Fitch Ratings Global Corporate Finance 1990–2005 Transition and Default Study

Corporate Finance
Credit Market Research
Fitch Ratings Global Corporate

Finance 1990–2005 Transition
and Default Study

Analysts
Summary
Charlotte L. Needham
This study, updated through 2005, examines rating transition and default
+1 212 908 0794
rates across Fitch’s global corporate rating universe both over the most
charlotte.needham@fitchratings.com
recent year, 2005, and over the long term, spanning the period 1990–2005.

The study is designed to offer a detailed view of the historical and recent
Mariarosa Verde
performance of Fitch’s global corporate ratings. In addition to providing
+1 212 908-0791
mariarosa.verde@fitchratings.com
data and analysis on the stability of Fitch’s corporate ratings and the ability

of Fitch’s ratings to predict default, this new study includes a discussion of
Fitch’s rating performance through the use of the Gini coefficient, a
quantitative measure of rating accuracy.
Global corporate credit quality remained robust in 2005 with the year
producing substantially more upgrades than downgrades, similar to
2004. In 2005, upgrades affected 12.4% of Fitch’s global corporate
ratings while downgrades affected 7.0% of outstanding ratings. The
year’s results, as shown in the Historical Ratings Changes chart below,
were very close to 2004 rating actions. In fact, the 2005 ratio of
downgrades to upgrades (calculated at the modifier level and
examining year-over-year rating movements) of 0.6 to 1.0, was close
to the 2004 downgrade-to-upgrade ratio of 0.5 to 1.0. For the second
consecutive year, Fitch’s global corporate ratings displayed more
stability and far more positive rating volatility than the difficult credit
Fitch Global Corporate Finance Historical Ratings Changes*
No. of Upgrades
No. of Downgrades
% Upgraded
% Downgraded
(#)
(% )
540
25
480
420
20
360
15
300
240
10
180
120
5
60
0
0
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
19
19
19
19
19
19
19
19
19
20
20
20
20
20
20
*Compares beginning of year rating with end of year rating. Does not count multiple rating actions throughout the year.
August 3, 2006
www.fitchratings.com

---

Corporate Finance
Fitch Ratings Global Corporate Finance Rating Movements Across Major Rating
Categories
(%)









1990–2004
2004
2005

Downgrade
Upgrade
Downgrade
Upgrade
Downgrade
Upgrade
‘AAA’
3.84
N.A.
4.00
N.A.
6.67
N.A.
‘AA’
8.34 0.13
7.47
0.00
1.69 0.00
‘A’
5.44
2.46
2.17
3.45
2.75
1.91
‘BBB’
4.88 4.58
1.27
5.32
6.35 4.59
‘BB’
11.44
7.27
4.30
8.98
4.95
7.92
‘B’
6.43 11.30
3.67
19.72
2.80 28.04
‘CCC’ to ‘C’
30.92
17.18
5.26
36.84
12.20
26.83
N.A. – Not applicable. Note: Data enhancement efforts may lead to slightly different results than previously published, particularly in 2005, with
Fitch's introduction of issuer default ratings (IDRs). Current study supersedes all prior statistics.
environment of 2000–2003. Across all of Fitch’s
investment-grade corporate ratings, for example, was
corporate rating categories, 93% of ratings either
just 0.11% through 2005. In contrast, Fitch’s average
remained the same or experienced upgrades in 2005.
annual speculative grade default rate was 3.27%.
Over the historical period 1990–2004, 88% of Fitch’s
Further, an analysis of Fitch’s rating performance
global corporate ratings on an average annual basis
conducted for this new study utilizing Gini
either remained the same or experienced upgrades.
coefficients, covering the period 1990–2005,
Fitch rating stability was especially pronounced at the
indicated a strong historical rating performance for
investment-grade level, both over the most recent
Fitch. The resulting rating accuracy ratios were
year and over the long term.
87.7%, 78.7% and 74.0% over one-, three- and five-
year horizons.
Fitch-rated defaults inched upward in 2005, totaling
eight for the year, compared with just three reported
Of note, Fitch ushered in 2005 with significant rating
in 2004. Consequently, the annual default rate, based
methodology changes, the core of which is a more
on Fitch-rated issuers, moved higher to 0.29% from
explicit and formal use of recovery analysis in the
0.12% in 2004. Fitch’s default statistics continued to
existing rating process and a more transparent
reflect the tone of the broader credit market. For
approach to communicating the role of the recovery
instance, Fitch’s U.S. high yield par value default
analysis and default risk in the assignment of ratings.
rate, based on the entire U.S. speculative-grade
Fitch introduced two new components to its rating
market, increased to 3.1% in 2005, up from 1.5%
scale: the issuer default rating (IDR)—a benchmark
recorded in 2004, yet less than the long-term average
probability of default indicator—and an important
annual rate of 5.3%. Furthermore, the European par-
companion, the issue’s recovery rating (RR), applied
based high yield default rate for 2005 mirrored the
explicitly to speculative grade issuers with IDRs of
record low documented in 2004 of only 0.5%. Fitch’s
‘B+’ or below and assigned at the security level to
long-term default rates across the various rating
indicate prospects of recovery in a default scenario.
categories continued to show a strong relationship
Additionally, the long-term IDR, since it denotes pure
between Fitch’s ratings and default risk. The 1990–
probability of default, now serves as a replacement for
2005 average annual default rate on Fitch’s
Fitch’s long-term issuer rating, a proxy for default risk
previously used as the central data point in Fitch’s
Corporate Transition and Default Studies.
Fitch Global Corporate Finance
Rating Actions By Sector — 2005*
Highlights





