KUALA LUMPUR: The annual default rate of corporate bonds last year stood at 1.6%, lower than the base-line forecast of 1.8% by RAM Ratings, according to the ratings agency's annual default study released on April 15.

Last year, three issuers defaulted on five debt securities with a rated value of RM394 million.

The study stated that even after excluding the sector-wide rating upgrades for domestic banks in the fourth quarter (4Q) of 2009, the credit direction still remained positive, with upgrades outpacing downgrades by five to three.

“The generally better corporate credit quality and stronger domestic economy, further supported by a sound banking system after the crisis in 1997/98, have been the key factors behind the more benign effects this time,” RAM Ratings CEO Liza Mohd Noor said.

The second half of 2009 saw an improvement over the first half with a decrease in the number of RAM Ratings’ issuers being put on negative Rating Watch, or negative rating outlook.

As at the end of December 2009, 11% were put on the negative rating outlook compared with 16% at end-June 2009. The overall credit performance of RAM Ratings’ rated portfolio managed to weather the storm cast by the global market turbulence, the study said.

“Moving forward, we believe that corporate credit quality will hold steady in 2010, spurred by continued government spending and private consumption as well as a gradual recovery in external demand.

“We expect corporate bond defaults to remain low at 0.6% this year, with a worst-case-scenario level of 1.7%,” Liza added.

Furthermore, some corporate’s working capital and refinancing pressures have eased off with the gradual recovery of the credit markets and the return of investors confidence since 3Q09.

Corporates within RAM Ratings’ universe have already begun reporting increases in their export orders and heightened levels of inventory restocking. The average number of downward rating adjustments narrowed from five notches in 1Q09 to just one notch by 4Q09.

However, small and medium-sized enterprises will remain tested by the fragility of external demand as it is typically discouraged by the bond market’s prohibitive funding costs for the lower end of the credit curve.

But the credit impact on these sectors will remain muted within RAM Rating’s universe, given the high proportion of rated entities from the banking and financial-services sector as well as concession-based entities, the study said.

The RAM Ratings’ annual default study, now in its tenth year, consistently shows a strong negative correlation between ratings and default rates. This means that higher ratings correspond to lower incidences of default, thereby indicating stronger creditworthiness.

This year also marked the introduction of the “Structured Finance Ratings Migration Study” by RAM Ratings, which seeks to enhance market transparency and provide additional insights on securitised transactions, said deputy chief executive officer Chong Kwee Siong.

According to Siew Suet Ming, head of structured finance ratings, this inaugural study showed that despite the challenges of a very small sample, structured transactions show more stable migration behaviour than corporate ratings as expected from the former’s structured nature.

The study also highlighted that less diversified asset classes performed less well than other asset classes that benefit from the law of large numbers.

In particular, the performance of structured transactions backed by collateralised loan obligations show significant vulnerability to the effects of the global meltdown in late 2008.

Given the significant exposure of the underlying portfolio to the export sector, the slump in Malaysia’s main export markets had contributed to the rapid and severe deterioration of a number of obligors in the portfolio.

Consequently, much of the credit deterioration in structured securities in the last two years have been solely concentrated in this asset class, and can be explained by the recent global crisis.

However, the migration behaviour of RAM Ratings’ structured finance transactions between 2002 and 2009 has been credit-positive on the whole, with 13 upgrades versus 10 downgrades during that period.