RAM Ratings has released the 21st instalment of its annual Corporate Default and Rating Transition Study. The study provides an update on the credit performance of 181 active issuers and 194 issues rated by RAM as at 1 January 2018.
The domestic corporate bond market remained relatively healthy in 2018 despite considerable economic volatility and uncertainties both domestically and abroad. After a bumper 2017 due to the front-loading of issuances, gross domestic corporate bond issuance moderated to RM105.4 bil (2017: RM124.9 bil), partly due to public rationalisation measures and slower economic growth in general. Notwithstanding slower funding activity, bond issuance as in previous years continued to be driven by issuers requiring large and long-duration financing from the financial services, infrastructure and property sectors. These sectors made up 77.2% of total gross issuance in 2018. Elsewhere, RAM assigned ratings to the bulk (73%) of the RM62.8 bil of rated corporate bonds issued in 2018.
RAM’s portfolio stayed healthy, with nearly 83% of issuers in the rated portfolio retaining their ratings in the review period. Of the remaining issuers (both with published and unpublished ratings) that saw rating movements, nine were downgraded and four were upgraded. This kept the net rating action (or rating drift) negative as at end-2018. There were, however, no defaults during the year. As at end-December 2018, the cumulative number of defaults stood at 51, with a combined rated programme value of RM13.2 bil.
“Despite a still-increased downgrade bias, the severity of forward rating actions could reduce. This is based on recent trends in RAM’s rated portfolio which exhibit a slower downgrade pace and a higher number of issuers with a positive outlook as at end-2018,” says Julie Ng, RAM’s Head of Data Analytics. Nevertheless, short-term volatilities could trigger rating transitions in specific sectors beset by various industry challenges. These include the automotive, media, oil and gas support services and property sectors.
“To date, the bulk of RAM’s portfolio has comprised high-grade bonds, with about 80% in the two highest long-term rating categories (AAA and AA). This underscores the low risk of default associated with these ratings. On a wider basis, a RAM study of the recent financial performance of large corporates listed on Bursa Malaysia found that their credit metrics are still resilient, albeit having slipped in the last three years. In prevailing business conditions, about 50% of listed corporates in the study have debt protection metrics that could potentially support a rating of A or higher,” adds Ng.
Going forward, a benign interest rate environment, supported by good access to financing and moderate economic growth, should continue to sustain sturdy corporate credit in Malaysia. For 2019, RAM has forecasted a GDP of 4.6% (2018:4.7%) and expects the OPR to stay unchanged at 3.25% with a chance of a possible downshift, given that foreign outflows have eased.