan Ratings' pool
also reflects the large-scale rating adjustment conducted in December
2004, which also resulted in a lower downgrade-to-upgrade ratio for Taiwan
Ratings' pool that averaged at 0.3 times in 1999-2006 in comparison with
1.6 times for Standard & Poor's regional and global pools.
Table
7
|
Summary
Of Annual Ratings Changes In Taiwan
|
Year
|
Issuers
as of Jan. 1
|
Upgrades
(%)
|
Downgrades
(%)
|
Defaults
(%)*
|
Withdrawn
ratings (%)
|
Changed
ratings (%)
|
Unchanged
ratings (%)
|
Downgrade/
upgrade ratio
|
1999
|
33
|
9.09
|
0.00
|
0.00
|
3.03
|
12.12
|
87.88
|
0.00
|
2000
|
60
|
3.33
|
13.33
|
1.67
|
5.00
|
23.33
|
76.67
|
4.00
|
2001
|
86
|
2.33
|
12.79
|
0.00
|
8.14
|
23.26
|
76.74
|
5.50
|
2002
|
104
|
18.27
|
19.23
|
0.00
|
11.54
|
49.04
|
50.96
|
1.05
|
2003
|
129
|
15.50
|
3.88
|
0.00
|
10.85
|
30.23
|
69.77
|
0.25
|
2004
|
134
|
58.21
|
2.99
|
0.00
|
11.19
|
72.39
|
27.61
|
0.05
|
2005
|
136
|
13.24
|
0.74
|
0.74
|
8.82
|
23.53
|
76.47
|
0.06
|
2006
|
141
|
16.31
|
3.55
|
0.71
|
10.64
|
31.21
|
68.79
|
0.22
|
Weighted
average (99-06)
|
|
20.05
|
6.56
|
0.36
|
9.60
|
36.57
|
63.43
|
0.33
|
Source:
Standard & Poor's CreditPro ® 7.51. Note: All intermediate
ratings are disregarded. *Excludes downgrades to 'D', shown separately
in the default column.
|
Table
8
|
Summary
of Global Annual Rating Changes, 1997-2006
|
Year
|
Issuers
as of Jan. 1
|
Upgrades
(%)
|
Downgrades
(%)*
|
Defaults
(%)
|
Withdrawn
ratings (%)
|
Changed
ratings (%)
|
Unchanged
ratings (%)
|
Downgrades/
upgrades
|
1997
|
3,553
|
8.92
|
7.82
|
0.62
|
7.26
|
24.63
|
75.37
|
0.88
|
1998
|
4,158
|
7.24
|
11.38
|
1.27
|
8.10
|
27.99
|
72.01
|
1.57
|
1999
|
4,602
|
5.56
|
11.45
|
2.09
|
8.69
|
27.79
|
72.21
|
2.06
|
2000
|
4,785
|
6.67
|
11.66
|
2.40
|
7.02
|
27.75
|
72.25
|
1.75
|
2001
|
4,875
|
5.50
|
15.69
|
3.71
|
7.30
|
32.21
|
67.79
|
2.85
|
2002
|
4,919
|
5.16
|
18.72
|
3.48
|
6.87
|
34.23
|
65.77
|
3.63
|
2003
|
4,949
|
6.28
|
14.18
|
1.86
|
7.27
|
29.60
|
70.40
|
2.26
|
2004
|
5,183
|
8.49
|
7.31
|
0.77
|
7.12
|
23.69
|
76.31
|
0.86
|
2005
|
5,490
|
12.35
|
9.03
|
0.56
|
8.27
|
30.22
|
69.78
|
0.73
|
2006
|
5,679
|
11.89
|
8.35
|
0.44
|
8.28
|
28.95
|
71.05
|
0.70
|
Weighted
average
|
8.01
|
11.50
|
1.53
|
6.90
|
27.93
|
72.07
|
1.62
|
Source:
Standard & Poor's CreditPro ® 7.51. Note: All intermediate
ratings are disregarded. *Excludes downgrades to 'D', shown separately
in the default column.
