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2017 Annual Greater China Corporate Default Study and Rating Transitions


These ESG Trends will Shape 2019, Sustainability Experts Say

S&P Global Ratings

COP24 Special Edition Shining A Light On Climate Finance

S&P Global Ratings

S&P Global Ratings' Global Outlook 2019

S&P Global Platts

Energy: What to Watch in 2019

2017 Annual Greater China Corporate Default Study and Rating Transitions


One company defaulted in Greater China in 2017, the same as in 2016, compared with a high of six defaults in 2015. The one-year speculative-grade default rate in 2017 was 0.19%.

The tally of corporations rated by S&P Global Ratings in Greater China (China, Hong Kong, Macau, and Taiwan) continued to grow rapidly in 2017, adding 63 issuers--an increase of 14% from 2016.

Ratings in Greater China continue to lean toward the investment-grade category, which tends to experience far fewer rating transitions than the speculative-grade segment. Nearly 74% of credit ratings in 2017 were unchanged, though among those that did change, downgrades were twice as common (11.3%) as upgrades (5.2%).

The 2017 one-year Gini coefficient for rated Greater China corporate issuers was 86.94%, compared with 82.39% globally. This shows the credit ratings' strong ability to differentiate credit risk in the region. State-owned enterprises (SOEs) showed a very high Gini coefficient of 98.94%, whereas non-SOE companies had a Gini coefficient of 83.08%.

The tally of corporations rated by S&P Global Ratings in Greater China (China, Hong Kong, Macau, and Taiwan) continued to grow rapidly in 2017, adding 63 issuers--an increase of 14% from 2016. Ratings in Greater China continue to lean toward investment grade ('BBB-' or higher), with a median rating of 'BBB', compared with a median rating of 'BB' in the U.S. Approximately 80% of 'BBB' rated issuers in Greater China did not experience rating changes within one year, on average, between 2000 and 2017, compared with about 60% of 'BB+' rated issuers. This aligns with our expectation of comparatively stable credit quality in 2018 for the Greater China issuers rated by S&P Global Ratings.

However, a number of key risks remain--namely, deleveraging, trade tensions, and growth of high-risk assets. Deleveraging has resulted from China's rapid credit growth over the past several years, which has been deemed unsustainable; unwinding and reducing leverage will require delicate care to avoid market destabilization. A combination of a strong dollar and rising interest rates in the U.S. may also contribute to asymmetric credit outflows from Greater China, which could exacerbate the deleveraging risk, since utilizing external capital is one of the Chinese government's tools to help stabilize the process of deleveraging. Additionally, high debt leverage in the corporate sector may compound this risk.

Meanwhile, escalating trade concerns do not seem to be abating as Washington and Beijing continue to trade tariffs on each other's goods and services. Further, there has been some grow 

th of new issuers in the speculative-grade (rated 'BB+' and below) segment, which is sizably more sensitive to macro shocks than the investment-grade category. As macro risks become more pronounced, these issuers are more likely to be downgraded, or even default, due to these sensitivities.

China's prolonged period of strong credit growth has increased its economic and financial risks, and S&P Global Ratings thus lowered its sovereign credit ratings on China to 'A+/A-1' from 'AA-/A-1+' on Sept. 21, 2017. The outlook is stable, reflecting S&P Global Ratings' view that China will maintain its robust economic performance and improved fiscal performance in the next three to four years.

In this study, S&P Global Fixed Income Research examines the ratings performance of 861 Greater China-based issuers rated by S&P Global Ratings. Entities included in this study are those with business operations in Greater China, regardless of the country in which they are incorporated. In a number of instances, entities included in this study are incorporated in foreign tax havens like the Cayman Islands. While S&P Global Ratings did rate issuers in Greater China prior to 2000, we limited the scope of analysis to issuers rated from 2000-2017. The statistics we present in this study refer only to the corporate ratings universe, which includes financial and nonfinancial entities in Greater China. Our methodology and the definitions of the terms we use in this study are in Appendix I.

Our study found that higher ratings correspond with stronger ratings stability for both state-owned enterprise (SOE) and non-SOE issuers. Due to their strong relationship with the sovereign, however, SOE issuers in Greater China had slightly lower stability rates across most rating categories in 2017, after the downgrade of China had knock-on effects for a number of SOE corporate issuers.

