Bangkok--23 May--TRIS Rating
The Thai economy expanded by only 2.87% year-on-year (y-o-y) in 2013, lower than earlier projections of the 4.5%-5% y-o-y growth. According to the National Economic and Social Development Board (NESDB), gross domestic product (GDP) growth was lower than expected for two main reasons. In 2012, the levels of private consumption and investment were unusually high due to the government’s first-car-buyer scheme which resulted in the large increase in car sale in 2012. The second reason is the slowdown in the export sector, despite strong growth in the tourism industry in 2013. In addition, the negative effects of the first-car-buyer program also became prominent as household debt rose significantly to more than 80% of GDP in 2013. The Bank of Thailand (BOT) has started raising concerns over the rising debt level since mid-2013. Its concerns were accentuated by the political turmoil which began in November 2013.
The rising household debt level, coupled with the lingering political turmoil, is expected to hinder GDP growth in 2014. The NESDB expects GDP to grow by 1.5%-2.5%. The relatively low estimates for GDP growth are due to the prolonged political turmoil, which could have a knock-on effect on domestic consumption and the levels of investment in the public and private sectors. Thus, the export sector and tourism will be the main engines driving GDP growth for this year.
In 2013, TRIS Rating publicly announced the ratings of 108 companies, up slightly from 101 in 2012. There were several rating changes, including 11 upgrades and eight downgrades, nine changes in outlook, and one CreditAlert. Three of the issuers which were downgraded received “negative” outlooks in the prior year. However, only one issuer receiving an upgrade was assigned a “positive” outlook in the prior year. No issuer defaulted in 2013, keeping the cumulative number of defaulters since 1994 at 18. The one-, two-, and three-year cumulative default rates in 2013 declined slightly to 1.6%, 3.5%, and 5.3% from 1.8%, 3.9%, and 6% in 2012, respectively.
The value of new bonds issued and registered with the Thai Bond Market Association (ThaiBMA) in 2013 totaled Bt444,308 million, 18% lower than the amount of bond issued in 2012. Bonds issued by banks accounted for 8.28% of the total value of new bonds issued in 2013, down significantly from the prior year. In 2012, several commercial banks issued subordinated bonds to serve their funding needs and strengthen their capital bases before the implementation of BASEL III in 2013. Due to the domestic economic slowdown this year, the BOT is expected to keep its policy interest rate low. At the end of April 2014, the 1-day policy interest rate stood at 2% per annum. TRIS Rating expects the total value of new bonds issued this year should increase. Companies needing funds are expected to issue more bonds, in order to lock in a low interest rate.
RATING ACTIONS IN 2013
The Thai economy faced another political crisis in late 2013. As a consequence, GDP growth in the last quarter dropped to only 0.56% y-o-y. GDP in 2013 grew by only 2.87% y-o-y, compared with projections of 4.5%-5% made at the beginning of 2013. Political turmoil and the lack of a government budget for new public projects are expected to cause an economic slowdown in 2014. Several planned infrastructure investments in 2014 are expected to be postponed. As the economy slows, sectors that are highly dependent on domestic demand will be affected the most. Industries like property development, engineering and construction, and building materials are highly dependent on the domestic economy. The tourism industry may also be impacted by political unrest. However, this sector seems to recover faster than other sectors.
- Increased number of rating changes
In 2013, TRIS Rating publicly announced the ratings of 108 companies, of which eight were new clients. The number of corporate issuers was 73, while the number of financial institution (FI) issuers was 35. Four issuers withdrew their ratings during the year, comprising one corporate issuer and three FI issuers. TRIS Rating issued 11 upgrades, eight downgrades (two companies withdrew their ratings after the downgrades), nine changes in outlook, and one CreditAlert. Nine of the upgrades were corporate issuers, distributing across various sectors. However, three downgrades were for issuers in the property development sector. The issuers were downgraded mainly due to the lower-than-projected operating performance and/or higher financial leverage than expected. Four issuers received upward outlook revisions while five received downward outlook revisions. The one-year stability rate of publicly announced ratings in 2013 (excluding new and withdrawn ratings) was 82.3%, somewhat lower than the level of 92.3% achieved in 2012. A one-year stability rate of 82.3% means 17.7% of publicly-announced ratings changed during the year. Of the changed ratings, 11.5% were upgrades and 6.2% were downgrades.
