Taiwan
Ratings' 2011 Corporate Default And Rating Transition Study
2012/05/30
Primary Credit
Analyst: |
Chris
Lee; (886) 2 8722-5816; chris_lee@taiwanratings.com.tw |
Secondary
Contacts: |
Raymond
Hsu, CFA; (886) 2 8722-5827; raymond_hsu@taiwanratings.com.tw |
|
Susan
Chu; (886) 2 8722-5813
susan_chu@taiwanratings.com.tw |
Coverage
Taiwan Ratings Corp.'s annual default and ratings transition study closely
examines the track record of credit ratings that we have assigned we began
operations in 1998. This comprehensive study shows that the movement of
ratings has followed a broadly similar pattern to Standard & Poor's
Ratings Services' global experience; however, rating movements in Taiwan
have been more volatile, particularly at lower rating levels. This study
primarily measures ratings migration over time and provides a quantitative
measure of ratings distribution and movement.
This report covers
266 issuer credit ratings assigned by Taiwan Ratings between 1998 and
2011, inclusive. The study analyzes the movement of ratings on Taiwan-based
obligors--industrials, utilities, insurance companies, financial holding
companies, banks, securities firms, and other financial institutions.
The study includes public and confidentially rated entities, as well as
those on which we later withdrew the ratings.
Key Findings
- The number of rating
actions increased most significantly in 2011 since the financial crisis
in 2008 and most of these actions were upward. Such rating movements
were mostly due to the implementation of Standard & Poor's revised
bank ratings criteria in late 2011. The credit quality of most of our
rated obligors remained stable in 2011. Excluding the impact of this
criteria change, the upgrade and downgrade ratios remain a low 4.65%
and 1.55%, respectively.
- There were no rated
obligor defaults in our ratings pool in 2011. The absence of any defaults,
in our view, is due to the majority of high ratings (87.1% are rated
'twA-' or above) in our issuer pool, and the relatively small issuer
pool size. Additional factors were a stable macro economy, a recovery
in market confidence, and sufficient liquidity in the financial market
to support the credit profiles of most large issuers within our pool.
- The positive correlation
between credit ratings transitions and the number of defaults is as
valid a foundation for ratings in Taiwan Ratings' pool in 1999-2011,
as it is for Standard & Poor's global pool over the same period.
- The transition
of ratings assigned by Taiwan Ratings in 1998-2011 broadly mirrors that
of Standard & Poor's global study during 1981-2011, which reveals
that higher-rated issuers tend to incur greater rating stability than
their lower-rated counterparts. However, it should be noted that the
transition within our ratings pool tends to be more volatile at the
lower end of the rating scale than Standard & Poor's global ratings
pool. This is due to the calibration differences between Taiwan Ratings
and Standard & Poor's rating scales and the statistical limitations
of Taiwan Ratings' smaller sample size and shorter rating history.
New Bank Rating
Criteria Dominated Rating Actions In 2011
The number of rating actions significantly increased in 2011 and most
of these were on financial institutions following the implementation of
Standard & Poor's revised bank rating criteria (see related criteria
and research) in the fourth quarter of 2011. The ratio of total upgrades
among all rating actions rose to 11.63% in 2011 from 2010, the highest
level since the emergence of financial market dislocation in 2008. Taiwan's
financial sector led these upgrades, accounting for 80% of total upgrades
(12 out of 15 upgrades). The ratings actions mostly reflected our view
that under the new bank rating criteria these rated institutions would
likely receive support from the government of Taiwan or their related
financial groups.
The number of 'twAAA'
rated obligors increased sharply to 11 at the end of 2011 from six a year
ago, partly due to the bank criteria change (see chart and table 1). Notably,
70% of the downgrades (five out of seven downgrades) were also financial
institutions, all of which were due to the bank criteria change. Nonetheless,
most of the remaining rated obligors maintained stable creditworthiness
in 2011, supported by a stable domestic economy and abundant liquidity
in the domestic market.
