2018 Annual Global Corporate Default And Rating Transition .

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Default, Transition, and Recovery:2018 Annual Global Corporate Default And RatingTransition StudyApril 9, 2019GLOBAL FIXED INCOME RESEARCHKey TakeawaysDiane VazzaNew York- Despite escalating market volatility and political uncertainty in 2018, funding conditionsremained accommodative, and the global speculative-grade corporate default rate fellto 2.1% in 2018 from 2.5% at the end of 2017. The number of corporate defaults globallyfell to 82. More companies were upgraded than downgraded, and 73% of companiesretained the same ratings by year-end.(1) 212-438-2760- All companies that defaulted in 2018 that were rated at the start of the year werespeculative grade (rated 'BB ' or lower), and 74% of these were in the 'CCC'/'C' ratingcategory. As a result, the one-year global Gini ratio rose to 93% in 2018 from 92.7% in2017, reaching its highest since 2014.nick.kraemer@spglobal.com- Emerging markets experienced the largest increases in the number of downgrades in2018. Corporate downgrades in Brazil, Argentina, and Turkey more than doubled, mostlyas a result of sovereign downgrades for each of these countries during the year.- For the first time in the 38-year history of the ratings covered in our global corporatedefault and transition studies, speculative-grade issuers represented the majority ofglobal ratings as of year-end. In large part, this resulted from the growing number ofnewly rated speculative-grade issuers over the past several years.diane.vazza@spglobal.comNick W Kraemer, FRMNew York(1) 212-438-1698Evan M GunterNew York(1) 212-438-6412evan.gunter@spglobal.comRESEARCH CONTRIBUTORSNivritti Mishra RichhariyaCRISIL Global Analytical Center, anS&P Global Ratings affiliate, MumbaiMallika JainCRISIL Global Analytical Center, anS&P Global Ratings affiliate, MumbaiAbhik DebnathDespite greater market volatility and political uncertainty in 2018, funding conditions forcompanies remained accommodative for much of the year, and the global corporate default ratedeclined. By many measures, 2018 showed improved performance for S&P Global Ratings'corporate credit globally. Even amid rising trade tensions, populism's growing political influence,and Brexit, companies were largely able to brush aside the noise and benefit from the continuedgrowth of the global economy. Against this backdrop, many of S&P Global Ratings' measures forrating performance and rating stability, as well as the proportion of upgrades, rose to their highestlevels since 2014. Meanwhile, the number of defaults fell to 82, its lowest level since that year (seechart 1 and table 1).CRISIL Global Analytical Center, anS&P Global Ratings affiliate, MumbaiSee complete contact list at end of article.Over half of all defaults in 2018 came from two sectors: the consumer services sector and energywww.spglobal.com/ratingsdirectApril 9, 20191

Default, Transition, and Recovery: 2018 Annual Global Corporate Default And Rating Transition Studyand natural resources (with 22 defaults each). These were the only two sectors with default ratesin 2018 that exceeded their long-term weighted averages (see chart 2). Residual stress hascontinued to weigh on energy and natural resources, and brick-and-mortar retailers in consumerservices are facing structural changes. Even though both sectors exhibited above-average defaultrates in 2018, these default rates (and the number of defaults for each sector) modestly declinedfrom 2017.This study includes industrials, utilities, financial institutions (banks, brokerages, assetmanagers, and other financial entities), and insurance companies globally with long-term localcurrency ratings from S&P Global Ratings. We calculated all default rates on an issuer-weightedbasis. The default rates that we refer to as weighted averages in this study use the number ofissuers at the beginning of each year as the basis for each year's weight. (For a detailedexplanation of our data sources and methodology, see Appendix I.)Chart 1Table 1Global Corporate Default SummaryYearTotal Investment-grade otal debtrate Investment-grade Speculative-grade outstanding(%)default rate (%)default rate (%)(bil. ww.spglobal.com/ratingsdirectApril 9, 20192