• For the second consecutive year, upgrades
Downgrades
Upgrades
% of
% of
outpaced downgrades in 2005, yielding a similar
Sector
Sector
ratio of downgrades to upgrades on a year-over-
Sector
No. Ratings
No.
Ratings
year basis, of 0.6:1.0 compared with 0.5:1.0
Banking and Finance
52
4.3
172
14.1
Industrials 83
9.9
108
12.9
recorded in 2004. The share of ratings upgraded
Global Power
28
9.0
27
8.6
and downgraded was comparable as well, with
Insurance 18
7.8
16
6.9
upgrades affecting 12.4% of ratings in 2005 and
*Compares beginning of year rating to end of year rating, does not
downgrades 7.0%, compared with a mix of
count multiple rating actions throughout the year. Rating changes
defined at the modifier level, making a distinction between +/-.
12.5% upgrades and 6.7% downgrades in 2004.
Fitch Ratings Global Corporate Finance 1990–2005 Transition and Default Study
2

---

Corporate Finance
Fitch Global Corporate Finance
Fitch Global Corporate Finance
Distribution of Downgrades by Sector —
Distribution of Upgrades by Sector — 2005
2005
Industrials
33%
Global Power
15%
Industrials
46%
Global Power
8%
Insurance
10%
Banking and
Finance
53%
Banking and
Finance
29%
Insurance
5%
Note: May not total 100% due to rounding.
Credit quality remained largely intact, despite
generally in short supply, with upgrades
climbing commodity prices and interest rates,
accounting for the majority of actions over the
and several significant downgrades in the U.S.
course of 2005. Examining the data by
automotive sector.
investment grade and speculative grade ratings
• On a sector-by-sector basis, downgrades were
revealed that speculative grade issuers were far
heaviest among industrials; however, upgrades
more likely to be upgraded than investment
still managed to outnumber downgrades.
grade issuers during the year. For instance,
Banking and financial institutions, which
25.8% of Fitch’s high yield issuers were
represent the largest percentage of Fitch’s
upgraded in 2005, compared with 8.8% of
outstanding ratings, provided the greatest
investment grade issuers upgraded during the
disparity between downgrades and upgrades,
year. A similar situation occurred in 2004, when
with upgrades outpacing downgrades by nearly
speculative grade upgrades outpaced investment
three upgrades to a single downgrade. A flurry of
grade upgrades, as credit quality improved
global merger and acquisition (M&A) activity
significantly relative to the severe credit
and more than a dozen sovereign upgrades
deterioration of 2001–2002.
contributed to a number of bank upgrades in
• The number of defaults, although higher in 2005
2005.
relative to 2004, remained relatively low. The
• In absolute numbers, 2005 saw slightly more
number of defaulted issuers carrying a Fitch
downgrades than 2004 but a more troubling
rating in 2005 totaled eight, consisting
development was the significant increase in the
predominantly of U.S.-based companies,
number of “fallen angels” and multi-notch
operating in sectors such as auto, transportation
downgrades. Fallen angels, by far, were more
and global power. Therefore, Fitch’s annual
prevalent in 2005, outnumbering the previous
default rate edged higher on a year-over-year
year’s totals by nearly five to one, due in part to
basis in 2005, to 0.29% from 0.12% in 2004.
multiple U.S. auto industry participants and their
• An analysis of Fitch’s rating performance
financing arms moving from investment grade to
conducted for this new study utilizing Gini
speculative grade. Similarly, there was a
coefficients, covering the period 1990–2005,
pronounced rise in the number of multi-notch
revealed a strong historical rating performance
downgrades in 2005, up 61.5% compared with
for Fitch. The resulting Gini coefficients of the
2004, driven by both merger and acquisition
Fitch corporate rating universe for the one-,
(M&A) activity and credit events.
three- and five-year time horizons over the
• Despite the abundance of downgrades in the U.S.
1990–2005 period were 87.7%, 78.7% and
auto industry, negative rating volatility was
74.0%, respectively.
Fitch Ratings Global Corporate Finance 1990–2005 Transition and Default Study
3