Table
1 |
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
|
0.00
|
9.09
|
90.91
|
0.00
|
2000 |
63
|
3.17
|
12.70
|
1.59
|
1.59
|
19.05
|
80.95
|
4.00
|
2001 |
93
|
2.15
|
10.75
|
1.08
|
3.23
|
17.20
|
82.80
|
5.00
|
2002 |
112
|
16.07
|
18.75
|
0.00
|
14.29
|
49.11
|
50.89
|
1.17
|
2003 |
136
|
14.71
|
3.68
|
0.00
|
13.97
|
32.35
|
67.65
|
0.25
|
2004 |
139
|
54.68
|
2.88
|
0.00
|
10.07
|
67.63
|
32.37
|
0.05
|
2005 |
143
|
13.99
|
0.70
|
0.70
|
6.29
|
21.68
|
78.32
|
0.05
|
2006 |
154
|
14.94
|
2.60
|
0.65
|
16.23
|
34.42
|
65.58
|
0.17
|
2007 |
141
|
17.73
|
4.26
|
3.55
|
6.38
|
31.91
|
68.09
|
0.24
|
2008 |
138
|
4.35
|
5.07
|
1.45
|
5.80
|
16.67
|
83.33
|
1.17
|
2009 |
135
|
0.74
|
17.04
|
0.00
|
9.63
|
27.41
|
72.59
|
23.00
|
2010 |
131
|
4.58
|
3.05
|
0.00
|
6.87
|
14.50
|
85.50
|
0.67
|
2011 |
129
|
11.63
|
5.43
|
0.00
|
2.33
|
19.38
|
80.62
|
0.47
|
Weighted
average (1999-2011) |
|
14.03
|
6.46
|
0.71
|
8.34
|
29.54
|
70.46
|
0.46
|
*Excludes
downgrades to 'D', shown separately in the default column. Note: Rating
changes measured from rating as of Jan. 1 to rating as of Dec. 31
exlude all intermediate rating changes. Source: Standard & Poor's
Global Fixed Income Research; Standard & Poor's CreditPro® 7.72;
Taiwan Ratings' database. |
However, the ratings
performance of several local sectors could become more volatile if global
financial market uncertainties and concerns over the contagious effect
of major financial market problems widen further. This is particularly
true for export-sensitive sectors and financial institutions whose businesses
are highly correlated with global capital market movements. This is reflected
in the low 4.65% upgrade ratio in 2011--excluding the impact of the bank
rating criteria change. In our view, local corporations are likely to
experience greater downward pressure on their credit profiles over the
next four quarters due to the heavy reliance of Taiwan's export-oriented
economy on external demand. In addition, the majority of negative rating
actions, excluding those due to the bank criteria change, were taken in
the second half of 2011.
Ratings Remain
A Good Indicator Of Default Probability
Our study largely supports the existence of a negative correlation between
rating levels and default probability--broadly similar to the observations
of Standard & Poor's global study (see Related Criteria And Research).
Nonetheless, the overall number of defaults in our rated pool will continue
to develop, given Taiwan Ratings' smaller sample size and shorter review
period compared with Standard & Poor's global experience. In particular,
the small rating base limited the number of defaults during the earlier
years of Taiwan Ratings' established pool (see tables 2, 3, and 4). This
study covers ratings migration for 266 entities (as of the end of 2011)
for the period 1998-2011 compared with Standard & Poor's global rated
pool of 15,299 entities in 1981-2011.
Table
2 |
Taiwan
Cumulative Average Default Rates, 1999-2011 |
(%) |
1
|
2
|
3
|
4
|
5
|
6
|
7
|
8
|
9
|
10
|
twAAA |
0.00
|
0.00
|
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
|
0.00
|
0.00
|
twA |
0.22
|
0.46
|
0.74
|
0.74
|
0.74
|
0.74
|
0.74
|
0.74
|
0.74
|
0.74
|
twBBB |
1.00
|
2.39
|
3.13
|
3.94
|
3.94
|
4.40
|
5.43
|
6.61
|
8.13
|
8.13
|
twBB |
2.55
|
4.61
|
6.18
|
6.71
|
8.35
|
10.06
|
11.28
|
12.58
|
13.41
|
13.41
|
twB |
4.88
|
9.88
|
12.39
|
12.39
|
15.21
|
18.04
|
24.60
|
33.47
|
39.52
|
39.52
|
twCCC/C |
0.00
|
0.00
|
9.09
|
45.45
|
72.73
|
90.91
|
100.00
|
N/A
|
N/A
|
N/A
|
All ratings |
0.71
|
1.49
|
2.11
|
2.72
|
3.42
|
4.22
|
5.20
|
6.25
|
7.17
|
7.17
|
N/A--Not
applicable. Source: Standard & Poor's Global Fixed Income Research;
Standard & Poor's CreditPro® 7.72; Taiwan Ratings Corp.'s database.