|
Table
9
|
Summary
of Asia ex-Japan Rating Changes, 1996-2006
|
Year
|
Average
no. of issuers*
|
Upgrades
(%)
|
Downgrades
(%)£
|
Defaults
(%)
|
Withdrawn
ratings (%)
|
Changed
ratings (%)
|
Unchanged
ratings (%)
|
Downgrade/
upgrades
|
1997
|
50
|
2
|
46
|
2
|
6
|
56
|
44
|
23
|
1998
|
92
|
4.37
|
62.3
|
9.84
|
14.21
|
90.71
|
9.29
|
14.25
|
1999
|
118
|
3.39
|
13.56
|
3.39
|
16.1
|
36.44
|
63.56
|
4
|
2000
|
133
|
10.57
|
4.53
|
1.51
|
6.79
|
23.4
|
76.6
|
0.43
|
2001
|
155
|
8.41
|
4.53
|
2.59
|
7.12
|
22.65
|
77.35
|
0.54
|
2002
|
166
|
18.73
|
13.9
|
0
|
7.85
|
40.48
|
59.52
|
0.74
|
2003
|
206
|
12.65
|
6.33
|
0.49
|
9.73
|
29.2
|
70.8
|
0.5
|
2004
|
255
|
19.61
|
2.75
|
0
|
5.1
|
27.45
|
72.55
|
0.14
|
2005
|
290
|
36.96
|
3.11
|
0
|
5.18
|
45.25
|
54.75
|
0.08
|
2006
|
331
|
9.68
|
3.33
|
0.3
|
25.11
|
38.43
|
61.57
|
0.34
|
Weighted
average
|
15.73
|
9.60
|
1.23
|
11.10
|
37.66
|
62.34
|
1.93
|
Source:
Standard & Poor's CreditPro ® 7.51. Note: All intermediate
ratings are disregarded. *Average of the number of issuers on the
first and last days of each year. £Excludes downgrades
to 'D', shown separately in the default column.
|
Default Implications
Of Ratings Transition
As the rating performance
of Taiwan Ratings' scale continues to develop, including the size of the
rated pool and the length of rating history, the default and rating transition
is likely to move toward Standard & Poor's global study after its
issuer pool undergoes testing through future business cycles. However,
there remains 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 sovereign
risk (Taiwan is rated AA-/Negative/A-1+ by Standard & Poor's Rating
Services).
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. The one-year default rate column in table 10 is equivalent
to the D (default) column in table 11, while the three-year default rate
column in table 10 is about the level of the D (default) column in table
11. 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
Cumulative Average Default Rates, 1981-2006 (%)
|
|
Time
Horizon (years)
|
Rating
|
1
|
2
|
3
|
4
|
5
|
6
|
7
|
8
|
9
|
10
|
11
|
12
|
13
|
14
|
15
|
AAA
|
0
|
0
|
0.09
|
0.19
|
0.29
|
0.43
|
0.5
|
0.62
|
0.66
|
0.7
|
0.7
|
0.7
|
0.7
|
0.76
|
0.83
|
AA
|
0.01
|
0.05
|
0.1
|
0.2
|
0.32
|
0.43
|
0.56
|
0.68
|
0.78
|
0.89
|
0.99
|
1.09
|
1.19
|
1.28
|
1.33
|
A
|
0.06
|
0.17
|
0.31
|
0.47
|
0.68
|
0.91
|
1.19
|
1.41
|
1.64
|
1.9
|
2.11
|
2.28
|
2.45
|
2.6
|
2.84
|
BBB
|
0.24
|
0.71
|
1.23
|
1.92
|
2.61
|
3.28
|
3.82
|
4.38
|
4.89
|
5.42
|
5.97
|
6.39
|
6.89
|
7.38
|
7.93
|
BB
|
1.07
|
3.14
|
5.61
|
7.97
|
10.1
|
12.12
|
13.73
|
15.15
|
16.47
|
17.49
|
18.46
|
19.22
|
19.9
|
20.36
|
20.84
|
B
|
4.99
|
10.92
|
15.9
|
19.76
|
22.55
|
24.72
|
26.54
|
28
|
29.2
|
30.42
|
31.46
|
32.38
|
33.35
|
34.24
|
35.03
|
CCC/C
|
26.29
|
34.73
|
39.96
|
43.19
|
46.22
|
47.49
|
48.61
|
49.23
|
50.95
|
51.83
|
52.57
|
53.34
|
53.95
|
54.59
|
54.59
|
All
rated
|
1.53
|
3.05
|
4.43
|
5.62
|
6.6
|
7.44
|
8.15
|
8.75
|
9.3
|
9.81
|
10.27
|
10.65
|
11.03
|
11.38
|
11.73
|
Source:
Standard & Poor's Global Fixed Income Research. Standard &
Poor's CreditPro® 7.51.
