2011 Annual Asia-Pacific Corporate Default Study And Rating Transitions

In line with global trends, ratings continued to serve as effective indicators of relative credit risk in Asia-Pacific in 2011. Standard & Poor's annual study of corporate defaults in Asia-Pacific identified a clear negative correspondence between ratings and defaults: The higher the issuer rating, the lower the observed default frequency (see chart 1). In 2011, four Asia-Pacific corporate issuers defaulted, all from New Zealand. The speculative-grade default rate in the region was 2.5% at the end of 2011, down from 4.64% in 2010 and 7.02% in 2009 (see chart 3 and table 1). The default rate for all rated entities in Asia-Pacific declined to 0.55% in 2011 from 1.01% in 2010 and 1.85% in 2009. The speculative-grade corporate default rates in all other regions also declined in 2011, expect Europe. The global default rate dropped to 1.71% in 2011 from 2.82% in 2010, the U.S. fell to 1.98% from 3.29%, emerging markets (which include entities from emerging Asia) declined to 0.59% from 1.25%, and Europe increased to 1.59% from 1.01%. One investment-grade-rated entity, U.S.-based MF Global Holdings Ltd., defaulted in 2011.

(Watch the related CreditMatters TV segment titled, "Standard & Poor’s 2011 Default And Rating Transitions Study For Asia-Pacific," dated April 13, 2012.)

Among the rated corporate entities based in Asia-Pacific, the 2011 one-year Gini coefficient was 94.87%. By comparison, the 2010 one-year Gini coefficient was 89.12%, and the 2009 Gini coefficient was 87.45%. The 1993-2011 one-year weighted-average Gini coefficient was 84.81%, the three-year was 79.91%, and the five-year was 73.47%. Weighted averages in this report use the issuer count at the beginning of the year as the weights. The Gini ratios are a measure of the rank-ordering power of ratings over a given time horizon. They show the ratio of actual rank-ordering performance to theoretically perfect rank ordering (for details on the Gini methodology, refer to Appendix II).

For the purposes of this study, Asia-Pacific refers to Australia, Cambodia, China, Fiji, Hong Kong, India, Indonesia, Japan, Korea, Malaysia, Marshall Islands, Mongolia, New Zealand, Pakistan, Papua New Guinea, Philippines, Singapore, South Korea, Sri Lanka, Taiwan, Thailand, and Vietnam. The statistics we present in this study refer only to the corporate ratings universe--they include financial and nonfinancial companies in Asia-Pacific. Our methodology and definitions of the terms we use in this study are in Appendix I.

Here are our key observations:

• In 2011, the ratings on 63 Asia-Pacific entities were higher at the end of the year than they were at the beginning of the year. By contrast, only 85 entities had lower ratings at the end of the year than they did at the beginning. The resulting downgrade-to-upgrade ratio was 1.35% in 2011, compared with 0.38% in 2010 and 3.12% in 2009. The percentage of unchanged ratings was 69.66% in 2011, down from 78.70% in 2010 and 69.84% in 2009.
• Four companies defaulted in Asia-Pacific in 2011, a sharp decline from 10 in 2010 and 16 in 2009 (see table 1). All four defaulters were from New Zealand. Three were finance companies, which were hurt by the downturn in the property market, and the fourth was an insurance company that suffered two major earthquakes that hit the country.
• Western Pacific Insurance Ltd. (WPIL) was placed into liquidation effective April 4, 2011, because of the impact that New Zealand's Christchurch and Canterbury earthquakes in September 2010 and February 2011, respectively, had on its financial performance. The other three defaults were finance companies. GFNZ Group Ltd. defaulted on April 5, 2011, NZF Money Ltd. on July 25, 2011, and Broadlands Finance Ltd. on Dec. 5, 2011. All three companies were exposed to New Zealand's property development sector, which took a hit during the 2008-2009 economic downturn, and to debenture funding, which came under stress as liquidity conditions tightened.