|
Table
3 |
Standard
& Poor's Global Cumulative Average Default Rates, 1981-2011 |
|
--Time
Horizon (years)--
|
(%) |
1
|
2
|
3
|
4
|
5
|
6
|
7
|
8
|
9
|
10
|
11
|
12
|
13
|
14
|
15
|
AAA |
0.00
|
0.03
|
0.14
|
0.25
|
0.37
|
0.49
|
0.55
|
0.64
|
0.71
|
0.78
|
0.81
|
0.85
|
0.89
|
0.97
|
1.06
|
AA |
0.02
|
0.07
|
0.14
|
0.26
|
0.37
|
0.49
|
0.60
|
0.69
|
0.77
|
0.86
|
0.94
|
1.01
|
1.09
|
1.16
|
1.23
|
A |
0.08
|
0.18
|
0.32
|
0.48
|
0.66
|
0.86
|
1.10
|
1.31
|
1.53
|
1.77
|
1.97
|
2.14
|
2.30
|
2.45
|
2.66
|
BBB |
0.24
|
0.67
|
1.14
|
1.71
|
2.30
|
2.88
|
3.38
|
3.88
|
4.38
|
4.88
|
5.41
|
5.86
|
6.30
|
6.76
|
7.22
|
BB |
0.89
|
2.70
|
4.79
|
6.79
|
8.61
|
10.34
|
11.85
|
13.21
|
14.48
|
15.58
|
16.49
|
17.29
|
17.97
|
18.55
|
19.24
|
B |
4.48
|
9.95
|
14.57
|
18.15
|
20.83
|
23.00
|
24.75
|
26.19
|
27.46
|
28.70
|
29.77
|
30.65
|
31.47
|
32.22
|
33.01
|
CCC/C |
26.81
|
35.83
|
41.14
|
44.26
|
46.72
|
47.81
|
48.78
|
49.65
|
50.76
|
51.64
|
52.41
|
53.28
|
54.23
|
55.12
|
55.12
|
All ratings |
1.57
|
3.10
|
4.46
|
5.62
|
6.58
|
7.41
|
8.11
|
8.73
|
9.29
|
9.83
|
10.29
|
10.68
|
11.04
|
11.38
|
11.73
|
Source:
Standard & Poor's Global Fixed Income Research; Standard Poor's CreditPro®
www.spcreditpro.com |
The statistically
smaller and less-diversified ratings in Taiwan Ratings' issuer rating
pool (33 issuers in January 1999, 63 in January 2000, and 129 in January
2011) have several distinct aspects compared with Standard & Poor's
global ratings pool (see tables 2 and 3) including:
- No defaults for
credits rated 'twAA' or higher;
- Few issuers rated
'twBB+' or below in our total rated pool (including no issuers rated
'twCCC') in recent years, reflecting the lack of rating requests from
less-creditworthy issuers (see chart 1). This is due to the high percentage
of financial institutions in our ratings pool (62.8% in 2011) and for
which high creditworthiness, and thus higher ratings are crucial to
the successful implementation of their business models (see table 4).
Table
4 |
New
Issuer Sector Breakdown |
|
Financial
institutions
|
Industrials
and utilities
|
Total
|
1998 |
27
|
1
|
28
|
1999 |
28
|
7
|
35
|
2000 |
26
|
6
|
32
|
2001 |
9
|
11
|
20
|
2002 |
33
|
15
|
48
|
2003 |
9
|
12
|
21
|
2004 |
5
|
9
|
14
|
2005 |
9
|
10
|
19
|
2006 |
6
|
9
|
15
|
2007 |
2
|
5
|
7
|
2008 |
4
|
2
|
6
|
2009 |
3
|
3
|
6
|
2010 |
2
|
5
|
7
|
2011 |
4
|
4
|
8
|
Total |
167
|
99
|
266
|
%
of total |
62.8
|
37.2
|
100.0
|
Our ratings pool continues
to show no defaults in 2011, following zero-default rate performance in
2009-2010. In our view, this is due to Taiwan Ratings' small and less
diversified ratings pool, as well as Taiwan's stable economy in 2011,
which partly benefited from government of Taiwan's actions to stabilize
the domestic credit environment over the past two years. In addition,
at the beginning of 2011, most of the entities in our ratings pool were
rated 'twA-' or above and only 2.9% were rated 'twBB+' or below.