Default, Transition, and Recovery: 2018 Annual Global Corporate Default And Rating Transition StudyTable 1Global Corporate Default Summary (cont.)YearTotal Investment-grade otal debtrate Investment-grade Speculative-grade outstanding(%)default rate (%)default rate (%)(bil. his column includes companies that were no longer rated one year prior to default. Sources: S&P Global Fixed Income Research and S&PGlobal Market Intelligence's CreditPro .www.spglobal.com/ratingsdirectApril 9, 20193

Default, Transition, and Recovery: 2018 Annual Global Corporate Default And Rating Transition StudyChart 2Of the 82 defaults in 2018, 72 were from companies rated as of the beginning of the year. The 10defaults from companies that were not rated at the beginning of 2018 included five for which theratings were withdrawn before the beginning of 2018 and five that were first rated by S&P GlobalRatings after Jan. 1, 2018. We consider companies reemerging from a prior default to be separateentities, with their rating histories beginning with the postdefault rating. As in 2017, there were nodefaults by companies that were rated investment grade ('BBB-' or higher). Each of the rateddefaulters was rated speculative grade ('BB ' or lower) at the beginning of 2018, and 74% of thesewere rated in the lowest rating category of 'CCC'/'C'.With such a large share of defaults coming from companies at the lowest rating levels in 2018, theone-year Gini ratio rose to its highest since 2014, to 93% from 2017's 92.7% (see chart 3). The Giniratio is a measure of the rank-ordering power of ratings over a given time horizon, from onethrough seven years. It shows the ratio of actual rank-ordering performance to theoreticallyperfect rank ordering. The one-year Gini in 2018 was well above the one-year weighted-average(since 1981) Gini ratio of 82.5% (see table 2 and chart 30). (For details on the Gini methodology,refer to Appendix II.)www.spglobal.com/ratingsdirectApril 9, 20194

Default, Transition, and Recovery: 2018 Annual Global Corporate Default And Rating Transition StudyChart 3All of S&P Global Fixed Income Research's default studies have found a clear correlation betweenratings and defaults: The higher the rating, the lower the observed frequency of default, and viceversa. Over each time span, lower ratings correspond to higher default rates (see chart 4 and chart25), and this relationship holds true when broken out by rating category and by rating modifier (seetables 24 and 26), as well as by region (see table 25).As the Gini ratios show, the ability of corporate ratings to serve as effective measures of relativerisk remains intact over time, particularly in low-default years. Many default studies, includingthis one, also look at transition rates, which gauge the degree to which ratings change--either upor down--over a particular period. Transition studies have repeatedly confirmed that higherratings tend to be more stable and that speculative-grade ratings generally experience morevolatility.However, since the financial downturn of 2008, many highly rated companies have beendowngraded, leaving, for example, exceedingly few 'AAA' rated issuers at the start of 2018 andfewer still by year-end. As such, rating categories with smaller populations will experience highrating transition rates when even a small number of issuers are upgraded or downgraded.Table 2Global Average Gini Coefficients By Broad Sector (1981-2018)(%)--Time arWeighted 1.04Standard l.com/ratingsdirectApril 9, 20195

Default, Transition, and Recovery: 2018 Annual Global Corporate Default And Rating Transition StudyTable 2Global Average Gini Coefficients By Broad Sector (1981-2018) (cont.)(%)--Time arWeighted 0.62(20.53)(14.66)(16.25)(15.55)Weighted 0.05Standard deviation(6.18)(5.31)(5.52)(5.11)FinancialStandard deviationNonfinancialNote: Numbers in parentheses are standard deviations. Sources: S&P Global Fixed Income Research and S&P Global Market Intelligence'sCreditPro .Chart 4For the ninth consecutive year, there were no defaults by companies from the 'A' category orhigher. Last year was also the second year in a row with no defaults from the 'BBB' category. Evenamong speculative-grade ratings, defaults were generally lower, with no defaults in the 'BB'category (down from 0.08% in 2017) and a slight decline in the 'B' category (to 0.98% from 0.99%).Only the 'CCC'/'C' category showed a rising default rate, up to 27.18% from 26.45%, reaching itshighest level since 2016 (see table 3).Outside of the 'CCC'/'C' category, default rates across all other rating categories were either at orbelow their long-term weighted averages. Most notably, the default rate for the 'B' category waswww.spglobal.com/ratingsdirectApril 9, 20196