As of the end of 2017, 69% of rated issuers in Greater China were rated investment grade, compared with 51% globally, 44% in the U.S., and 59% in Europe. This distinction is particularly important in China because ratings also correspond strongly to the cost of debt: The higher the rating, the lower the cost of debt. Issuers in Greater China have had an average yield to maturity at initial issuance of just 3% in the 'A' rating category, 3.9% in the 'BBB' rating category, and 6.4% in the 'BB' rating category since 2013.

Higher-rated issuers tend to issue longer-term debt to take advantage of this lower cost of capital. In the same period, investment-grade issuers in Greater China averaged seven years for their new issuance terms, compared with just four years for speculative-grade issuers. This lower cost of financing and longer maturities help issuers mitigate default risk as well as stabilize transition rates.

In line with global trends, ratings continued to serve as effective indicators of relative credit risk in Greater China in 2017. Our study of corporate defaults in Greater China identified a clear negative correspondence between ratings and defaults: The higher the issuer credit rating, the lower the observed default frequency.

The one-year Gini ratio--a measure of the relative ability of ratings to differentiate risk--was 86.94% in Greater China. This signifies a strong ability of ratings to differentiate relative credit risk across the ratings spectrum. The three-year Gini ratio for Greater China was 82.70%. By comparison, the global one-year Gini ratio was 82.39%, and the global three-year Gini ratio was 75% (see table 1). Gini ratios are measures of the rank-ordering power of ratings over a given time horizon. They show the ratio of actual rank-ordering performance to theoretically perfect rank ordering (for details on the Gini methodology, refer to Appendix III).

Listen: These ESG Trends will Shape 2019, Sustainability Experts Say

Progress on corporate disclosures. A looming talent shortage. Climate change mitigation. These are among the top trends that sustainability experts predict will shape the ESG landscape in 2019. In the inaugural episode of ESG Insider, a new podcast from S&P Global, co-hosts Esther Whieldon and Lindsey White speak to several ESG leaders about the key themes they are watching this year, including Rakhi Kumar, State Street Global Advisors’ head of ESG investments and asset stewardship, Mindy Lubber, CEO and president of Ceres, and Libby Bernick, Trucost managing director and global head of corporate business.

"ESG investing is no longer a sideshow," State Street Global Advisors Inc.'s Rakhi Kumar said in the inaugural episode of ESG Insider, which will focus on environmental, social and governance issues.

Kumar, SSGA's head of ESG investments and asset stewardship, also highlighted the importance of leadership teams setting goals around issues like diversity to achieve progress toward building more sustainable businesses in the long term.

Some other takeaways:

Why companies are starting to pay more attention to the physical risks of climate change

Amid an increase in extreme weather events such as hurricanes, droughts and heat waves, companies are beginning to take a closer look at how climate change could threaten their operations and even their bottom line, said Libby Bernick, Trucost managing director and global head of corporate business.

"It's not just 'what's my company's impact on climate,' it's 'what's climate's impact on my company,'" Bernick said.

Trucost is a research group within S&P Global Market Intelligence that assesses business risks related to climate change and other ESG factors.

Companies are responding to investor pressure to tackle sustainability issues

Investor pressure has already prompted a number of companies to step up their environmental efforts, particularly those tied to climate change and water shortages, according to Ceres President and CEO Mindy Lubber. Ceres is an organization that helps coordinate sustainability discussions between major companies and shareholders.

Lubber expects the momentum will continue in 2019 with companies beginning to tackle climate-related issues in a "more concentrated, focused, systemic way."

To read more of S&P Global's coverage of sustainability issues, you can subscribe here to receive our weekly ESG Insider newsletter.

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.

COP24 Special Edition Shining A Light On Climate Finance


− Green loans are evolving, with the Climate Bond Initiative forecasting nearly $1 trillion in green bond issuance by 2020.

− Despite the uptick in green bond and loan issuance, the market still remains relatively small, especially compared to the universe of assets comprising CLO 2.0 transactions.

− In our view, a green CLO market has large growth potential, boosted by regulatory initiatives and emerging interest from both issuers and investors in 2018.

− We built a hypothetical rating scenario for a green CLO to compare and contrast the underlying portfolio and structure with a typical European CLO 2.0 transaction.

− Our hypothetical green CLO analysis showed that green loans may have different fundamental characteristics to corporate loans, such as lower asset yields, higher credit quality, and higher recovery rates assumptions.