---

Corporate Finance
Fitch Global Corporate Finance
Fitch Global Corporate Finance
Distribution of Downgrades by Region —
Distribution of Upgrades by Region — 2005
2005
Asia/Pacific
Other*
North
8%
12%
America
35%
Europe
North
23%
America
Latin America
62%
and
Caribbean
Latin America
8%
and
Caribbean
7%
Europe
Asia/Pacific
22%
23%
Other
1%
*Other includes Africa and Middle East.
• In 2005, Fitch introduced important rating
natural disasters (e.g., Hurricanes Katrina, Wilma and
methodology enhancements across its corporate
Rita)—enough to ensure 2005 was in no way an
finance and sovereign coverage areas. The
exact replica of 2004.
purpose of the changes was to further articulate
and integrate the role of recovery analysis into
On a year-over-year basis, the ratio of downgrades to
the rating process, in part through additional
upgrades in 2005 mimicked that of 2004, resulting in
disclosure on the two main elements of credit
a ratio of 0.6:1.0 for Fitch-rated global corporate
risk—default risk and loss given default. As a
finance issuers, resembling 2004’s ratio of 0.5:1.0.
result, Fitch introduced two new components to
This rendered the most recent two years of the decade
the Fitch rating scale, IDRs and RRs. These
far better in terms of credit quality than earlier years,
changes directly affected a portion of the
when Fitch downgrades outpaced upgrades by a ratio
underlying data used in Fitch’s Corporate
of nearly 4:1 and 2:1, in 2002 and 2003, respectively.
Transition and Default Studies. In particular, the
Similarly, improved credit quality resulted in a lower
IDR, where implemented, replaced the long-term
annual default rate for Fitch-rated issuers, of 0.29%
issuer rating, which had functioned as the study’s
in 2005, which comes in marginally higher than the
central data point since its inaugural publication
0.12% recorded in 2004.
in 2001.
Downgrades inched up in 2005 compared with
The Benign Credit Environment
activity from 2004. A number of market segments
Perseveres in 2005
appeared to carry the burden of the negative actions
Corporate rating activity—upgrades and
in 2005, including the U.S. auto industry, with a few
downgrades—are defined here at the modifier level
notable participants crossing over to the other side—
(i.e., ‘A+’ to ‘A’) as opposed to the flat level (i.e.,
the speculative grade market. The U.S. auto industry
‘A’ to ‘BBB’). In general, credit quality remained
downgrades hit both the industrial and finance
remarkably stable during 2005, enjoying the
sectors, since General Motors Corp.’s (GM)
continued strength of the global economy and solid
downgrade (to ‘B+’ from ‘BBB’) also resulted in a
corporate performance. This solid economic
downgrade of the company’s financing division,
performance supported sustained business growth
General Motors Acceptance Corp. (to ‘BB’ from
and borrowing. Of course, there were notable
‘BBB’). Overall, the majority of downgrades
exceptions, including ratings downgrades due to the
appeared within the industrial and banking/finance
troubled U.S. auto industry, corporate governance
sectors in 2005, which accounted for 45.9% and
and accounting issues, and geopolitical issues and
28.7%, respectively, of all Fitch global corporate
finance downgrades. Across the board, on a sector-
Fitch Ratings Global Corporate Finance 1990–2005 Transition and Default Study
4

---

Corporate Finance
by-sector basis all were either close to 2004
hurricane season in the United States. With
downgrade levels or modestly higher, with the only
Hurricanes Wilma, Rita and Katrina pounding the
noticeable increases originating from both industrials
Gulf Coast, insurance companies’ hefty losses were
(up 18.6%) and banking and finance (up 15.6%).
just one financial toll, reflected in a number of
downgrades. Among a few of those downgraded
Although the insurance sector experienced a marginal
were Citizens Property Insurance Corp. and XL
decline in downgrades year-over-year, insurer ratings
Capital Ltd. (both to ‘A–’ from ‘A’), and Montpelier
still felt the impact of a worse than expected
Re Holdings, Ltd. (to ‘BB’ from ‘BBB–’).
Fitch Refines Rating Methodology in 2005: Clarifying the Role of Recovery
Analysis in the Assignment of Ratings
Periodically, Fitch revisits its analytical process as a reflection of its commitment to provide more comprehensive and
accurate credit ratings to the investing public. On this occasion, Fitch introduced enhancements to its informational content
and transparency, directly related to the role of recovery analysis within the ratings process. Recovery analysis has
consistently been part of the Fitch rating process and visible via the different ratings assigned to securities of a single issuer,
reflecting their relative seniority and likely recoveries in the event of a default. The recent enhancements to Fitch’s
methodology provide for an even more transparent and explicit means by which to convey loss given default.