Chart 1

• All four defaulters in 2011 were initially rated 'BB+' or lower. Broadlands Finance was initially rated 'BB-' on Feb. 24, 2010, and NZF Money had an initial rating of 'B' assigned on Feb. 23, 2010. GFNZ Group was rated 'CCC' on March 30, 2010, after it completed a distressed exchange, and Western Pacific Insurance was assigned an initial rating of 'B-' on March 30, 2006. All except Western Pacific Insurance had negative outlooks as of Jan. 1, 2011. The rating outlook on Western Pacific Insurance was stable at the beginning of 2011. The average time to default from first rating for the four defaulting issuers in 2011 was 2.3 years.
• The rating distribution in Asia-Pacific remains skewed toward investment grade. The share of investment-grade entities was 73.8% in 2011, slightly lower than 75.9% in the two previous years. At the end of 2011, 33.5% of all ratings were in the 'A' category, while the 'BBB' category accounted for 31% of the total (see chart 4).
• The changes in ratings distribution resulted from downgrades to speculative grade from investment grade (fallen angels) and new speculative-grade ratings assigned. Fallen angels totaled five in 2011--Tokyo Electric Power Co. Inc., ACOM Co. Ltd., CITIC Pacific Ltd., IPM Australia Ltd., and Kawasaki Kisen Kaisha Ltd. Rising stars also totaled five (entities upgraded to investment grade from speculative grade) in 2011--The Co-operative Bank, MARAC Finance Ltd., Softbank Corp., and two confidentially rated companies. Of the 116 newly rated entities in 2011, Standard & Poor's rated 53% speculative grade (see table 4).

Chart 2

Chart 3

Table 1

Globally, corporate defaults declined to 53 in 2011 from 81 in 2010 and 265 in 2009. The 53 corporate defaults in 2011 affected debt worth $84.26 billion (see table 2).

Table 2

Table 3

Table 4

Chart 4

A Closer Look At Asia-Pacific Corporate Defaulters

In full-year 2011, four companies rated by Standard & Poor's Ratings Services defaulted on US$30 million of debt (see table 9).

Western Pacific Insurance Ltd.

Michael Vine, Melbourne (61) 3-9631-2102; Lucy Huynh, Melbourne (61) 3-9631-2175

On April 5, 2011, Standard & Poor's Ratings Services revised its counterparty credit and insurer financial strength ratings on Western Pacific Insurance Ltd. (WPIL) to 'R', which indicates regulatory action.

WPIL was placed into liquidation on April 4, 2011, following the material financial impact of the Christchurch and Canterbury earthquakes in September 2011 and February 2011, respectively. The insurer had significant exposure to these events given its South Island base. Two catastrophe reinsurance program net retentions of NZ$1 million in a short time period and shareholders' failure to inject sufficient capital to maintain solvency at a time of stress overwhelmed WPIL's limited capital resources.

Table 5

GFNZ Group Ltd.

Peter Sikora, Melbourne (61) 3-9631-2094

• NZD $30 million unsecured term loan due 3/31/2015

On April 6, 2011, Standard & Poor's revised its long-term counterparty credit rating on Geneva Finance Ltd. to 'SD' (selective default) from 'CC'.

The rating action followed shareholder and subordinated noteholder approval on March 31, 2011, to convert existing debt interests to equity, which, in Standard & Poor's view, constitutes a distressed exchange, considering the conversion price is higher than the current market value of shares, and noting the limited liquidity of Geneva's shares.

On April 29, 2011, we raised the long-term counterparty credit rating on Geneva to 'CCC-' from 'SD'. The rating action reflected the improvement in the company's capital adequacy following the debt-for-equity exchange, which boosted the company's capital resources by about NZ$5 million and, in our view, improved the group's prospects for meeting regulatory capital adequacy requirements and cash flow needs in the near term.

On March 18, 2011, Standard & Poor's lowered its long-term counterparty credit rating on Geneva to 'CC' from 'CCC'. The rating action followed the company's announcement that it would seek subordinated noteholder approval to convert existing debt interests to equity.

Table 6

NZF Money Ltd.