Despite continuing
uncertainty over the global economy, the creditworthiness of entities
in our ratings pool generally stabilized in 2011. This was mostly supported
by a relatively stable domestic economy as well as ample liquidity in
the domestic market, which provide Taiwan's corporate and financial service
sectors with a cushion against the effect of turbulent exports over the
past two to three quarters. Ample liquidity provides easy access to debt
funding for domestic industrial sectors with low costs.
For the purpose of
global consistency, this study views financial institutions that are placed
under regulatory supervision as being in default. However, placing a financial
institution under regulatory supervision, to which we assign a 'twR' rating,
does not necessarily indicate a default event but emphasizes that the
regulator has the power to favor one class of obligations over others
or to pay some obligations and not others. Among the nine institutions
that Taiwan Ratings rated 'twR' in 2000-2011, five had generally serviced
their debt obligations. Subsequently, we did not record these as 'SD'
or selective default, as they did not have debts beyond the legal scope
of the government's protection as defined by relevant regulation (i.e.
non-deposit debts issued after July 2005).
Taiwan's Rating
Transitions Largely Mirror Those In Global And Regional Ratings Studies
As mentioned above, our transition study shows a strong mirror to Standard
& Poor's observations of rating movements on a global and regional
scale. In particular, the higher-rated issuers tend to exhibit less ratings
volatility than lower-rated entities. For instance, the probability that
a Taiwan issuer rated 'twAA' at the beginning of a year will be rated
'twAA' at the end of the year is 93.8% (see table 5), 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 60.2%. The probability that a global issuer
that Standard & Poor's rates 'AA' will retain this rating after one
year is 86.3%, whereas the probability that a 'BB' rated global issuer
will retain this rating after one year is only 75.9%.
Table
5 |
Average
One-Year Transition Rates (%) |
Taiwan
Ratings Corp.'s issuer ratings (1999-2011) |
From/To |
twAAA
|
twAA
|
twA
|
twBBB
|
twBB
|
twB
|
twCCC/CC
|
D
|
NR
|
twAAA |
84.44
|
11.11
|
0.00
|
0.00
|
0.00
|
0.00
|
0.00
|
0.00
|
4.44
|
twAA |
2.21
|
93.82
|
1.55
|
0.00
|
0.00
|
0.00
|
0.00
|
0.00
|
2.43
|
twA |
0.00
|
6.59
|
86.15
|
2.42
|
0.22
|
0.00
|
0.00
|
0.22
|
4.40
|
twBBB |
0.00
|
0.33
|
10.30
|
74.09
|
1.99
|
0.00
|
0.00
|
1.00
|
12.29
|
twBB |
0.00
|
0.00
|
1.02
|
12.24
|
60.20
|
1.02
|
0.51
|
2.55
|
22.45
|
twB |
0.00
|
0.00
|
0.00
|
0.00
|
9.76
|
46.34
|
7.32
|
4.88
|
31.71
|
twCCC/CC |
0.00
|
0.00
|
0.00
|
0.00
|
36.36
|
0.00
|
63.64
|
0.00
|
0.00
|
Standard
& Poor's Global issuer ratings (1981-2011) |
From/To |
AAA
|
AA
|
A
|
BBB
|
BB
|
B
|
CCC/C
|
D
|
NR
|
AAA |
87.18
|
8.69
|
0.54
|
0.05
|
0.08
|
0.03
|
0.05
|
0.00
|
3.37
|
AA |
0.56
|
86.33
|
8.30
|
0.54
|
0.06
|
0.08
|
0.02
|
0.02
|
4.08
|
A |
0.04
|
1.91
|
87.27
|
5.44
|
0.38
|
0.16
|
0.02
|
0.08
|
4.71
|
BBB |
0.01
|
0.12
|
3.65
|
84.86
|
3.91
|
0.64
|
0.15
|
0.24
|
