We at Standard & Poor's expect the pace of downgrades in the corporate sector to ease in the near term, and the banking sector ratings in the Association of Southeast Asian Nations (Asean) to remain largely stable. Most companies in the utility and telecom sectors are well placed to satisfy upcoming debt maturities and capital-spending requirements. Though we foresee improvements in the consumer-related, energy, and commodities sectors, the shipping, high-tech, and real estate development sectors will continue to experience some stress.
Meanwhile, the outlooks on sovereign ratings in Asean are largely stable. The outlook on Indonesia was recently revised to positive, based on progress and the government's commitment to economic reforms. However, the outlook on Thailand is negative due to political uncertainties; and the outlook on Vietnam is negative because of government stimulus spending, particularly for the banking sector.
Standard & Poor's regional credit rating scale for Asean, which was launched six months ago, captures these credit trends. The number of Asean scale ratings has increased to 42 from the 19 ratings that were assigned at the scale's inception, highlighting investors' acceptance of the new scale as a benchmark for creditworthiness throughout Southeast Asia.
The Asean scale provides investors with an additional opinion for differentiating among issuers and issues. It includes obligors, guarantors and insurers residing in Asean, as well as foreign obligors that issue debt denominated in an Asean currency or that are active in Asean financial markets. Asean scale ratings are distributed across Thailand, Singapore, Malaysia, Indonesia, the Philippines, Vietnam and Cambodia, and have been assigned to corporate, bank, insurance and sovereign obligors.
The Asean rating scale is similar to S&P's more familiar global rating scale. The main difference is that the relative measure for the Asean scale is regional. Global, national and regional scales tend to use use the same letter grade symbols, from 'AAA' to 'D' and the 'AAA' designation is the highest rating assigned on both the regional and global scales. However, the rating definitions differ. For example, a 'AAA' rating on S&P's global scale is "the obligor's capacity to meet its financial commitment on the obligation is extremely strong", whereas an obligor rated 'axAAA' on the Asean rating scale has a "very strong capacity to meet its financial commitments relative to that of other Asean obligors". Thus, the creditworthiness of obligors rated 'axAAA' on the Asean scale approximately corresponds with obligors rated 'A+' and above on the S&P's global scale.
The Asean rating is most granular in the middle part of the scale. Nonetheless, it should be pointed out that ratings assigned on both scales are based on the same credit rating criteria. This allows for a stable mapping between the global and Asean rating scales. (See the full document "Asean Regional Scale Ratings Definitions", which is available in the Criteria section of our website www.standardandpoors.com).
Table 2 is a list of the Asean and global scale ratings for the 42 obligors that carry ratings on both scales. The list is presented as a rank ordering of obligors (from the highest to the lowest rating). The rank ordering is the same for both scales, and based on the global scale local currency ratings. The directions of rating movements are expected to be largely parallel on both scales.
The ratings and outlooks show the following:
• Eleven obligors are rated 'axAAA' on the Asean scale compared with two on the global scale. Not surprisingly, nine of the obligors are located in Singapore and the other two in Malaysia. In Singapore 'axAAA' rated obligors are: the sovereign, three banks (DBS, Overseas Chinese Banking Corp, and UOB), one insurance company (ACE Insurance), and four Singapore government-related entities (Singapore Power, SP Power Assets, SMRT, and Singapore Post). In Malaysia, the two 'axAAA' rated entities are the sovereign and Petronas.
• The percentage of obligors rated 'axBBB-' and above represents 88% of the obligors that have requested Asean scale ratings. This is higher than the 69% rated 'BBB-' and above on the global scale from the same group of 42 obligors. This is an expected outcome of the mapping and calibration of the two scales. Over time, the distribution is likely to change, with an increasing percentage expected to fall in the 'axBB+' and below categories.
• Obligors that cross over to 'axBBB-' and above are:
o Sovereign: Philippines, Indonesia, and Vietnam
o Corporate: Globe Telecom, PLDT, and PT Indosat
o Banking: TMBank Public Co
o Insurance: Malayan Insurance Co
• All three of the corporate obligors that cross over to 'axBBB-' and above are in the telecommunications sector, which is one of the most highly-rated and stable sectors in the region. Similarly, all of the utilities rated on the Asean scale are in the 'axA' category and above; the ratings are all related to their respective governments.
• While sovereign ratings do not represent a cap for issuer credit ratings on the global scale, issuer credit ratings tend to remain at, or below, S&P's "Transfer and Convertibility assessment" (T&C) of a given country. Of the obligors listed in Table 2, four ratings exceed the foreign currency global scale rating on the sovereign in their respective country of domicile. All of those companies are in the telecommunications sector: Advanced Info Service Public Co (A-/Negative/--), Philippine Long Distance Telephone Co (BB+/Stable/--), Globe Telecom (BB+/Stable/--), and PT Indosat. (BB/Stable/--). None of the non-sovereign ratings exceeds the sovereign ratings on the Asean scale.
• Many of the negative outlooks are related to companies that have been affected by the negative outlook on Thailand's sovereign rating. The only exception being the ratings on the SingPower group, which are based on a weakening financial risk profile.
The Asean scale offers investors greater granularity along with a complementary measure of relative credit risk. The scale's linkage to S&P's global scale and adherence to the common rating criteria provides global comparability.
The Asean rating scale supports the development of domestic capital markets as well as intra-region investments. One non-Asean issuer, Commonwealth Bank of Australia, received an Asean scale rating of 'axAAA' on its Thai baht bond issue, and pioneered the use of the Asean rating scale for non-Asean domiciled obligors. The Asean rating scale has given investors a new benchmark to use in assessing credit risk.
The author of this article, Suzanne Smith, is a managing director of corporate and government ratings at Standard & Poor's Ratings Services.
