Published on 24 Aug 2020.
RAM Ratings has released its half-year Corporate Default and Rating Transition Study. The study provides an update on the credit performance of RAM’s portfolio for 1H 2020 amid a world gripped by COVID-19.
We estimate that currently about 5.7% of our portfolio is at higher risk of default, under a worst-case scenario. Financial challenges induced by lockdowns on firms continue to corral rating actions into bearish territory. In 1H 2020, about 4% of RAM’s total rated issuers received negative rating actions – be it downgrades or changes in outlook. Given the prevailing economic uncertainties, we expect the negative bias to our rating actions to remain in the next few quarters. However, we stress that overall credits remain hale – over 80% of RAM-rated issuers are low-risk with a stable outlook.
An analysis of the broader corporate sector – covered in a special article in this year’s study – suggests that non-financial firms listed on Bursa Malaysia are generally able to ride out a short recession. Earnings retreated 11% y-o-y in 1Q 2020 for some 720 companies; anecdotal evidence suggests further degeneration, by up to 35% q-o-q in the second quarter at the height of the lockdown. That said, other metrics show signs of fortitude. With low debt levels, debt servicing (as measured by the ratio of earnings before interest, tax, depreciation and amortisation to debt) remains adequate above 0.2 times while liquidity can sustain at least three months of operations, more when supported by fiscal stimuli and bank relief measures.
The coronavirus pandemic has riven the global economy. Lockdowns, quarantine and social distancing rule the day; they still do in most countries. Attempts to flatten the pandemic curve have unfortunately also flattened the economic curve. Malaysia recorded its worst quarter in 2Q 2020, with GDP contracting 17.1% q-o-q (1H 2020 GDP: -8.3% y-o-y).
RAM projects Malaysia’s GDP to contract by 4% this year, with a moderate rebound in 2021. This is premised on industry’s ability to return to normal operating capacity and, of course, an effective vaccine on the horizon. Although economic recovery is still uncertain, we remain hopeful.
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About RAM Rating Services Berhad (RAM Ratings)
Established in 1990, RAM Ratings is a leading credit rating agency registered under the Securities Commission’s Guidelines on Registration of Credit Rating Agencies, 2011. In addition to the provision of credit ratings for corporate bonds and sukuk and their issuers, RAM Ratings also provides research and publications on Islamic finance, fixed income and macro-economic and industry analysis as well as data analytics relating to credit risk, counterparty assessments and other related domains.
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