As part of methodology enhancements, two new rating components were added to the existing Fitch rating scale for all
global corporate finance and sovereign issuers beginning in 2005. The first, the IDR, is assigned at the issuer level to
corporations, financial institutions and sovereigns, reflecting their ability to meet all financial commitments on a timely basis.
The IDR is essentially a benchmark probability of default for issuers. Securities within an issuer’s capital structure continue
to be rated the same, higher than or lower than the IDR dependent upon their recovery prospects, in addition to differences in
ability and willingness to pay.

Secondly, Fitch formally introduced a separate recovery rating scale, consisting of an ordinal scale ranging from ‘RR1’
(outstanding recovery prospects) to ‘RR6’ (poor recovery prospects). This scale is applied at the security level of issuers with
IDRs of ‘B+’ or below, to indicate prospects of recovery in a default scenario. Applying recovery ratings at the low end of
the speculative grade market provides greater transparency to the rating process and recognition that recoveries become a
critical component in the analysis for lower-rated securities. Additionally, the scale provides for uniformity across Fitch’s
rating universe, again with securities being rated higher, lower or the same as the IDR, depending on the recovery prospects.

Furthermore, Fitch revised its approach for defaulted or distressed securities. Specifically, instead of taking such instruments
to a default level rating, instead they would be rated ‘C’, ‘CC’, ‘CCC’ or on occasion even ‘B’ depending upon the recovery
scale designation. Thus, Fitch removed the ‘DDD’–‘D’ portion of the rating scale for rating obligations. Instead, ‘D’ is
assigned at the issuer level upon the default of all obligations and a newly introduced restrictive default (RD) rating is
assigned to issuers in cases when an issuer defaults on some, but not all, of its obligations.

Methodology Implications for Fitch’s Corporate Default and Migration Data
The Fitch criteria and rating scale enhancements resulted in methodology revisions to Fitch’s Corporate Transition and
Default Study. Primarily, the long-term IDR replaces the long-term issuer rating proxy, previously used as the core data point
in Fitch’s migration and default statistics. However, since the rollout process began in the second half of 2005, not all IDRs
were assigned by year’s end. Therefore, in a multitude of cases, the long-term issuer rating was still in place at year-end
2005, indicating it would serve as the representative rating for those issuers in the 2005 study. Also for those issuers still
without a long-term issuer rating or IDR, Fitch continued to derive an IDR proxy from the securities outstanding for those
issuers at year-end. Most, if not all, of these exceptions should diminish with the 2006 study, as the IDR rollout reaches its
completion in 2006. Of note, in instances where the assignment of an IDR created a change in the existing rating, a historical
IDR proxy was derived from the newly assigned rating. Finally, the new RD rating designation is a default and recorded as
such in Fitch’s default and migration statistics since its introduction. For more specifics on Fitch Corporate Transition and
Default study’s methodology, see page 11.

IDRs Assignments Launched With U.S. Industrials
Fitch began implementing long-term IDRs and recovery ratings (RR) into its ratings process in 2005, commencing with U.S.
corporates, global power and sovereigns. The U.S. financial institutions and insurance sectors received IDR assignments in
early 2006, with non-U.S. entities—including those in Europe, Asia and Latin America—directly on the heels of the
completed U.S. launch. For additional information concerning these rating enhancements visit Fitch’s Website at
www.fitchratings.com
Fitch Ratings Global Corporate Finance 1990–2005 Transition and Default Study
5