Nico De Lange, Sydney (61) 2-9255-9887; Peter Sikora, Melbourne (61) 3-9631-2094

On July 25, 2011, Standard & Poor's lowered its local-currency issuer credit ratings on NZF Money Ltd. to 'D' from 'CC'. The rating action followed NZF's announcement that its trustee, Covenant Trustee Co. Ltd., had appointed a receiver at the request of NZF's directors because of the company's inability to find a short-term funding solution. As a result of the appointment of a receiver, NZF defaulted on its debenture trust deed.

Earlier, on July 21, 2011, Standard & Poor's lowered its long-term issuer credit rating on NZF to 'CC' from 'CCC-'. The rating action reflected our view that unless NZF was able to inject new funds into the business, the company would likely default on its debt obligations.

On Sept. 27, 2011, we withdrew the counterparty credit and issue ratings on NZF because the company is in receivership and, therefore, is being wound down.

Table 7

Broadlands Finance Ltd.

Gavin Gunning, Melbourne (61) 3-9631-2092; Peter Sikora, Melbourne (61) 3-9631-2094

On Dec. 16, 2011, Standard & Poor's revised its long-term issuer credit ratings on Broadlands Finance Ltd. (BFL) to 'SD' from 'CC'. The rating action followed BFL's missed interest payment on its loan to its key shareholder, Mr. Anthony Radisich, on Dec. 15, 2011. This nonpayment of interest reflected a deed that was executed between BFL and its trustee company resulting in external debenture holders being repaid before BFL's key shareholder.

Table 8

Table 9

Higher Ratings Are Consistent With Fewer Defaults

We generally have observed that higher-rated companies take a longer time to default than lower-rated companies do. We have found this to be true when examining the data for Asia-Pacific issuers, using the original rating as the reference point as well as the last ratings (see table 10). For example, Asia-Pacific entities rated 'B' took an average of 2.9 years to default, less than the average of 8.5 years to default for 'A' rated entities. The average time to default--the average number of years elapsed between the initial rating date and the default date--of the four defaulters in 2011 was 2.3 years.

Note that for the entire long-term pool of Asia-Pacific defaults (86), the average time to default across all rating categories was 3.58 years, compared with 5.8 years in the global pool. Moreover, we observe the same gap in the average time to default between global ratings and Asia-Pacific ratings at each rating category (see chart 5). The smaller sample size in Asia-Pacific (i.e., the scarcity of defaults) is largely responsible for this disparity. For example, in the 31 years ended in 2011, 185 global issuers from the 'BBB' rating category defaulted, of which only 12 were from Asia-Pacific. As expected, the average time to default from all ratings--which includes all ratings transitions--generally shows that higher ratings tend to take longer to default, albeit somewhat shorter than the time to default from the original rating. Time to default from all ratings includes original ratings and all intermediate ratings on every entity that defaulted in Asia-Pacific.

Table 10

Table 11

Chart 5

The breakout of default rates by rating modifier (plus or minus after the rating) shows that lower rating categories historically experience higher default rates, on average, though variability is possible in any given year (see table 12). Nevertheless, the data from past default cycles indicate that most of the defaults stemmed from the lowest ratings.

Table 12

Industry Profile

In 2011, the default rates for the financial institutions and insurance sectors were 1.31% and 1.1%, respectively (see table 13). We note that the sector statistics are based on a limited history, with a small number of defaults.

Table 13

Table 14

Transition Tables And Cumulative Default Rates

The analysis of rating transitions in 2011 suggests that ratings behavior in Asia-Pacific continues to exhibit consistency with global trends, which have shown a negative correspondence between credit rating and default. Investment-grade-rated issuers in Asia-Pacific tend to exhibit greater credit stability (as measured by the frequency of rating transitions) than their speculative-grade counterparts (see table 15). For instance, 88.72% of Asia-Pacific issuers rated 'A' at the beginning of the period (i.e., Jan. 1, 2011) were still rated 'A' at the end of the period (i.e., Dec. 31, 2011), whereas the comparable share for issuers rated 'BB' was only 65.91%. Caution must be used in interpreting the low stability rates associated with the 'CCC'/'C' rating category in light of the small sample size.