Default, Transition, and Recovery: 2018 Annual Global Corporate Default And Rating Transition Studynearly 2.5 percentage points below its long-term weighted average (see table 4). Once again, thedefault rate in the 'AAA' rating category was zero, continuing the unblemished default record forcorporate ratings in this category and consistent with historical trends.Table 3Global Corporate Annual Default Rates By Rating ww.spglobal.com/ratingsdirectApril 9, 20197

Default, Transition, and Recovery: 2018 Annual Global Corporate Default And Rating Transition StudyTable 3Global Corporate Annual Default Rates By RatingCategory 0.9827.18Sources: S&P Global Fixed Income Research and S&P Global Market Intelligence's CreditPro .Table 4Descriptive Statistics On One-Year Global Default ed long-term 0.000.060.583.4024.83Standard deviation0.000.070.100.261.003.2911.472008 default rates0.000.380.390.490.814.1027.27Latest four quarters ence between last four quarters andweighted r of standard urces: S&P Global Fixed Income Research and S&P Global Market Intelligence's CreditPro .2018 Summary Findings- Of the 82 corporate defaults in 2018, the majority (47) were from companies in the U.S. andassociated tax havens (Bermuda and the Cayman Islands). The emerging markets regionfollowed with 17 defaults, Europe with 13, and the other developed region (Australia, Canada,Japan, and New Zealand) with five.- Distressed exchanges accounted for the largest share of defaults (among publicly ratedcompanies) in 2018, with 38%, followed by missed interest or principal payments (32%) andChapter 11 filings (23%). Two defaults resulted from payment suspension and two from foreignbankruptcy, while another resulted from the issuer being placed under regulatory directive.- The global trailing-12-month speculative-grade default rate fell to 2.1% at the end of 2018from 2.5% in 2017, remaining below its annual average rate (since 1981) of 3.99%. Thespeculative-grade default rate fell in the U.S. (to 2.4%) and Europe (1.9%) but rose modestly inthe emerging markets (1.3%) and other developed (3.3%) regions.- All of the 72 defaulters that were rated by S&P Global Ratings at the beginning of the year hadspeculative-grade ratings at that time. The remainder of the 2018 defaulters began the yearwww.spglobal.com/ratingsdirectApril 9, 20198

