PETALING JAYA: As the Covid-19 pandemic continues to rattle businesses across the nation, more corporate rating downgrades are expected this year although the default rate will unlikely exceed that of the last global financial crisis (GFC).
One of the two leading rating agencies in the country, RAM Ratings said it anticipated more corporate rating downgrades this year but defaults wise, it did not expect it to exceed 0.5% within the next one year.
Based on RAM rated portfolio, the default rate was highest at 9% during the Asian Financial Crisis (AFC) and 1.6% at the height of the GFC. The rating agency noted that as at the end of last year, its default rate stood at 0.6%.
Last year, based on RAM’s portfolio, corporate rating downgrades stood at 1.7% and upgrades were at 2.8%, while 88% ratings remain unchanged. It did not provide a forecast for its rating downgrades this year.
Meanwhile, Moody’s Investors Service cautioned that the default rate for Asia-Pacific’s high-yield non-financial companies is expected to rise in 2020 due to Covid-19.
The global rating agency said the trailing 12-month high-yield corporate default rate for Asia-Pacific would rise to 6.4% by end-2020 under the baseline scenario. This was a “significant upward revision” from the previous estimate of 2.4%, it noted.
“In our pessimistic scenario, in which we assume the coronavirus will create wider and deeper economic disruption throughout the year, the Asia-Pacific high-yield corporate default rate will reach 9.1%, compared with the peak of 14.1% at the end of 2009, ” it said in a recent report.
RAM Ratings head, data and analytics, economic and sovereign research and publications Julie Ng told StarBiz that currently more than 80% of RAM’s current portfolio were AAA and AA rated bonds.
“Most companies will be affected to some extent and there would be higher rating downgrades in light of the unprecedented crisis and the extension of the movement control order (MCO).
“However, we ran some scenario tests of the impact of potential economic contractions (ranging from -1 to -5%) in 2020, and we found that the probability of default for the AAA and AA rated bond categories remains relatively low, and is not anticipated to exceed 0.5% within a one-year horizon, ” she added.
For 2020, Ng said based on its latest review at end-March 2020, less than 6% or 10 issuers were at “high” risk of credit deterioration, adding that this may not necessarily translate into definite downgrades or default.
In the iteration of a “worst-case” scenario that all entities currently rated non-investment-grade (BB and lower) in RAM’s portfolio (of which there are fewer than 15) were to concurrently default, she said the default rate would peak at around 7%.
“We, however, do not think this scenario will pan out. Even so, investor losses may be limited as all but two of these non-investment-grade issuers are either bank or Danajamin guaranteed, or are supported by entities rated at least AA1, ” Ng said.
During the GFC in 2008/09, up to 10% of RAM’s portfolio suffered downgrades with an average quantum of two notches. Whereas during the AFC, she said when the Malaysian economy contracted by about 7%, 60% of its portfolio suffered downgrades averaging three notches.
Since then, she said the structure of the Malaysian corporate bond market and the financial profile of issuers have substantially changed, with corporates that were less leveraged and have minimal offshore borrowings
She said almost half of RAM’s portfolio were assessed to have “low” credit impact, noting that this may not necessarily further preclude higher negative rating actions in the event of a deep and prolonged economic downturn beyond 2020.
In this unprecedented public health crisis that has also birthed economic contractions globally, Ng said having adequate liquidity support measures, especially for weaker credits, would be critical to ride through this challenging period.
For rated bonds, Ng said any near-term liquidity stresses without adequate mitigators could precipitate a downward rating action.
As for the sectors that could see more potential downgrades and defaults, she said: “While most businesses will be affected to some extent, sectors that are more vulnerable include the tourism, leisure and hospitality, aviation, retail and oil & gas sectors. The impact on individual companies will depend on their reserves, liquidity and financial flexibility.”
“As the MCO continues and new information about business conditions emerges, we will maintain our surveillance and reassess our credit expectations accordingly.”
Given the weaker economic prospects and uncertainties with project implementation and capital expenditure plans, RAM has revised its corporate bond issuance to RM80bil – RM95bil in 2020, from its earlier forecast of RM100bil - RM110bil.
Meanwhile, it projects higher MGS/GII issuance of RM135bil – RM145bil (revised from RM125bil – RM135bil), taking into account the wider budget deficit due to increased development expenditure following the stimulus packages announced by the government.
For this year, Malaysian Rating Corp Bhd (MARC) expects the total gross issuance of corporate bonds to be around RM95bil to RM105bil, lower than 2019’s level (RM132.0bil). MARC’s forecast is premised on the expected contractions in real GDP and private investment in 2020.
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