|
Table
11
|
Average
Multi-Year Transition Matrices, 1981 - 2006 (%)
|
|
One-year
transition rates
|
From/To
|
AAA
|
AA
|
A
|
BBB
|
BB
|
B
|
CCC/CC
|
D
|
N.R.
|
AAA
|
88.34
|
7.84
|
0.47
|
0.09
|
0.09
|
0
|
0
|
0
|
3.17
|
AA
|
0.59
|
87.31
|
7.54
|
0.57
|
0.06
|
0.1
|
0.02
|
0.01
|
3.79
|
A
|
0.05
|
2
|
87.39
|
5.47
|
0.4
|
0.15
|
0.02
|
0.06
|
4.46
|
BBB
|
0.01
|
0.15
|
3.98
|
84.17
|
4.14
|
0.73
|
0.16
|
0.24
|
6.42
|
BB
|
0.03
|
0.06
|
0.22
|
5.18
|
75.71
|
7.2
|
0.84
|
1.07
|
9.69
|
B
|
0
|
0.05
|
0.18
|
0.3
|
5.78
|
72.77
|
4.1
|
4.99
|
11.83
|
CCC/CC
|
0
|
0
|
0.26
|
0.39
|
1.1
|
11.15
|
47.49
|
26.29
|
13.34
|
|
Three-year
transition rates
|
From/To
|
AAA
|
AA
|
A
|
BBB
|
BB
|
B
|
CCC/CC
|
D
|
N.R.
|
AAA
|
68.39
|
18.98
|
2.55
|
0.4
|
0.12
|
0.03
|
0.03
|
0.09
|
9.41
|
AA
|
1.41
|
66.46
|
18.06
|
2.38
|
0.41
|
0.25
|
0.02
|
0.1
|
10.92
|
A
|
0.1
|
4.57
|
67.34
|
12.21
|
1.52
|
0.62
|
0.11
|
0.32
|
13.21
|
BBB
|
0.04
|
0.47
|
9.09
|
60.55
|
8.06
|
2.33
|
0.43
|
1.32
|
17.72
|
BB
|
0.05
|
0.1
|
0.81
|
11.33
|
43.82
|
11.87
|
1.54
|
5.92
|
24.57
|
B
|
0.01
|
0.07
|
0.45
|
1.3
|
11.01
|
37.08
|
4.34
|
17.04
|
28.71
|
CCC/CC
|
0
|
0
|
0.3
|
1.06
|
2.43
|
14.25
|
13.57
|
42.61
|
25.78
|
Source:
Standard & Poor's Global Fixed Income Research. Standard &
Poor's CreditPro® 7.51. N.R.--not rated.
|
Appendix: Default Methodology And Definitions
This long-term corporate
default and rating transition study uses the CreditPro? 7.51 database
of long-term issuer credit ratings. An issuer credit rating reflects Taiwan
Ratings' opinion of a company's overall capacity to pay its obligations
(that is, its fundamental creditworthiness). This opinion focuses on the
obligor's ability and willingness to meet its financial commitments on
a timely basis, and it generally indicates the likelihood of default regarding
all financial obligations of the firm. It is not necessary for a company
to have rated debt in order to be assigned an issuer credit rating.
Although a company's
senior secured debt (particularly debt with strong covenants) may occasionally
be rated higher than the issuer credit rating on the company, specific
issues are typically rated as high as or lower than the issuer rating,
depending on their relative priority within the company's debt structure.