Table 15

This pattern is similar to the long-term (1981-2011) trend of ratings behavior among all global rated issuers. Of the Asia-Pacific issuers rated 'AA', 87.00% retained this rating after one year, whereas only 65.64% of issuers rated 'B' maintained that rating (see table 16). Based on the transition analysis for a time horizon of two years rather than one year, lower ratings also tend to display less stability than higher ratings do (see table 17).

Transitions at the rating modifier also display the same relationship by and large, though differences in sample size occasionally create slight variations between adjacent rating categories (see table 18).

Table 16

Table 17

Table 18

The negative correspondence between ratings and defaults in the Asia-Pacific region holds true over time, as the cumulative average default rates illustrate (see tables 19 and 20 and chart 6). No defaults have ever occurred in the 'AAA' category in Asia-Pacific (see table 10). On average, from 1993-2011, 'BBB' rated Asia-Pacific issuers had a 0.25% default rate in the first year after they were rated and 0.45% in the second year. Issuers rated 'B' recorded a default rate of 4.08%, on average, in the first year, 7.85% in the second, and so on.

We note that our findings are qualified by the small number of issuers in the pool and the short time period of the study. The size of the pool of issuer ratings for Asia-Pacific is only 1,531, compared with 15,136 for the global study. Although the study period for Asia-Pacific is 1993-2011, about 75% of the total issuer ratings were assigned after 2000. Therefore, a significant portion of the pool has not seasoned as long as its global counterparts.

Table 19

Chart 6

Table 20

Gini Ratios And Lorenz Curves

A quantitative measure of ratings performance indicates that the relative rank ordering of ratings in Asia-Pacific is consistent across various time horizons. To measure ratings performance or ratings accuracy, the cumulative share of issuers by rating is plotted against the cumulative share of defaulters in a Lorenz curve to render the accuracy of their rank ordering visually (see charts 7-9). For definitions and methodology, refer to Appendix II at the end of the report. Our calculations indicate that the one-year transition to default in Asia-Pacific shows an average one-year Gini coefficient of 84.81%, a three-year of 79.91%, and a five-year of 73.47% (see table 21). If corporate ratings only randomly approximated default risk, the Gini coefficient would be zero. On the other hand, if corporate ratings were perfectly rank ordered so that all defaults occurred only among the lowest-rated entities, the Lorenz curve would capture all of the area on the graph above the diagonal, and its Gini coefficient would be 1.

Table 21

As expected, the Gini coefficients decline as the time horizon lengthens because longer time horizons allow for more time for credit degradation among higher-rated entities. In the one-year Asia-Pacific Lorenz curve, for example, 88.7% of defaults occurred in the speculative-grade category ('BB+' or lower), while ratings of 'BB+' or lower constituted only 23.8% of all Asia-Pacific corporate issuers (see chart 7). The five-year Lorenz curve shows that speculative-grade issuers constituted 80.95% of defaulters and only 24.32% of the entire sample (see chart 9). If the rank ordering of ratings had little predictive value, the cumulative share of defaulting corporate entities and the cumulative share of all entities would be nearly the same.

Chart 7

Chart 8

Chart 9

Appendix I: Default Methodology And Definitions

This long-term corporate default and rating transition study uses the CreditPro® database of long-term local currency issuer credit ratings. Most tables and charts in this study are the direct output of the CreditPro® interface, while others are based off of manual manipulation of the underlying database. The tables and charts that we created by manually manipulating the data were charts 5 and 7-10 as well as tables 1-4, 9-14, and 16-27.

An issuer credit rating reflects Standard & Poor's forward-looking 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 on a firm's financial obligations. It is not necessary for a company to have rated debt to be assigned an issuer credit rating.

