No defaults but more negative rating actions in 1H 2021

Published on 01 Sep 2021.

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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 2021.

Domestic corporate bond market activity remained relatively healthy in the first half of the year despite the slew of uncertainties following a series of economic and social restrictions to contain the resurgence of COVID-19 infections. Issuance of corporate bonds and sukuk amounted to RM59.5 bil in 1H 2021 (1H 2020: RM38.9 bil; 2017: RM104.6 bil) as firms locked in lower funding costs amid accommodative interest rates. We expect corporate bonds to close the year with an upward bias to our forecast of RM100 bil-RM110 bil in 2021, underscored by nascent economic recovery, the revival of big-ticket infrastructure projects under Budget 2021 and the continued low interest rate environment.

As expected, rating actions stayed negatively skewed in 1H 2021. While no defaults were recorded, RAM took negative rating actions on 7 entities (5 downgrades and 2 outlook changes, representing 3.8% of our rated portfolio). No upgrades were logged but one entity saw positive rating action in the form of an outlook change. The number of issuers on negative outlook rose to 14 as at end-June 2021, representing 7.6% of the rated portfolio (end-June 2020: 6 and 3.4%, respectively). These are financial institutions and firms in the toll road, property, travel/aviation, and tourism/hospitality sectors. The rating drift (measured by upgrades net of downgrades and defaults) moved into the negative territory as at end-2Q 2021.

We continue to expect a negative bias in our rating actions over the next few quarters, until economic recovery gains a stronger foothold. High defaults are however unlikely – approximately 80% of RAM-rated issuers were rated AA or higher as at end-June 2021 and 92% carried a stable outlook. Defaults, if any, are expected to stay below 1.6% in 2021. Even so, investors losses may be limited due to credit enhancement arrangements.

Malaysia’s GDP growth recovered to 7.1% in 1H 2021 from a low base, following a sharp 8.4% contraction in 1H 2020. While gaining from improving external demand and better global economic prospects, the path to recovery will remain uneven and fragile, dependent on the country’s immunisation campaign. RAM expects GDP growth to rebound to 3.8% in 2021. 

 

Analytical contacts
Hazel Dashini 
(603) 3385 2540
hazel@ram.com.my

Han Ting Ting
(603) 3385 2507
tingting@ram.com.my

 

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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