If they are lower rated entities, issuer credit ratings are generally
two notches higher than subordinated debt ratings. Otherwise, they are
generally one notch higher. Therefore, though a 'twBB+' issuer credit
rating is generally paired with a 'twBB-' subordinated debt rating, a
'twAA' issuer credit rating usually corresponds to a 'twAA-' subordinated
rating.
Standard & Poor's
ongoing enhancement of the CreditPro? database used to generate this study
may lead to outcomes that differ to some degree from those reported in
previous studies. However, this poses no continuity problem because each
study reports statistics back to Dec. 31, 1998. Therefore, each annual
default study is self-contained and effectively supersedes all previous
versions.
Issuers included
in this study
The study analyzed
the rating histories of 208 companies that were rated by Taiwan Ratings
as of Dec. 31, 1998, or that were first rated between that date and Dec.
31, 2006. These companies include industrials, utilities, insurance companies,
financial holding companies, banks, securities firms, and other financial
institutions in Taiwan with long-term credit ratings. The global data
presented in this report refers to Standard & Poor's ratings histories
of all 12,293 long-term rated issuers from Dec. 31, 1980 to Dec. 31, 2006.
And the Asia ex-Japan data refers to Standard & Poor's ratings histories
of 582 long-term rated issuers from Dec. 31, 1992 to Dec. 31, 2006. The
study includes nonconfidentially and confidentially rated entities as
well as those whose ratings were withdrawn after initial assignment. The
analysis excludes public information (pi) ratings and ratings based on
the guarantee of another company. Structured finance vehicles, public-sector
issuers, and sovereign issuers are the subject of separate default and
transition studies and are also excluded from this study.
Subsidiaries whose
debt is fully guaranteed by a parent or whose default risk is considered
identical to that of their parents were excluded. The latter are companies
whose obligations are not legally guaranteed by a parent but whose operating
or financing activities are so inextricably entwined with those of the
parent that it would be impossible to imagine the default of one and not
the other. At times, however, some of these subsidiaries might not yet
have been covered by a parent's guarantee, or the relationship that combines
the default risk of parent and child might have come to an end, or might
not have begun. Such subsidiaries were included for the period during
which they carried a distinct and separate risk of default.
Definition of
default
A default is recorded
on the first occurrence of a payment default on any financial obligation,
rated or unrated, other than a financial obligation subject to a bona
fide commercial dispute; an exception occurs when an interest payment
missed on the due date is made within the grace period. Preferred stock
is not considered a financial obligation; thus, a missed preferred stock
dividend is not normally equated with default. Distressed exchanges, on
the other hand, are considered defaults whenever the debt holders are
coerced into accepting substitute instruments with lower coupons, longer
maturities, or any other diminished financial terms.
Issue ratings are
usually lowered to 'D' following a company's default on the corresponding
obligation. In addition, 'SD' is used whenever Taiwan Ratings believes
that an obligor that has selectively defaulted on a specific issue or
class of obligations will continue to meet its payment obligations on
other issues or classes of obligations in a timely matter. 'twR' indicates
that an obligor is under regulatory supervision owing to its financial
condition. This does not necessarily indicate a default event, but the
regulator may have the power to favor one class of obligations over others
or pay some obligations and not others. 'D', 'SD', and 'twR' issuer ratings
are deemed defaults for purposes of this study. A default is assumed to
take place on the earliest of: the date Taiwan Ratings revised the ratings
to D', 'SD', or 'twR'; the date a debt payment was missed; the date a
distressed exchange offer was announced; or the date the debtor filed
or was forced into bankruptcy.
Static pool
methodology
Taiwan Ratings conducts
its default studies 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. When an issuer defaults, that default is assigned
back to all of the static pools to which the issuer belonged.
Taiwan Ratings uses
the static pool methodology to avoid certain pitfalls in estimating default
rates, to ensure that default rates account for rating migration, and
to allow for default rates to be calculated across multi-period time horizons.
Some methods for calculating default and rating transition rates might
charge defaults against only the initial rating on the issuer--ignoring
more recent rating changes that supply more current information. Other
methods may calculate default rates using only the most recent year's
default and rating data--this method may yield comparatively low default
rates during periods of high rating activity, as they ignore prior years'
default activity.