Although the rating on a company's very senior forms of secured debt, particularly ones with strong covenants, could occasionally be higher than the issuer credit rating on the company, specific issues are typically rated as high as or lower than these ratings, depending on their relative priority within the company's debt structure. For speculative-grade companies, the issuer credit ratings are generally two notches higher than the subordinated debt ratings. Otherwise, they are generally one notch higher. Therefore, although a 'BB+' issuer credit rating is generally paired with a 'BB-' subordinated debt rating, a 'AA' issuer credit rating usually corresponds to a 'AA-' subordinated rating.

Standard & Poor's ongoing enhancement of the CreditPro® database used to generate this study could 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, 1992. Therefore, each annual default study is self-contained and effectively supersedes all previous versions.

Issuers included in this study

For the purposes of this study, Asia-Pacific refers to Australia, Cambodia, China, Fiji, Hong Kong, India, Indonesia, Japan, Korea, Malaysia, Marshall Islands, Mongolia, New Zealand, Pakistan, Papua New Guinea, Philippines, Singapore, South Korea, Sri Lanka, Taiwan, Thailand, and Vietnam.

The study analyzes the rating histories of 1,531 Asia-Pacific companies that Standard & Poor's rated from 1992 through Dec. 31, 2011. These include industrials, utilities, financial institutions, and insurance companies with long-term local currency ratings. 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 we excluded these from this study.

We excluded subsidiaries with debt that is fully guaranteed by their parents and subsidiaries with default risk that Standard & Poor's considers identical to that of their parents. The latter are companies with obligations that are not legally guaranteed by a parent but that have operating or financing activities that 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 subsidiary might have come to an end or might not have begun. We included such subsidiaries for the period when 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 a company misses an interest payment on the due date but then makes that payment during the grace period. Preferred stock is not considered a financial obligation, so we do not normally equate a missed preferred stock dividend with default. On the other hand, we consider distressed exchanges to be defaults when the debtholders are coerced into accepting substitute instruments with lower coupons, longer maturities, or any other diminished financial terms.

Standard & Poor's usually revises issue ratings to 'D' following a company's default on the corresponding obligation. In addition, Standard & Poor's revises ratings to 'SD' when it 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. An 'R' indicates that an obligor is under regulatory supervision owing to its financial condition. This does not necessarily indicate a default event, but the regulator might have the power to favor one class of obligations over others or pay some obligations and not others. Standard & Poor's deems 'D', 'SD', and 'R' issuer ratings defaults for the purposes of this study. A default is assumed to take place on the earliest of: the date Standard & Poor's revised the ratings to 'D', 'SD', or 'R'; 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.

Calculations

Static pool methodology.  Standard & Poor's 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.

Standard & Poor's uses the static pool methodology to avoid certain pitfalls in estimating default rates. This is to ensure that default rates account for rating migration and to allow for default rates to be calculated across multiperiod 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 calculate default rates using only the most recent year's default and rating data; these methods might yield comparatively low default rates during periods of high rating activity because 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, 1992, so as to avoid continuity problems.

Entities that have had ratings withdrawn--that is, revised to 'NR'--are monitored with the aim of capturing a potential default. These companies, as well as those that have defaulted, are excluded from subsequent static pools. For example, the 1993 static pool consists of all companies rated as of 12:01 a.m. on Jan. 1, 1993. Adding those companies first rated in 1993 to the surviving members of the 1993 static pool forms the 1994 static pool. All rating changes that took place are reflected in the newly formed 1994 static pool. We used this same method to form static pools for 1995-2008. From Jan. 1, 1993, to Dec. 31, 2011, a total of 1,531 first-time rated organizations were added to form new static pools. We excluded all the defaulted companies and companies that had a last rating of 'NR'.

Consider the following example: An issuer is originally rated 'BB' in mid-1996 and Standard & Poor's downgrades the company to 'B' in 1998. This is followed by a rating withdrawal ('NR') in 2000 and a default ('D') in 2003. This hypothetical company would be included in the 1997 and 1998 pools with the 'BB' rating, which it was rated at the beginning of those years. Likewise, it would be included in the 1999 and 2000 pools with the 'B' rating. It would not be part of the 1996 pool because it was not rated as of the first day of that year, and we would not include it in any pool after the last day of 2000 because Standard & Poor's had withdrawn the rating by then. Yet each of the four pools in which this company was included (1997-2000) would record its 2003 default at the appropriate time horizon.

