Slower growth, euro debt crisis may lift corporate default rate

This may exert some pressure on companies repaying their loans from banks or through bond issues, resulting in defaults.

Bank Negara has revised the country's economic growth projection to between 4% and 5% this year from the earlier estimate of between 5 per cent and 6 per cent that was announced in the Economic Report released by the finance ministry.

The Malaysian economy grew by 5.1 per cent last year.

RAM Ratings is expecting the country's economic growth to moderate to 4.6 per cent this year before picking up to 5.2 per cent in 2013. In terms of funding, the rating agency is bullish on the bond market.

It is forecasting new corporate bond issuance to reach betwween 80 billion and 85 billion ringgit this year from 69.6 billion ringgit last year.

It attributes this partly to planned expenditure for major oil and gas projects, increased funding for private finance initiative/public-private partnership projects as well as fund raising by financial institutions to shore up capital bases in anticipation of Basel III requirements.

Strong interest from foreign issuers looking to diversify their funding and lock in favourable interest rates was also expected to shore up the domestic bond market, the rating agency said in its 2011 Annual Corporate Default and Rating Transition study.

As some of the big ticket projects, for example the Klang Valley Mass Rapid Transit, would be undertaken and funded by government-related entities, it said investors might see more unrated issues in the market in this year.

In 2011, 17.5 billion ringgit of such bonds were issued, notably for the restructuring of water utilities, it noted.

RAM Ratings assigned ratings to 43 new debt issues with a total debt value of 57.1 billion ringgit in 2011 (2010: 36.9 billion ringgit).

In terms of the corporate segment (excluding structured finance transactions), this included 26 issuers with a total rated value of 48 billion ringgit (2010: 29 billion ringgit).

The rating agency's corporate portfolio comprised predominantly of issuers from financial services (32 per cent) and infrastructure and utilities (25 per cent), most of whom were highly rated.

Despite strong prospects for the bond market this year, RAM Ratings was weighing in a negative credit outlook and higher corporate default rate this year.

It is projecting a corporate default rate of between 0.5 and 1.1 per cent for this year, after two consecutive years (2010 and 2011) without such defaults.

It said the subdued economic prospects on both the domestic and global fronts also accounted for a slightly more negative credit outlook. The percentage of ratings with a negative outlook edged up to 9.3per cent in 2011 (2010: 7.3 per cent) as opposed to 1.7 per cent with a positive outlook (2010: 3.6 per cent), it added.

That aside, it said 90 per cent of RAM Ratings' portfolio was expected to retain a stable outlook this year in view of the various supportive elements in the domestic economy, as well as the portfolio's composition.

The rating agency's default study noted the steady decline of the annual default rate since 1998 which was partly due to the sanguine performance of the economy in the last decade and also the concentration of RAM Ratings portfolio in the more stable and higher-rated financial services and infrastructure sectors.

As at the end of 2011, these sectors constituted 57 per cent of RAM Ratings' portfolio; in terms of rating distribution, 62 per cent carried AAA and AA ratings.

As with previous default studies, the current one affirms the strong relationship between default and the ratings assigned by RAM Ratings, ie the higher the rating, the lower the possibility of default.

Corporate defaults for the 20-year period from 1992 to 2011 totalled 49 with a rated value of 12.2 billion ringgit.

RAM Ratings performance, ie the accuracy ratio (or Gini coefficient) that measures the ability of the rating agency's ratings to differentiate and rank order credit risk, had remained above 72 per cent per cent.

In terms of credit trends, the overall volatility of RAM Ratings portfolio continued to decline in 2011.

Over 80 per cent of the ratings remained unchanged while downgraded ratings stayed stable at 5.5 per cent (2010: 6 per cent).

Nevertheless, the pace of upgrades moderated to 3.6 per cent (from 10.2 per cent in 2010), resulting in a negative rating drift by end-2011.

The slower pace of upgrades was in tandem with the anticipated moderation in Malaysia's economic growth and the still-fragile global economy that could cloud the prospects of some issuers in our portfolio, the default study said.