The pools are static
in the sense that their membership remains constant over time. Each static
pool can be interpreted as a buy and hold portfolio. Because errors, if
any, are corrected by every new update, and because the criteria for inclusion
or exclusion of companies in the default study are subject to minor revisions
as time goes by, it is not possible to compare static pools across different
studies. Therefore, every new update revises results back to the same
starting date of Dec. 31, 1998, so as to avoid continuity problems.
Entities that have
had ratings withdrawn--that is, revised to N.R.--are surveilled with the
aim of capturing a potential default. These companies, as well as those
that have defaulted, are excluded from subsequent static pools.
For instance, the
1999 static pool consists of all companies rated as of 12:01 a.m. Jan.
1, 1999. Adding those companies first rated in 1999 to the surviving members
of the 1999 static pool forms the 2000 static pool. All rating changes
that took place are reflected in the newly formed 2000 static pool. This
same method was used to form static pools for 2001 through 2006.
Consider the following
example: An issuer is originally rated 'twBB' in mid-1998 and is downgraded
to 'twB' in 2000. This is followed by a rating withdrawal (N.R.) in 2002
and a default ('D') in 2005. This hypothetical company would be included
in the 1999 and 2000 pools with the 'twBB' rating, which it was rated
at at the beginning of those years; likewise, it would be included in
the 2001 and 2002 pools with the 'twB' rating. It would not be part of
the 1998 pool because it was not rated as of the first day of that year,
and it would not be included in any pool after the last day of 2002 because
the rating had been withdrawn by then. Yet each of the four pools in which
this company was included (1999-2002) would record its 2005 default at
the appropriate time horizon.
Ratings are withdrawn
when an entity's entire debt is paid off or when the program or programs
rated are terminated and the relevant debt extinguished. They may also
occur as a result of M&A. Others are withdrawn because of a lack of
cooperation, particularly when a company is experiencing financial difficulties
and refuses to provide all the information needed to continue surveillance
on the ratings.
Default rate
calculation
Annual default rates
were calculated for each static pool: first in units, and later as percentages
with respect to the number of issuers in each rating category. Finally,
these percentages were combined to obtain cumulative default rates for
the nine years covered by the study (see table 2).
Issuer-weighted
default rates
Averages that appear
in this study are calculated based on the number of issuers rather than
the dollar amounts affected by defaults or rating changes. Although dollar
amounts provide information about the portion of the market that is affected
by defaults or rating changes, issuer-weighted averages are a more useful
measure of the statistical performance of ratings.
Many practitioners
use statistics from this default study and CreditPro? to estimate the
probability of default and the probability of rating transition. It is
important to note that Taiwan Ratings' ratings do not imply a specific
probability of default; however, Taiwan Ratings' historical default rates
are frequently used to estimate these characteristics. When estimating
the probability of default, issuer-weighted statistics have less variance
than dollar-weighted statistics and are therefore preferable.
Cumulative average
default rate calculation
Cumulative default
rates that average the experience of all static pools were derived by
calculating marginal default rates, conditional on survival (survivors
being nondefaulters) for each possible time horizon and for each static
pool, weight averaging the conditional marginal default rates, and accumulating
the average conditional marginal default rates (see table 10). Conditional
default rates are calculated by dividing the number of issuers in a static
pool that default at a specific time horizon by the number of issuers
that survived (did not default) to that point in time. Weights are based
on the number of issuers in each static pool. Cumulative default rates
are one minus the product of the proportion of survivors (nondefaulters).
For instance, the
weighted average first-year default rate for 'B' rated companies for all
26 pools was 4.99%, meaning that an average of 95.01% of obligors survived
for a period of one year or longer. Similarly, the second- and third-year
conditional marginal averages were 6.24% for the first 25 pools (93.76%
of those companies that did not default in the first year survived the
second year) and 5.59% for the first 24 pools (94.41% of those companies
that did not default by the second year survived the third year). Multiplying
95.01% by 93.76% results in a survival rate of 89.08% to the end of the
second year, or a two-year cumulative average default rate of 10.92%.