---

Corporate Finance
compared with 5.4% of issuers receiving a
Fitch Global Corporate Finance Ratings
downgrade in the previous year. Likewise, 5.7% of
Distribution by Sector — 2005
Asia/Pacific issuers were downgraded in 2005, while
only 3.0% were the previous year. In both cases,
upgrades continued to outnumber downgrades,
Industrials
displaying no significant signs of credit erosion.
32%
Negative sovereign rating activity did not translate
into corporate finance ratings actions, given the lower
level of corporate coverage associated with some
Global Power
emerging market sovereigns. One noteworthy
12%
sovereign downgrade involved the Dominican
Republic, which performed a distressed debt
Banking and
exchange in May 2005 and was lowered to ‘DDD’.
Finance
47%
Despite, for example, the relatively positive sign
provided by the limited increase in the number of
downgrades in 2005, an area of potential interest
Insurance
concerns changes in the number of multiple-notch
9%
downgrades year-over-year. Multi-notch downgrades
reversed course from the previous year, climbing
61.5% over year-earlier totals. A number of these
actions can be attributed to weakening company
Crossing borders, credit quality remained reasonably
performance, and still others to M&A transactions,
stable year-over-year. In North America and Europe,
such as with Georgia-Pacific Corporation,
where the majority of Fitch-rated issuers reside,
downgraded to ‘B+’ from ‘BB+’, as a result of its
downgrade totals remained close to 2004 levels,
acquisition by Koch Industries, Inc.
increasing only 1% and 5%, respectively. Rating
activity continued to be largely positive in both Latin
Coupled with multi-notch downgrades, there were
America and Asia/Pacific, with a persisting low
more instances of fallen angels in 2005, i.e., issuers
levels of downgrades and higher levels of upgrades.
rated investment grade at the beginning of the year
For instance, 8.2% of Latin American and Caribbean
and subsequently downgraded to speculative grade
Fitch-rated issuers were downgraded in 2005,
by year’s end. The number of fallen angels rose in
2005, mostly as a direct result of several U.S. auto
industry downgrades from investment grade to
Fitch Global Corporate Finance Ratings
speculative grade territory. Among those auto
Distribution by Region — 2005
industry participants and their affiliates touched by
these rating changes were GM (to ‘B+’ from ‘BBB’),
Ford Motor Company (to ‘BB+’ from ‘BBB+’), and
Asia/Pacific
Dana Corp (to ‘BB–’ from ‘BBB–’, and which
9%
ultimately defaulted in 2006). Similarly, the
Europe
Fitch Global Corporate Finance
North
26%
Rating Actions By Region — 2005*
America
55%


Downgrades
Upgrades
Latin America
% of
% of
and
Regional
Regional
Caribbean
Region
No.
Ratings
No.
Ratings
6%
Asia/Pacific 14
5.7
75
30.6
Europe 41
6.1
71
10.6
Latin America and
Caribbean
13 8.2
27
17.1
Other
North America
112
7.8
113
7.9
3%
Other 1
1.1
37
41.6
*Compares beginning of year rating to end of year rating, does not
Note: May not add to 100% due to rounding.
count multiple rating actions throughout the year. Rating changes
defined at the modifier level, making a distinction between +/-.
Fitch Ratings Global Corporate Finance 1990–2005 Transition and Default Study
6

---

Corporate Finance
insurance sector harbored several fallen angels, some
in connection with the severe losses resulting from
Fitch Global Corporate Finance Ratings
the crippling U.S. hurricane season; however, all
Distribution by Rating Category* — 2005
were riding the cusp of investment and speculative
grade ratings before they received the downgrade.
(% )
35
Included among those insurers moving to speculative
grade were Unionfidi Piemonte and PXRE Group
30
Ltd., both downgraded to ‘BB+’ from ‘BBB–’.
25
Upgrades followed a familiar path in 2005,
20
increasing a modest 5.6% over 2004 figures, but
again easily managing to outnumber downgrades for
15
the year and at nearly the same pace of almost two
upgrades to a single downgrade. Ratings performed
10
similar in nature to those of 2004, as the upgrade
5
percentage for all Fitch-rated issuers in 2005
emulated that of the previous year, settling in again at
0
a solid 12%. Examining the data at the market sector
‘AAA’
‘AA’
‘A’
‘BBB’
‘BB’
‘B’
‘CCC’ to
level, upgrades were more prevalent among banking
‘C’
and finance, representing 53.3% of all upgrades,
while industrials accounted for nearly 35% of the
*End of year ratings, as of Dec. 31.
total. A variety of issues contributed to the upgrade
totals, including (for some) improving operating
performance-related improvements were U.S.
performance, measures related to debt reduction and
technology manufacturer Corning Inc. and retailer
increasing corporate profitability. For others, factors
J.C. Penney Co., Inc., both raised to ‘BBB–’ from
such as M&A activity and sovereign upgrades played
‘BB+’, while Sweden’s Ericsson Telefonaktiebolaget
a role. Year-over-year, upgrades increased most
LM (to ‘BBB–’ from ‘BB+’) and France’s SCOR SA
noticeably within the insurance sector, which doubled
(to ‘BBB’ from ‘BB’) moved up as well.
from year-earlier levels, and global power, which
witnessed a 28.6% jump in upgrades compared with
Fitch Rating Migration Rates
2004 totals.
Examining the 2005 migration data at the broad
rating category revealed that downgrades increased
On a regional basis, upgrade totals remained
noticeably in three rating categories, including
relatively consistent on a year-over-year basis in
‘AAA’, ‘BBB’ and ‘CCC’ to ‘C’. The AAA-rated
North America and Europe, while declining in Latin
category experienced a downgrade rate of 6.7% in
America and the Caribbean (down 40%), and
2005, exceeding the 4.0% downgrade rate in 2004
increasing among Fitch-rated issuers in both
and surpassing the average annual totals from 1990–
Asia/Pacific (up 56%) and the Middle East,
2004 for the ‘AAA’ category by 3.0%. Of note, Fitch
particularly Turkey. The surge in upgrades for the
lowered the ratings of American International Group
latter two regions correlated with improvements in
(AIG) and a number of its subsidiaries to ‘AA’ from
local economies, also reflected in sovereign
‘AAA’ as a result of government investigations into
upgrades. Sovereign upgrades sparked numerous
select business practices by the company.
banking upgrades in the following countries:
Downgrades among ‘BBB’-rated issuers rose to 6.4%
Thailand (‘BBB+’), The Republic of Korea (South)
in 2005, compared with 1.3% in 2004, thanks in part
(‘A+’), Indonesia (‘BB–’) and Turkey (‘BB–’).
to the U.S. auto industry, whose subsidiaries and
affiliates represented 40% of the negative actions in
A closer look at the upgrade data reveals multi-notch
the ‘BBB’ territory. Downgrades increased within the
upgrades in 2005 declined 38.1% year-over-year. To
‘CCC’ to ‘C’ rating category to 12.2% in 2005 from
a large degree, the decline served as a reminder of
5.3% in 2004, reflecting the increase in defaults at
how exceptional credit quality was in 2004 compared
this level.
with previous years. On the contrary, rising stars
shined just a bit brighter in 2005, climbing 21.7%
Downgrades among the remaining broad rating
compared with 2004. Among those issuers upgraded
categories held steady when compared with year-
from speculative to investment grade territory due to
earlier levels, scarcely changing year-over-year. The
Fitch Ratings Global Corporate Finance 1990–2005 Transition and Default Study
7

