Default, Transition, and Recovery: 2012 Annual …

1 default , transition , and recovery : 2012 Annual global corporate DefaultStudy And Rating TransitionsGlobal Fixed Income Research:Diane Vazza, Managing Director, New York (1) 212-438-2760; W Kraemer, Director, New York (1) 212-438-1698; Contributor:Nivritti Mishra Richhariya, CRISIL global Analytical Center, an S&P affiliate, MumbaiTable Of Contents2012 SummaryAnnual global Trends2012 Timeline: Europe Takes Center StageQuarterly TrendsLower Ratings Are Consistent With Higher default VulnerabilityIndustry VariationsHefty Growth In Speculative-Grade RatingsTransition Tables And Cumulative default RatesGini Ratios And Lorenz CurvesAppendix I: default Methodology And DefinitionsAppendix II: Additional TablesAppendix III.

2 Gini 18, 2013 11097086 | 300000444 Table Of Contents (cont.)Appendix IV: Defaults In ProfileRelated 18, 2013 21097086 | 300000444 default , transition , and recovery : 2012 Annual global corporate default study AndRating TransitionsIn 2011, Standard & Poor's Ratings Services' downgrade of the had spillover effects on corporate borrowersthroughout the country. A year later, the same happened with Europe's economic turmoil and sovereign debt , corporate borrowers showed some resilience during 2012 .

3 In the full year, 84 global corporate issuersdefaulted, up from 53 in 2011 and nearly the same as the 2010 total of 83 (see table 1). These 84 defaulted issuersaccounted for a total of $ billion in debt, up from $ billion in 2011. (Watch the related CreditMatters TVsegment titled, "The Key Findings Behind Standard & Poor s 2012 global corporate default And Ratings TransitionStudy," dated March 18, 2013.)Overall, credit quality deteriorated slightly in 2012 (see table 6). The ratio of downgrades to upgrades increasedrelative to 2011, though the average number of notches recorded among downgrades fell marginally to in 2012from the previous year.

4 The average number of notches for upgrades held steady at year over year (see chart13).All of the defaulted companies in 2012 that began the year with active ratings (66) had speculative-grade ratings ('BB+'and lower) just prior to default (see table 1). Of the remaining 18, Standard & Poor's assigned ratings on fourcompanies during 2012 , and 14 began the year with withdrawn ratings. Also, of the 84 defaulters, 76 initially hadspeculative-grade ratings, and the majority (59) from the 'B' and 'CCC'/'C' rating the end of December 2012 , the speculative-grade default rates rose to in the , in the emergingmarkets, and in Europe from 2%, , and , respectively.

5 Conversely, the default rate for other developedmarkets (including Australia, Canada, Japan, and New Zealand) fell to from 6% (see table 7). When including allrated entities, the global default rate rose to in 2012 from a year study includes industrials, utilities, financial institutions (which includes banks, brokerages, asset managers, andother financial entities), and insurance companies around the world with long-term local-currency ratings. Wecalculated all default rates reported on an issuer-weighted basis.

6 (For a detailed explanation of the data sources andmethodology used in the study , see Appendix I.)Despite an increase in the number of corporate defaults in 2012 from the prior year, the one-year Gini ratio--a keymeasure of the relative ability of ratings to differentiate risk--rose marginally, to in 2012 from in is the sixth-highest Annual Gini ratio in the 32 years the database covers (see chart 30) and is considerably higherthan the one-year average of (see table 2). (For details on the Gini methodology, refer to Appendix III.)

7 Theincrease in default activity in 2012 was fairly evenly spread out across industrial sectors; however, most industries stillhad default rates below their long-term averages (see chart 2). The default rates in this study that we refer to asweighted averages use the number of issuers at the beginning of each year as the basis for each year's weight. With theexception of the 'CCC/C' category, every rating category had an Annual default rate in 2012 that was below itslong-term average (see table 9).

8 18, 2013 31097086 | 300000444 Table 1 global corporate default SummaryYearTotaldefaults*Investment-grad edefaultsSpeculative-gradedefaultsDefaul trate (%)Investment-gradedefault rate (%)Speculative-gradedefault rate (%)Total debtoutstanding(bil. $) *This column includes companies that were no longer rated one year prior to default . Sources: Standard & Poor's global Fixed Income Researchand Standard & Poor's CreditPro . 18, 2013 41097086 | 300000444 default , transition , and recovery : 2012 Annual global corporate default study And Rating TransitionsChart 18, 2013 51097086 | 300000444 default , transition , and recovery : 2012 Annual global corporate default study And Rating TransitionsChart 2 The Gini ratios are a measure of the rank-ordering power of ratings over a given time horizon--one through sevenyears (see chart 3).

9 It shows the ratio of actual rank-ordering performance to theoretically perfect rank 18, 2013 61097086 | 300000444 default , transition , and recovery : 2012 Annual global corporate default study And Rating TransitionsChart 3 All of Standard & Poor's default studies have found a clear correlation between ratings and defaults: The higher therating, the lower the observed frequency of default , and vice versa. Over each time span, lower ratings correspond tohigher default rates (see chart 4 and chart 25).

10 We found that the same is true when we broke out the data by rating(see table 24 and table 26), as well as by region (see table 25). As the Gini ratios show, the ability of corporate ratingsto serve as an effective measure of relative risk remains intact, particularly in low- default years. Many default studies,including this one, also look at transition rates, which gauge the degree to which ratings change--either up ordown--over a particular time. transition studies have repeatedly confirmed that higher ratings tend to be more stableand that speculative-grade ratings generally experience more volatility.