Default, Transition, and Recovery: 2018 Annual Global Corporate Default And Rating Transition Studywithout ratings or were first assigned ratings later in the year. None began the year ratedinvestment grade. Of the companies that defaulted in 2018 (and that had ratings as of Jan. 1,2018), 87.5% were rated 'B-' or lower at the start of the year.- The volume of debt affected by default rose by 26% to 131.65 billion in 2018, even as thenumber of defaults fell from 2017. The average amount of debt per defaulter rose to 1.6 billionin 2018 from 1.1 billion in 2017, modestly higher than the post-Lehman Bros. (2009 onward)annual average of 1.4 billion.- The largest default of the year was from Texas-based media and entertainment companyiHeartCommunications Inc., with 20.2 billion (15.3%) of the outstanding debt.- Global new corporate bond issuance in 2018 totaled 3.9 trillion, down 10.3% from 2017.Nearly all of the drop-off came from the developed markets.- Bond spreads in the U.S. widened through most of 2018. Investment-grade spreads moved 57basis points (bps) wider over the course of the year, while speculative-grade spreads widenedby 154 bps. Most of this movement took place in the fourth quarter.- Ratings showed increasing stability in 2018. About 73.2% of global corporate ratings wereunchanged during the year, up from 72.07% in 2017 and above the annual average of 71.31%since 1981.- The percentage of defaulters with confidential ratings fell in 2018 (to 11%) as compared with2017. However, the count of confidentially rated issuers that defaulted remained at nine.- Two of the defaulters in 2018 were initially rated investment grade, and the other 80 (98% ofthe total) were initially rated speculative grade.- Of these two that were initially investment grade, the average time to default--the timebetween first rating and date of default--was 24.1 years, with an associated standard deviationof 18.5 years. In contrast, the average time to default among entities initially rated speculativegrade was 5.4 years, with an associated standard deviation of five years. For all of the issuersthat defaulted in 2018, the average time to default from the first rating was 5.8 years, with amedian of 4.2 years and a standard deviation of six years.- The issuer with the longest time to default in 2018 was U.S.-based retailer Sears, Roebuck andCo., with an initial rating of 'AA' as of Dec. 31, 1980, 37.2 years before the issuer credit ratingwas lowered to 'SD' (selective default) in March 2018.- The issuer with the shortest time to default (13 days) was House of Fraser (UK & Ireland) Ltd.The company defaulted twice in 2018.- The consumer services sector and energy and natural resources sector had the largest numberof defaulters last year, with 22 each. All other sectors had fewer than 10 defaults, and only theinsurance sector had zero defaults.- Credit quality displayed modest net improvement in 2018. A slightly higher share of companieswere upgraded in 2018 than in 2017, bringing upgrades to their highest level (9.02%) since2014.- The number of 'AAA' rated companies declined by one during the year, after Singapore-basedSMRT Corp. Ltd. was downgraded to 'AA ' from 'AAA' on March 13, 2018. As of the end of 2018,there were just eight companies still rated 'AAA' globally.- By the end of 2018, speculative-grade issuers represented the majority of rated companiesglobally, accounting for 50.3% of rated issuers, up from 49.4% at the beginning of the year. Inlarge part, this expansion represents the growing number of newly rated issuers that arewww.spglobal.com/ratingsdirectApril 9, 20199

Default, Transition, and Recovery: 2018 Annual Global Corporate Default And Rating Transition Studyspeculative grade. S&P Global Ratings assigned initial ratings to 905 issuers in 2018, up from775 issuers in 2017. Of these new issuers, 79.1% had speculative-grade ratings--the highestshare since 2010 and one of the highest proportions annually.Annual Global Trends: A Year Of Credit StabilityThe number of defaulters that began the year with active ratings fell to 72 in 2018 from 83 in 2017.This marks the lowest count since 2014 (see chart 5). Nonetheless, the default total in 2018 wassubstantially higher than in 2014 (when there were 45 rated at the beginning of the year and 60 intotal). Although the number of defaulters fell during the year, the amount of debt affected bydefault rose by 26% to 131.7 billion (see chart 6).As in most years, the U.S. accounted for the majority of defaults in 2018, by both count and theamount of affected debt. The U.S. has the largest population of rated corporate issuers,accounting for roughly 46% of the global total at the start of 2018. With its highly developedfinancing markets, the U.S. also has a considerably higher share of speculative-grade companiesthan other regions, and U.S. issuers accounted for 51% of total speculative-grade companiesglobally as of the beginning of 2018.Meanwhile, the emerging markets region was the only region that experienced an increase in thenumber of defaults, to 12 from eight. By sector, financial institutions led defaults in the emergingmarkets region (with five), followed by the aerospace/automotive/capital goods/metals sector(with four).While the default rate fell globally, credit quality also showed a modest net improvement in 2018,with more companies upgraded than downgraded. The share of companies upgraded rose to9.02% in 2018, and the share of ratings that were unchanged during the year rose to 73.21%. Boththese rates reached their highest levels since 2014. Meanwhile, the ratio of downgrades toupgrades remained unchanged at 0.97 (see table 6). A ratio of 1 would indicate that theperce

Default, Transition, and Recovery: 2018 Annual Global Corporate Default And Rating Transition Study April 9, 2019 Key Takeaways - Despite escalating market volatility and political uncertainty in 2018, funding conditions

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