The global collateralized loan obligation (CLO) market has experienced a rebirth (2010 in the U.S. and 2013 in Europe). New issuance continues to increase due to investor familiarity with the product, as well as low historical default rates. While a market for green assets, such as green loans and bonds has been established for a while, although still of a relative size, a sustainable securitization market is still in its infancy. Considering the challenge in financing the amounts, S&P Global Ratings expects green CLOs to play a role in increasing the private sector presence in the sustainable finance market.

Following the Paris Agreement that came into force in November 2016, 184 parties have ratified the action plan to limit global warming. For this purpose, developed nations have pledged to provide $100 billion (about €87 billion) annually until 2025. As part of this deal the EU has committed to decrease carbon emissions by 40% by 2030. In March 2018 the European Commission (EC) proposed the creation of environmental, social, and corporate governance 'taxonomy', regulating sustainable finance product disclosures, as well as introducing the 'green supporting factor' in the EU prudential rules for banks and insurance companies.

Read the Full Report

S&P Global Ratings' Global Outlook 2019

 A deep dive into S&P Global Ratings’ insights on the credit outlook for 2019 and what are the risks and vulnerabilities to look out for.

Access all the Global Outlook
Read More

Energy: What to Watch in 2019


S&P Global Platts Analytics Issues Two Special Reports

Pricing across the global energy markets will face headwinds in 2019, with a weaker and more uncertain macroeconomic framework deflating price formation in general, according to two special reports just issued by S&P Global Platts Analytics. Such headwinds will require the industry and portfolio managers to take a big-picture approach.

See the Executive Summary of the S&P Global Platts Analytics special report 2018 Review and 2019 here. Access the full S&P Global Platts Analytics Top Factors to Look Out For in 2019 for Energy here.

"One of the key lessons learned in 2018, painfully by some, is that market sentiment can shift violently without much change in fundamentals, requiring a steady, holistic perspective," said Chris Midgley, global head of analytics, S&P Global Platts. "It is clear that this volatility will remain a feature across the energy markets in 2019, particularly as IMO 2020 nears."

Particularly blustery headwinds are in store for markets where prices finished 2018 at elevated levels, and well above costs, such as North American natural gas and global coal. However, if the supply side can adjust to the reality of slowing demand growth, energy prices can find support. For natural gas liquids (NGLs), the ongoing logistical constraints at the US Gulf Coast are likely to manifest on continued price volatility, particularly for ethane and liquid petroleum gas (LPG), over the next year despite strong global demand.

LPG, such as propane and butane and used in transportation fuel, refrigeration, heating and cooking, is rapidly facing US export capacity constraints, especially along the US Gulf Coast. For LPG feedstock propylene, there is clear potential for high volatility globally over the next 12-18 months.

Analysts at S&P Global Platts see weakening prices of Henry Hub natural gas. The slowdown in US demand growth will exceed that of supply. But if winter temperatures prove to be colder than normal, near-term prices will need to move higher to bring on enough supply to replenish depleted storage levels.

For global liquefied natural gas (LNG), it will be end-user-backed LNG demand that faces particular struggle to cope with the speed and force of new supply entering the market in 2019. Non price-responsive demand in Asia will be easily met and JKM spot physical prices (reflecting LNG as delivered into Japan, Korea and China) will sag next year.

Access the full S&P Global Platts Analytics Top Factors to Look Out For in 2019 for Energy here. Among the 22 key take-away themes:

  • NGL supply growth will strain the North American energy system
  • Saudi Arabia will need to be nimble to balance 2019 oil supply
  • US oil supply limited by pipelines
  • Oil demand slowing: trade war, industrial slump
  • 2019 LNG supply additions largest since the Qatari mega-trains
  • US gas supply growth to exceed demand growth even with LNG exports
  • Global solar growth slowing
  • Shipping disruption looming - IMO 2020
  • New Russian gas pipeline advantage over Ukraine
  • US coal demand to decline again in 2019
  • Growth in new refineries and complex capacity likely to weigh on refinery margins especially in Asia

Year 2019 will certainly be one of transition for crude and refined oil products as it will lead into 2020 when roughly three million barrels per day of high-sulfur fuel oil must be “destroyed” (including enhanced usage of HSFO in power generation) due to the International Marine Organization (IMO) mandate of eco-friendly shipping fuels in use at sea. A similar amount of middle distillate/low sulfur fuel must be created (by refinery changes and by running more crude oil. The increase in refinery capacity between now and 2020 is large, but mostly needed to cover normal demand growth. Expect prices of light sweet crudes to be bid up in 4Q19.