Bond downgrades could rise in 2020, but most rated credits holding up

KUALA LUMPUR: In spite of all the uncertainties brought forth this year, RAM Ratings Bhd (RAM) cites the possibility of a bond downgrade but that most rated credits are still holding up so far.

This was highlighted in RAM Ratings’ latest annual Corporate Default and Rating Transition Study which provides an update on the credit performance of RAM’s portfolio through end-2019 and updated to the first quarter of 2020 (1Q20), amid the rapid spread of Covid-19.

“Gross Domestic Product (GDP) growth was expectedly more moderate year on year (y-o-y) in 2019, coming in at 4.3 per cent owing to global headwinds,” it said in a statement. “While some respite had initially seemed within reach for 2020, the world was turned upside-down by the pandemic of unprecedented magnitude.

“The collapse of crude oil prices to all-time lows in the wake of a breakdown in the

Opec+ agreement further aggravated the challenging situation.

“At the time of writing, many governments have implemented lockdowns and aggressively rolled out mitigating measures, cut rates, launched emergency funding programmes and other fiscal and financial relief initiatives in all-out drastic efforts to alleviate the adverse impact of Covid-19.”

On the home front, the Movement Control Order (MCO) has been extended to a full month until mid-April 2020 and Bank Negara Malaysia had cut the Overnight Policy Rate twice to 2.5 per cent as at March 2020, besides instituting an extensive automatic sixmonth moratorium on loan repayments affecting over 70 per cent of Malaysian banks’ loan book and other supportive measures.

Given the unprecedented nature of the pandemic, RAM admitted it was difficult for anyone to estimate with much certainty the full impact on the economy.

“As each crisis in the past – and certainly this pandemic – has had different root causes, it is difficult to draw parallels between them,” it said.

“In reviewing the impact of this pandemic on RAM’s portfolio and our macroeconomic forecasts, we look to the fundamental strength of issuers and our economy and the headroom available to them to absorb the significant stress.

“Although the rating drift ended 2019 on a positive note, it may be inevitable to see more downgrades in view of the extraordinarily challenging period ahead – which would turn the rating drift negative in 2020.”

RAM recapped that during the Global Financial Crisis (GFC) in 2008/2009, up to 10 per cent of its portfolio suffered downgrades with an average quantum of two notches.

“Whereas during the 1998/1999 Asian Financial

Crisis, when the Malaysian economy contracted by about seven per cent, 60 per cent of our portfolio suffered downgrades averaging three notches,” it said.

“That said, the structure of the Malaysian corporate bond market and the financial profile of issuers are substantially different now, with better credits and corporates that are less leveraged and have minimal offshore borrowings.

“While most businesses will be affected to some extent, sectors that are more vulnerable include the tourism, leisure and hospitality, aviation, retail and oil & gas sectors. The impact on individual companies will depend on their reserves, liquidity and financial flexibility.

“Given that the situation remains fluid at this juncture, we are maintaining a very close watch on our rated portfolio and will provide relevant updates to the market from time to time.”