Multiplying 89.08% by 94.41% results in an 84.10% survival rate to the
end of the third year, or a three-year cumulative average default rate
of 15.90%.
N.R.-removed
default rates
A slightly different
method is used to obtain N.R.-removed default rates. These are obtained
by omitting those issuers that had ratings withdrawn. The N.R.-removal
replicates the default rate that a buy-and-hold portfolio would experience
if the portfolio were reallocated among the non-N.R. members of the portfolio
each time the rating on a company is withdrawn. The numerators and denominators
of the default rates decrease gradually as companies merge, leave the
public fixed-income markets, or request the ratings on them be withdrawn.
These rates are, in general, greater than those of the conventional default
rate calculation, but the overall behavior of the default rates is quite
similar. That is, the higher the rating, the lower the default likelihood.
The N.R.-removed default
rate calculation may unduly inflate default rates as shown by the following
example. Suppose that there were 10 issuers in a static pool, nine of
which became N.R. over a 10-year time span for benign reasons such as
mergers or retiring of debt. If, in the 10th year, the one company that
was still rated was to default, the N.R.-adjusted default rate would be
100% for the 10-year time horizon. In order for the conventional default
rate to reach 100%, all nine of the N.R. issuers would need to default
after the ratings on them were withdrawn. Although the N.R.-removed default
rate likely overstates the risk of default, it is included in this study
because some investors use it as a conservative estimate of average default
rates.
Time sample
This update limits
the reporting of default rates to the selected time horizon; however,
the data was gathered for nine years and all calculations are based on
the rating experience of that period. The maturities of most obligations
are much shorter than the selected time horizon. In addition, average
default statistics become less reliable at longer time horizons as the
sample size becomes smaller and the cyclical nature of default rates increases
its effect on averages.
Default patterns share
broad similarities across all static pools, suggesting that Standard &
Poor's rating standards have been consistent over time. Adverse business
conditions tend to coincide with default upswings for all pools. Speculative-grade
issuers have been hit the hardest by these upswings, but investment-grade
default rates also increase in stressful periods.
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 was compared with the rating at the beginning of the same year. An
issuer that remained rated for more than one year was counted as many
times as the number of years it was rated. For instance, an issuer continually
rated from the middle of 1998 to the middle of 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, 2005, had 7 one-year transitions,
while companies first rated between Jan. 1, 2006, and Dec. 31, 2006 had
only one.
Each one-year transition
matrix displays all rating movements between letter categories from the
beginning of the year through year-end. For each rating listed in the
matrix's left-most column, there are nine ratios listed in the rows, corresponding
to the ratings from 'twAAA' to 'D,' plus an entry for N.R.
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 law or inclination
to invest in top-grade bonds would want to assess the likelihood that
Taiwan Ratings' analysts will continue to assign top ratings to their
investments. Conversely, investors buying high-yield bonds in hopes of
profiting from a rating upgrade would be able to gauge that expectation
realistically.
The credit community
might also use rating transition information, in part, to determine maturity
exposure limits or to measure credit risk in the context of the value-at-risk
models. Assuming that the rating transition rates are stable and follow
a first-order Markov process, cumulative default rates could be projected
for any number of years into the future. Rating transition matrices could
also be constructed to produce stressed default rates. Such matrices are
often used in the area of credit risk measurement. In addition, multiyear
transition matrices are valuable tools that can be used to forecast future
rating distributions and may be better suited for certain applications
than are one-year transition matrices.
N.R.-removed
transition rates
The difference between
a N.R.-removed table and one that is not is that the former is based on
pools that 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 speculative-grade ratings categories
after just a few years. Little is known about 'N.R.' obligors except that
there is no public record of a default. Indeed, default might be unlikely
for those obligors whose debt has been extinguished.
Comparing transition
rates with default rates
Rating transition
rates may be compared with the marginal and cumulative default rates described
in the previous section. For example, note that the one-year default rate
column of table 2 is equivalent to column 'D' of the average one-year
transition matrix found in table 5. Cumulative average default rates are
the summary of all static pools from 1998 through 2006 while the number
of pools used in the average transition rate is limited by the transition's
time horizon.
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