Bangkok--10 Jul--Standard & Poor's
Financial history shows that all debt-fueled booms inevitably entail harsh consequences. Periods of debt accumulation--whether by governments or the private sector--necessitate prolonged painful phases of deleveraging, balance-sheet readjustment, and risk repricing, said an article published today by Standard & Poor's.
This cycle will prove no different, given that the buildup of credit this time around is on par with prior periods of financial crisis, according to the article, titled "The Devil Is In The Details: Understanding The Variation In Corporate Default Rates And Rating Transitions."
These credit-cycle gyrations are reflected in ratings-related metrics, including default frequencies, extreme multinotch downgrades, fallen angel activity, and other rating transitions. In the case of default rates, variability is observed both by sector and region. Among sectors, the variation may be partly explained by credit quality mix (i.e., the higher the share of lower-rated issuers in a sector, the greater the observed default frequency).
"Observed default rates for all rating categories do not remain constant over time but rather rise and fall as the economic environment progresses through periods of expansion and contraction," said Diane Vazza, head of Standard & Poor's Global Fixed Income Research Group. "Given the scope and severity of this downturn, we expect to see some record-setting default rates during this cycle."
Experience from prior downturns suggests that not all periods of stress have an equal impact on all parts of the ratings spectrum. Companies in the financial sector loaded up their balance sheets with debt during the boom years. As a result, the beginning of 2008 saw much greater downward rating pressure in the highest rating categories in that sector.
The report is available to RatingsDirect subscribers at www.ratingsdirect.com. If you are not a RatingsDirect subscriber, you may purchase a copy of the report by calling (1) 212-438-9823 or sending an e-mail to [email protected]. Ratings information can also be found on Standard & Poor's public Web site at www.standardandpoors.com; under Ratings in the left navigation bar, select Find a Rating. Members of the media may request a copy of this report by contacting the media representative provided.
Media Contact:
Mimi Barker, New York (1) 212-438-5054, [email protected]
Analyst Contacts:
Diane Vazza, New York (1) 212-438-2760