---

Corporate Finance
Fitch Global Corporate Finance Multi-
Fitch Global Corporate Finance Fallen
Notch Ratings Actions*
Angels and Rising Stars
(1995–2005)
(1995–2005)
Upgrades
Dow ngrades
Rising Stars
Fal en Angels
(#)
(#)
250
75
200
60
150
45
100
30
50
15
0
0
97
99
03
05
1995
19
19
2001
20
20
00
02
03
1995 1996 1997 1998 1999 20
2001 20
20
2004 2005
*A multi-notch rating action is defined here as an upgrade or a
*A Fallen Angel is an issuer downgraded from an investment
downgrade of more than one notch examining rating changes on a
grade to a speculative grade rating. A Rising Star is an issuer
year-over-year basis.
upgraded from a speculative grade to an investment grade rating.
exception was ‘AA’ rated issuers, of whom 98.3% of
at this level experienced improvements in debt
ratings remained unchanged in 2005, compared with
reduction, capital structure and profitability.
92.5% in 2004. Overall, Fitch’s ratings at the broad
rating categories displayed an extension of the strong
The ‘CCC’ to ‘C’ category experienced the largest
credit environment, which surfaced in 2004.
drop in upgrades year-over-year, as upgrades at the
lowest rated speculative grade categories, although
Upon inspection of the migration data at the modifier
strong, slowed in comparison to 2004. Among those
level (+/-), downgrades were also limited in number,
issuers rated ‘CCC’ to ‘C’, 26.8% received an
with most of the volatility residing in the lower
upgrade in 2005, compared with the 36.8% upgraded
echelons of the rating spectrum. As noted earlier,
one year earlier. Interestingly, as displayed by rating
although downgrades surpassed totals recorded a year
activity at the ‘CCC’ to ‘C’ and the ‘B’ categories,
earlier, negative rating volatility was in limited
speculative grade issuers possessed a better chance of
supply. On the whole, just 7.0% of Fitch-rated global
experiencing an upgrade than investment grade
corporate finance issuers received a downgrade in
issuers in 2005, in line with 2004.
2005, on par with the 6.7% reported in 2004, and a
healthy distance below levels reached in 2002 and
Observing the migration data at the modifier level for
2003, of 23.3% and 15.8%, respectively.
upgrades provides a better perspective of the upgrade
disparity between investment and speculative grade
Examining upgrades year-over-year at the broad
issuers during 2005. In 2005, 25.8% of speculative
rating categories showed changes to the ‘AA’, ‘A’,
grade issuers received an upgrade, while only 8.8%
‘BBB’ and ‘BB’ rating pools were, at most, minimal.
of investment grade issuers moved up. Although
Only in the ‘B’ rating category was there a
disproportionate, the totals for 2004 were even more
considerable increase from year-earlier levels, as
so, with 32.2% of speculative grade and 7.2% of
28% of the ‘B’ category received upgrades on the
investment grade issuers upgraded. Speculative grade
year compared with 19.7% in 2004. More than a
issuers, by their nature, are affected by changes in the
dozen of the ‘B’ upgrades can be directly linked to
macroeconomic environment more strongly on both
the aforementioned sovereign upgrades for Indonesia
the upside and downside.
(‘BB–’) and Turkey (‘BB–’). Other issuers upgraded
Fitch Ratings Global Corporate Finance 1990–2005 Transition and Default Study
8