6.42
|
BB |
0.02
|
0.04
|
0.16
|
5.24
|
75.88
|
7.19
|
0.75
|
0.89
|
9.83
|
B |
0.00
|
0.04
|
0.13
|
0.22
|
5.57
|
73.43
|
4.42
|
4.48
|
11.72
|
CCC/C |
0.00
|
0.00
|
0.17
|
0.26
|
0.78
|
13.66
|
43.91
|
26.81
|
14.40
|
Standard
& Poor's Asia excluding Japan issuer ratings (1993-2011) |
From/To |
AAA
|
AA
|
A
|
BBB
|
BB
|
B
|
CCC/C
|
D
|
NR
|
AAA |
93.33
|
6.67
|
0.00
|
0.00
|
0.00
|
0.00
|
0.00
|
0.00
|
0.00
|
AA |
3.17
|
85.71
|
7.94
|
0.00
|
0.00
|
0.00
|
0.00
|
0.00
|
3.17
|
A |
0.00
|
2.76
|
90.46
|
3.39
|
0.13
|
0.38
|
0.00
|
0.00
|
2.89
|
BBB |
0.00
|
0.00
|
4.94
|
83.83
|
3.97
|
0.68
|
0.10
|
0.29
|
6.20
|
BB |
0.00
|
0.00
|
0.00
|
5.49
|
75.78
|
3.92
|
1.18
|
0.59
|
13.04
|
B |
0.00
|
0.00
|
0.00
|
0.00
|
8.54
|
68.18
|
2.20
|
2.89
|
18.18
|
CCC/C |
0.00
|
0.00
|
0.00
|
0.00
|
0.00
|
15.00
|
51.25
|
17.50
|
16.25
|
NR--Not
rated. Source: Standard & Poor's Global Fixed Income Research; Standard
& Poor's CreditPro® 7.72; Taiwan Ratings' database; Standard &
Poor's CreditPro® www.spcreditpro.com |
The majority of Taiwan
Ratings' rated categories registered a lower stability rate than those
rated by Standard & Poor's, due to Taiwan Ratings' smaller issuer
rating pool and shorter rating history, as well as the volatility inherent
in smaller or weaker financial institutions. However, caution is required
in interpreting the higher stability rates associated with the 'twCCC'/'twCC'
rating category relative to the 'twB' rating category in light of the
extremely small sample size. In addition, the somewhat high number of
withdrawals diluted the rating stability of the 'twB' rating category
(see table 5).
Most entities in our
pool tended to migrate to higher-rating categories in the period 1999-2011,
which is in the opposite direction to Standard & Poor's global ratings
pool. In our view, this was mainly due to the continued evolution of Taiwan's
financial services industry, in which Taiwan Ratings' rating pool concentrates,
and Taiwan's economic growth. These evolutions included the increasing
integration within financial holding company (FHC) groups, which largely
enhance the creditworthiness of newly associated weaker group members,
and the improvements in risk management across major participants.
The aforementioned
reasons resulted in a lower downgrade-to-upgrade ratio for Taiwan Ratings'
pool, which averaged 0.46 times in 1999-2011 compared with 1.41 times
for Standard & Poor's global pools over the same period (see tables
1 and 6). We adjusted a large number of ratings in December 2004. This
ratio would remain low at 0.33 times in 2011 if excluding the impact from
the bank rating criteria change in 2011.
However, the ratings
in our pool, which is a smaller and less diversified sample concentrated
in the financial service sector, are more volatile than the ratings in
Standard & Poor's global pool. The frequency range of annual rating
changes in Taiwan was 9.09%-67.63% in 1999-2011 and averaged 29.5% over
the same period (see table 1). This contrasts with the range of annual
rating changes in Standard & Poor's global pool of 23.9%-35.6% in
1999-2011 and an average 30.6% over the same period (see table 6).
