Debt default rate dips: Crisil

The default rates of debt issuers have declined over the past 8 years (2000-2007) compared with those considered for the period between 1992 and 2007, according to a Crisil study.

The rating agency has released the study on its ratings experience in the default and transition ratings of both short-term and structured securities in the country in the last 16 years.

The data used for the study covers a period of weakened credit quality (1995-1999) as well as one of improving credit quality (2000-2007).

In the current edition of the Default Study (2007), Crisil has considered the data relating to 1,669 issuers for structured finance securities spread over a period of 11 years from 1997 to 2007.

For short-term ratings, it has considered 3,242 issuers for a period of 16 years, between 1992 and 2007, while it has 4,642 long-term data points.

The ratings continue to be ordinal, with highly-rated securities being much less likely to default than lower-rated ones. Long-term ratings are more stable at any time in the last five years, with an average one-year stability rate of 84.9 per cent.

Also, 'P1+'-rated short-term papers (provisional rating) have shown an impressive stability rate of 97.6 per cent over the 16-year period of the study.

The industry-wise analysis of long-term defaults revealed that four sectors "" non-banking finance companies, steel, non-ferrous metals, mining textile and consumer durables "" accounted for about half of the defaults on Crisil-rated debt instruments over the past 16 years.

A majority of defaults occurred between 1997 and 1999 due to the simultaneous occurrence of a number of events, including economic recession, and structural/regulatory changes, especially in the financial sector.

Although economic cycles will continue, Crisil believes that structural and regulatory changes of this magnitude are unlikely in the future, thus rendering the possibility of a repeat of the 1997-1999 default rates remote.

For structured finance securities that include securitisation transactions, namely, asset-backed securities, mortgage-backed securities and collateralised debt obligations as well as other structured finance transactions such as guarantee and partial guarantee transactions, the three-year cumulative default rates for securities rated 'AAA (so)' were at 0.8 per cent due to recognition of default on certain guaranteed papers on account of observed delay in payment of interest on the securities.

On an overall basis, the stability rates have been steadily rising and now are at a five-year high of 84.9 per cent. On a year-on-year comparison in 2007, the AAA stability rate has slid down by 0.2 per cent points.

Such a slide is mainly due to pressure on credit quality consequent to Indian companies' global ambitions and intent to expand.

This is reflected in an increasing risk appetite leading to the current phase of acquisitions and capacity expansions as witnessed in 2007, said the study.

Crisil's default rates for the past eight years (2000-07) stood at an average of 1.5 per cent as against an average of 2.6 per cent observed over the entire 16-year period of this study (1992-2007).

Moreover, about 70 per cent of defaults in Crisil's portfolio, till date, occurred between 1997 and 1999, resulting in an upward bias for the rating agency's overall historical default rates.