---

Corporate Finance
One-Year Global Corporate Finance Transition Rates
(%)






‘CCC’

‘AAA’
‘AA’
‘A’
‘BBB’
‘BB’
‘B’
to ‘C’
‘D’
Total
2005



‘AAA’
93.33
6.67
0.00
0.00
0.00
0.00
0.00
0.00
100.00
‘AA’ 0.00
98.31
1.69
0.00
0.00
0.00
0.00
0.00
100.00
‘A’
0.00
1.91
95.33
2.75
0.00
0.00
0.00
0.00
100.00
‘BBB’
0.00 0.35 4.24
89.06
5.88
0.24
0.00 0.24
100.00
‘BB’
0.00
0.00
0.66
7.26
87.13
4.62
0.33
0.00
100.00
‘B’
0.00 0.00 0.00
1.87
26.17
69.16
2.34 0.47
100.00
‘CCC’ to ‘C’
0.00
0.00
0.00
0.00
0.00
26.83
60.98
12.20
100.00
2004*



‘AAA’
96.00
4.00
0.00
0.00
0.00
0.00
0.00
0.00
100.00
‘AA’ 0.00
92.53
7.47
0.00
0.00
0.00
0.00
0.00
100.00
‘A’
0.00
3.45
94.37
2.05
0.13
0.00
0.00
0.00
100.00
‘BBB’
0.13 0.51 4.69
93.41
1.14
0.13
0.00 0.00
100.00
‘BB’
0.00
0.00
0.00
8.98
86.72
4.30
0.00
0.00
100.00
‘B’
0.00 0.00 0.00
0.00
19.72
76.61
3.21 0.46
100.00
‘CCC’ to ‘C’
0.00
0.00
0.00
0.00
2.63
31.58
60.53
5.26
100.00
*Data enhancement efforts may lead to slightly different results than previously published, particularly in 2005, with Fitch's introduction of issuer
default ratings (IDRs). Current study supersedes all prior statistics.
Average Annual Global Corporate Finance Transition Rates: 1990–2005
(%)









‘CCC’

‘AAA’
‘AA’
‘A’
‘BBB’
‘BB’
‘B’
to ‘C’
‘D’
Total
‘AAA’
95.94
3.93
0.13
0.00
0.00
0.00
0.00
0.00
100.00
‘AA’ 0.12
92.02
7.49
0.32
0.02
0.02
0.00
0.00
100.00
‘A’
0.02
2.38
92.43
4.78
0.24
0.04
0.07
0.04
100.00
‘BBB’ 0.02
0.25
4.32
90.33
3.94
0.59
0.26
0.30
100.00
‘BB’
0.04
0.09
0.18
7.05
82.06
7.05
2.03
1.50
100.00
‘B’ 0.00
0.00
0.00
0.73
13.46
80.02
4.03
1.77
100.00
‘CCC’ to ‘C’
0.00
0.00
0.00
0.33
0.66
16.17
56.77
26.07
100.00

Defaults Edge Higher in 2005
transportation, auto and global power. The industries
Fitch-rated issuer defaults rose in 2005, but remained
represented—namely, auto and transportation—both
comparatively low alongside the elevated levels
highly competitive industries, heavily dependent
experienced during the 2001–2003 period of credit
upon the supply of commodities and their pricing,
erosion, with only eight Fitch-rated defaults
besides being plagued by legacy issues such as
identified in 2005. Visible trends surfaced among
pensions and health care. Despite select industry
defaulting issuers in 2005, something clearly lacking
credit pressures experienced in 2005, credit quality
in 2004’s short list of defaulters. For one, the
overall remained strong, with no significant breach
defaulters, with one exception, originated in the
emerging on a global basis.
United States—the lone non-U.S. based entity,
Cooperativa Nacional de Ahorro y Credito (COFAC),
Fitch Long-Term Average Annual
is a Uruguayan bank and the only Fitch-rated default
Default Rate Holds Steady at 0.65%
not associated with a bankruptcy, but rather a
The long-term average annual default rate for Fitch-
suspension of COFAC's activities by the Central
rated corporate issuers held steady 0.65% in 2005. A
Bank of Uruguay. Additionally, two of the eight
snapshot of the one- through five-year periods at the
defaulting issuers were investment grade at the
major or broad rating categories is available in the
beginning of 2005, Delphi Corporation and Entergy
Average Cumulative Default Rates table on page 10.
New Orleans Inc., both rated ‘BBB–’, whereas all
As shown, the probability of default increases
2004 defaults began the year as speculative grade.
significantly with each incremental movement down
Furthermore, defaults in 2004 were scattered among
the rating scale, but in particular when the movement
three separate sectors, while 2005 defaults were more
coincides with a shift from investment grade to
concentrated in a few sectors, most notably
speculative grade.
Fitch Ratings Global Corporate Finance 1990–2005 Transition and Default Study
9