Table
6 |
Summary
Of Standard & Poor's Global Annual Rating Changes, 1999-2011 |
Year |
Issuers
as of Jan. 1
|
Upgrades
(%)
|
Downgrades
(%)*
|
Defaults
(%)
|
Withdrawn
ratings (%)
|
Changed
ratings (%)
|
Unchanged
ratings (%)
|
Downgrade
/ upgrade ratio
|
1999 |
4553
|
5.58
|
11.46
|
2.13
|
8.79
|
27.96
|
72.04
|
2.06
|
2000 |
4728
|
6.62
|
11.76
|
2.45
|
7.04
|
27.88
|
72.12
|
1.78
|
2001 |
4807
|
5.55
|
15.83
|
3.77
|
7.51
|
32.66
|
67.34
|
2.85
|
2002 |
4834
|
5.21
|
18.74
|
3.54
|
7.07
|
34.57
|
65.43
|
3.6
|
2003 |
4843
|
6.26
|
14.31
|
1.9
|
7.31
|
29.77
|
70.23
|
2.29
|
2004 |
5077
|
8.41
|
7.45
|
0.79
|
7.25
|
23.89
|
76.11
|
0.89
|
2005 |
5369
|
12.55
|
9.03
|
0.58
|
8.44
|
30.6
|
69.4
|
0.72
|
2006 |
5527
|
12.05
|
8.43
|
0.45
|
8.52
|
29.46
|
70.54
|
0.7
|
2007 |
5732
|
13.21
|
9.09
|
0.37
|
10.31
|
32.97
|
67.03
|
0.69
|
2008 |
5851
|
7.61
|
15.54
|
1.74
|
7.49
|
32.37
|
67.63
|
2.04
|
2009 |
5770
|
4.63
|
18.53
|
4.06
|
8.37
|
35.58
|
64.42
|
4
|
2010 |
5498
|
11.55
|
8.55
|
1.15
|
6.22
|
27.46
|
72.54
|
0.74
|
2011 |
5848
|
11.87
|
11.42
|
0.75
|
7.39
|
31.43
|
68.57
|
0.96
|
Weighted
average (1999-2011) |
|
8.7
|
12.28
|
1.78
|
7.84
|
30.6
|
69.4
|
1.41
|
*Excludes
downgrades to 'D', shown separately in default column. Source: Standard
& Poor's Global Fixed Income Research; Standard & Poor's CreditPro®
www.spcreditpro.com. Note: Rating changes measured from rating as
of Jan 1 to rating as of Dec. 31. |
Default implications
of ratings transition
We believe that as the pattern of ratings migration for entities within
Taiwan Ratings' rated pool continues to develop, as well as the pool size
and length of study, the default and rating transition is likely to closely
mirror 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 positioned as a national
scale and excludes direct sovereign risks of a general or systemic nature
[Standard & Poor's rates the government of Taiwan 'AA-/Stable/A-1+'
(Unsolicited Ratings)].
Based on Standard
& Poor's historical observations, cumulative default rates may also
be calculated for multi-year periods (Note: the one-year and three-year
default rate columns in table 3 are approximately equivalent to the level
of the respective 'D' (default) columns in table 7). The slight difference
in results between the two tables mainly stems from slight variations
in the static pools used to calculate transition to default and cumulative
average default rates. Cumulative average default rates are the summary
of all available static pools and are calculated using marginal default
rates (conditional on survival), while the transition's time horizon limits
the number of pools used in the average transition rate.
Table
7 |
Standard
& Poor's Global Average Multi-Year Transition Matrices, 1981-2011 |
|
One-year
transition rates (%) |
From/To |
AAA
|
AA
|
A
|
BBB
|
BB
|
B
|
CCC/C
|
D
|
NR
|
AAA |
87.18
|
8.69
|
0.54
|
0.05
|
0.08
|
0.03
|
0.05
|
0.00
|
3.37
|
AA |
0.56
|
86.33
|
8.30
|
0.54
|
0.06
|
0.08
|
0.02
|
0.02
|
4.08
|
A |
0.04
|
1.91
|
87.27
|
5.44
|
0.38
|
0.16
|
0.02
|
0.08
|
4.71
|
BBB |
0.01
|
0.12
|
3.65
|
84.86
|
3.91
|
0.64
|
0.15
|
0.24
|
6.42
|
BB |
0.02
|
0.04
|
0.16
|
5.24
|
75.88
|
7.19
|
0.75
|
0.89
|
9.83
|
B |
0.00
|
0.04
|
0.13
|
0.22
|
5.57
|
73.43
|
4.42
|
4.48
|
11.72
|
CCC/C |
0.00
|
0.00
|
0.17
|
0.26
|
0.78
|
13.66
|
43.91
|
26.81
|
14.40
|
|
Three-year
transition rates (%)
|
|
AAA
|
AA
|
A
|
BBB
|
BB
|
B
|
CCC/C
|
D
|
NR
|
AAA |
66.79
|
19.95
|
2.42
|
0.33
|
0.17
|
0.08
|
0.11
|
0.14
|
10.00
|
AA |
1.29
|
65.28
|
18.93
|
2.23
|
0.36
|
0.27
|
0.03
|
0.15
|
11.45
|
A |
0.08
|
4.42
|
67.44
|
11.90
|
1.40
|
0.57
|
0.12
|
0.33
|
13.73
|
BBB |
0.03
|
0.38
|
8.68
|
62.12
|
7.35
|
2.06
|
0.36
|
1.19
|
17.84
|
BB |
0.01
|
0.07
|
0.65
|
11.17
|
44.31
|
12.13
|
1.35
|
4.97
|
25.34
|
B |
0.01
|
0.04
|
0.32
|
1.00
|
10.70
|
39.50
|
4.54
|
15.25
|
28.63
|
CCC/C |
0.00
|
0.00
|
0.26
|
0.88
|
1.86
|
15.18
|
11.62
|
42.69
|
27.52
|
Source:
Standard & Poor's Ratings Services Global Fixed Income Research; Standard
& Poor's CreditPro® www.spcreditpro.com |
Appendix: Default
Methodology And Definitions
This long-term corporate default and rating transition study uses CreditPro?