Standard & Poor's withdraws ratings when an entity's entire debt is paid off or when the program or programs rated are terminated and the relevant debt extinguished. Rating withdrawals can also occur as a result of mergers and acquisitions. 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.  We calculated annual default rates for each static pool, first in units and then as percentages with respect to the number of issuers in each rating category. Finally, we combined these percentages to obtain cumulative default rates for the 18 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 are a more useful measure of the performance of ratings.

Many practitioners use statistics from this default study and CreditPro® to estimate probability of default and probability of rating transition. It is important to note that Standard & Poor's ratings do not imply a specific probability of default.

Cumulative average default rate calculation.  We derived cumulative default rates that average the experience of all static pools 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. 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 hypothetical weighted-average first-year default rate for 'B' rated companies in Asia-Pacific for all 19 pools was 5%, meaning that an average of 95% survived one year. Similarly, the second- and third-year conditional marginal averages were 6% for the first 18 pools (95% of those companies that did not default in the first year survived the second year) and 4% for the first 17 pools (96% of those companies that did not default by the second year survived the third year), respectively. Multiplying 95% by 94% results in a 89.30% survival rate to the end of the second year, which is a two-year cumulative average default rate of 10.70%. Multiplying 89.30% by 96% results in an 85.73% survival rate to the end of the third year, which is a three-year cumulative average default rate of 14.27%.

Time sample.  This update limits the reporting of default rates in Asia-Pacific to the 19-year time horizon, and we based all calculations on the rating experience of that period. Global data are based on a 31-year time horizon. The maturities of most obligations are much shorter than 19 years. In addition, average default statistics become less reliable at longer-time horizons, because the sample size becomes smaller and the cyclical nature of default rates has a bigger 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. These upswings have hit speculative-grade issuers the hardest, but investment-grade default rates also increase during 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, we compared the rating on each entity at the end of a particular year 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 1994 to the middle of 2001 would appear in the six consecutive one-year transition matrices from 1995 to 2000. All 1993 static pool members still rated on Dec. 31, 2011, had 19 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 'AAA' to 'D', plus an entry for 'NR'. For instance, the first panel of table 15, which corresponds to the 2011 static pool, shows that out of all 'A' rated companies at the beginning of that year, 88.72% were rated the same at year-end, while Standard & Poor's had upgraded 2.33% to 'AA', and so on.

Average one-year transition matrices were calculated on the basis of the one-year transition matrix just described. The ratios represent the historical incidence of the ratings listed on the first column, changing to the ones listed on the top row over the course of the reference period (see tables 16 and 17).

Multiyear transitions.  We also calculated multiyear transitions for periods of two to five years. In this case, we compared the rating at the beginning of the multiyear period with the rating at the end. For example, two-year transition matrices were the result of comparing ratings at the beginning of the years 1993-2010 with the ratings at the end of the years 1994-2011 (see table 17). Otherwise, the methodology was identical to that used for single-year transitions.

Initial-to-last transitions and default rates.  These transition rates compare issuer ratings from the time of the first rating to the last rating, regardless of the time elapsed in the interim. They provide a roadmap to all of the historically observed rating states inhabited by corporate ratings during their rated lifetime. Tables 28 and 29 display the initial-to-last transitions separately for two broad sectors, nonfinancials and financials (including insurance). Initial-to-last default rates are calculated based on the initial rating of each defaulter, and they encompass varying time horizons. For example, in table 29, a default rate of 7.81% refers to the total share of defaulting issuers from the 64 financial institutions that received a first rating of 'BBB' in the entire historical database.

Additional Tables

Table 22

Table 23

Table 24

Table 25

Table 26

Table 27

Table 28

Table 29