---

Corporate Finance
Fitch Ratings Global Corporate Finance Average Cumulative Default Rates:
1990–2005
(%)







Average 1-year
Average 2-year
Average 3-year
Average 4-year
Average 5-year
‘AAA’
0.00
0.00
0.00
0.00
0.00
‘AA’
0.00 0.00
0.00
0.03 0.07
‘A’
0.04
0.17
0.34
0.51
0.71
‘BBB’
0.28 0.91
1.79
2.78 3.65
‘BB’
1.39
3.98
6.26
8.24
9.80
‘B’
1.63 4.05
6.40
8.97 9.58
‘CCC’ to ‘C’
23.87
30.42
37.04
37.31
33.09




Investment
Grade
0.11 0.36
0.68
1.01 1.31
High Yield
3.27
6.15
8.83
10.72
11.30
All
Corporates 0.65 1.31
1.97
2.49 2.77

As mentioned in previous studies, there are a few
the 2002 cohort—the pool that produced the highest
items worth noting with respect to the historical
default rates during the recent credit cycle
default frequencies displayed above. Default rates at
downturn—are included in all the multi-year
the ‘B’ level for example appear modest relative to
averages with the exception of the five-year averages
data reported by the other major rating agencies.
(since at the end of 2005, only four years had elapsed
This is due to Fitch’s historically more limited
since the formation of the 2002 cohort). As a result,
coverage of the high yield market. However, the
some of the default patterns moving from the four-
effect is quickly diminishing as Fitch’s high yield
year to the five-year average rates shown above may
market share grows. For example, as shown in the
appear irregular (for example the drop in the ‘CCC’
table labeled Fitch Ratings Global Corporate Finance
to ‘C’ default rate from 37.31% to 33.09%). Fitch
Most Recent Three-Year Cumulative Default Rates
expects all of these anomalies to disappear as both
(CDRs), displayed on page 14, the three-year CDRs
sample sizes and observation years continue to grow.
for the ‘BB’ and ‘B’ categories for the 2003 cohort
For a more detailed description of the methodology
were 1.2% and 3.08%, respectively, showing a more
used to calculate Fitch’s default rates please see the
meaningful gap than the average long-term three-year
Methodology section beginning on page 11.
CDRs for ‘BB’ and ‘B’ issuers of 6.26% and 6.40%
(see above). In addition, cumulative default rates for
In order to supplement the traditional analysis of
rating performance described above – namely the
view of rating performance utilizing default
Fitch Ratings Global Corporate
frequencies and rating transition rates - two
Finance Issuer Default Rates*
additional measures of rating accuracy were



computed for this new study, the Gini curve and the
Number of Fitch Rated
Default
Gini coefficient. 1 The Gini curve is constructed by

Defaults
Rate (%)
first ordering the population of ratings from the worst
1990
6
1.35
199
credit quality
1 10
1.81
(‘CCC’ to ‘C’) to best credit quality
1992
4
0.62
(‘AAA’) and then plotting the cumulative share of
199
issuer ratings
3 0
0.00
against the cumulative share of
1994
0
0.00
199
defaulters. Th
5 1
0.11
is visual assessment of ratings
1996
2
0.19
performance is shown in the Fitch Corporate Finance
199
Rating Perform
7 1
0.08
ance graph on page 11. The Gini
1998
6
0.41
199
coefficient summarizes
9 11
0.65
the results of the Gini curve
2000
8
0.42
into a single statistic that ranges between 0% and
200
100%. A Gini
1 19
0.81
of 100% would indicate that ratings
2002
47
2.03
200
had perfect ab
3 25
1.01
ility to predict default.
2004
3
0.12
200

5 8
0.29

*Data enhancement efforts may lead to slightly different results
than previously published, particularly in 2005, with Fitch's
1
introduction of issuer default ratings (IDRs). Current study
A Gini Curve is also known as a Cumulative
supersedes all prior statistics.
Accuracy Profile, Power Curve, or Lorenz curve.
Fitch Ratings Global Corporate Finance 1990–2005 Transition and Default Study
10

---