- Ratings[1] were concentrated in the “A” rating category
At the end of 2013, companies rated in the “A” category remained the largest proportion of TRIS Rating’s portfolio, accounting for 46.2% of publicly announced ratings (including new issuers but excluding withdrawals and defaults). This percentage fell slightly in 2013 from 50% in 2012. The second largest portion was in the “BBB” rating category, at 35.6%, a slight rise from 34% in 2012. The issuers rated in the lower ranges (i.e., “BB”, “B”, and “C”) have consistently comprised a small portion of rated companies throughout TRIS Rating’s history. In 2013, only three issuers were rated below the “BBB” category, accounting for only 2.9% of rated companies. This was a slight increase from 2% in 2012. The rise was due to the downgrade of one company from a “BBB-” rating to a “BB+” rating. The relatively small proportion of issuers in these lower rating categories was due to the lack of demand for speculative grade bonds in the Thai debt market. Mutual funds face limitations when investing in non-investment grade bonds. Therefore, issuers with ratings lower than investment grade tend to keep their ratings private or withdraw their ratings. The plan of the Securities and Exchange Commission (SEC)
[1] Issuer ratings for this study are based on stand-alone creditworthiness of the publicly announced issuers. For example, instead of using the issue ratings of fully guaranteed debentures, which generally reflect the creditworthiness of the guarantors, this study used the shadow ratings of issuers assigned internally.
- Cumulative default rates declined
The one-, two-, and three-year cumulative average default rates[1] for each rating category were calculated to estimate the probability of default during the one-, two-, and three-year period after a company was rated. As credit ratings should reflect the default risk, the higher the rating, the lower the probability of default should be. However, due to both the small sample size and the severe financial crisis faced by all companies in 1997, the default rates of the “AA” rating were abnormally higher than the default rates of the “A” rating. As more bond issues are added to the sample each year, the reliability of the cumulative default rates is expected to improve. Since there were no defaults in 2013, the one-, two-, and three-year average cumulative default rates improved in all rating categories. The one-, two-, and three-year cumulative default rates in 2013 declined slightly to 1.6%, 3.5%, and 5.3%, from 1.8%, 3.9%, and 6% in 2012, respectively.
[1] The calculation methodology of the three-year cumulative average default rate is explained in Appendix I.
Corporate Rating Transitions between 1994 and 2013
A rating transition is the probability of a given issuer rating moving to another rating category within a specified time period. For example, in Table 4, 94.06% of companies rated at “A” were still rated “A” by the end of a year. A small portion, or of 3.47%, were upgraded to “AA” and 2.23% were downgraded to “BBB”. For more than half of the rated companies in any particular rating category, their ratings remained unchanged by the end of that year. The ratings of investment-grade issuers were more likely to remain at the same level over a one-year period than the ratings of non-investment grade issuers. The highlighted cells of Table 4 contain the stability rates of each rating category, e.g., the stability rate is 81.25% for “AAA” issuers.
Structured Finance Rating Transitions between 1999 and 2013
Due to the relatively few number of structured finance transactions in the Thai bond market, TRIS Rating has rated only two transactions. The first transaction, LSPV Co., Ltd., involved an inventory securitization. This issue was rated at “A-” in 1999 and was fully redeemed in 2002. The second transaction, DAD SPV Co., Ltd., is a securitization program backed by a 30-year lease and services payments agreement from the Treasury Department. The rating of the secondtransaction has been maintained at “AAA”.