7.72 software. 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.
For lower rated entities, the issuer credit ratings are generally two
notches higher than the 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 analyzes the rating histories of 266 companies on which Taiwan
Ratings had assigned ratings as of Dec. 31, 1998, or that were first rated
between that date and Dec. 31, 2011. These include industrials, utilities,
insurance companies, FHCs, 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 15,299 companies that were rated by Standard & Poor's as of
Dec. 31, 1980, or that were first rated between that date and Dec. 31,
2011. The study includes non-confidentially 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 excluded from this study.
We excluded subsidiaries
with debt that is fully guaranteed by a parent or with default risk that
is considered identical to that of their parents. 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 event 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.
However, we consider distressed exchanges as defaults whenever the debt
holders are coerced into accepting substitute instruments with lower coupons,
longer maturities, or any other diminished financial terms.
Taiwan Rating's will
usually lower an issue rating to 'D' following a company's default on
the corresponding obligation. In addition, 'SD' is used whenever we believe
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. A 'twR' issuer rating
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 the purpose 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 when a debt payment was missed;
the date a distressed exchange offer was announced; or the date the debtor
filed for or was forced into bankruptcy.
Static Pool Methodology
Taiwan Ratings conducts its default studies on the basis of groupings
called static pools. These 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
belongs.
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 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, to avoid continuity problems.
Entities that have
had ratings withdrawn--that is, revised to NR (not rated)--are surveyed
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 2011.
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 (NR) in 2002
and a default ('D') in 2005. This hypothetical company would be included
in the 1999 and 2000 pools with the 'twBB' rating assigned to it 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. This may also
occur as a result of mergers and acquisitions. Other ratings 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 our surveillance on the ratings.
Default Rate Calculation
Annual default rates are 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 are combined to obtain cumulative
default rates for the 13 years covered by the study.
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 is a more useful measure of the performance of ratings.
Many people in the
investment field 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 we do not imply a specific probability of
default; however, our historical default rates are frequently used to
estimate these characteristics.
Average Cumulative
Default Rate Calculation
Cumulative default rates that average the experience of all static pools
are derived by calculating marginal default rates, conditional on survival
(survivors being non-defaulters) 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. 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 (non-defaulters).
Time Sample
This update limits the reporting of default rates to the selected time
horizon; however, the data has been gathered for 13 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 Taiwan Ratings'
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 is compared with the rating at the beginning of the same year. An
issuer that remained rated for more than one year is 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, 2011, had 13 one-year transitions,
while companies first rated between Jan. 1, 2011, and Dec. 31, 2011 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 NR.
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. 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.
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. Average cumulative
default rates are the summary of all static pools from 1998 through 2011,
while the number of pools used in the average transition rate is limited
by the transition's time horizon.
Related Criteria
And Research
- 2011
Annual Global Corporate Default Study And Rating Transitions, www.globalcreditportal.com,
March 21, 2012
- 2011
Annual Asia-Pacific Corporate Default Study And Rating Transitions,
www.globalcreditportal.com, April 13, 2012
- Ratings
Roundup Report For 2011 And Outlook For 2012: Pressure To Maintain Stable
Credit Profiles Will Rise In 2012, Particularly For The Corporate Sector,
rrs.taiwanratings.com.tw, Dec. 29, 2011
- Banks:
Rating Methodology And Assumptions, Nov. 9, 2011
(Unless otherwise
stated, related criteria and research are published on www.globalcreditportal.com,
access to which requires a registered account)
|