Global financial services issuers rated by S&P Global Ratings continued to show high rating stability in 2018. Upgrades exceeded downgrades for a second consecutive year. Issuers benefited from slow but positive economic growth, accompanied by the recovery of some of the European economies that were most affected by the eurozone crisis and favorable conditions for market liquidity, which continued to be supported by central banks across the world. Furthermore, many banks have strengthened balance sheets since the financial crisis and built up bail-in-eligible capital buffers.

While these factors have supported the credit quality of global financial services issuers, several risks emerged in 2018 that will continue to pose headwinds, and the number of financial services defaults increased to nine in 2018 from seven in 2017. Geopolitical risk ramped up as trade talks between the U.S. and China deteriorated, North American trade tensions flared amid the NAFTA renegotiation, Brexit negotiations slowly collapsed, and Turkey experienced a currency crisis.

In this study, we review the defaults, rating transitions, and ratings performance of financial services broadly, including the following sectors:

Banks:  bank holding companies, bank subsidiaries, savings and loans, credit unions, and government-related entities

Nonbank financial institutions (NBFIs):  a loose grouping of highly diverse companies, including broker-dealers, asset managers, finance companies, financial market infrastructure companies, and other financial entities that share some common features

Insurance:  life insurance, health insurance, property/casualty insurance, reinsurance, bond insurance, mortgage insurance, insurance brokers, and title insurance

Our findings in this study show that S&P Global Ratings' credit ratings continue to serve as effective indicators of relative credit risk for financial services companies. We identified a clear negative correspondence between ratings and defaults: The higher the issuer credit rating, the lower the observed default frequency.

We show the relationship between ratings and defaults with the Gini ratio, which is a measure of the rank-ordering power of ratings over a given time horizon (see table 1). This measure shows the ratio of actual rank-ordering performance to theoretically perfect rank ordering. In 2018, the Gini coefficient rose slightly, to 95.1%, reaching its highest level since 2013. In recent years, financial services ratings have performed exceptionally well, as demonstrated by the one-year Gini coefficients, which have held above 90% over the past seven consecutive years as financial services companies have exhibited lower ratings prior to default.

Over longer time horizons, Gini ratios continue to attest to ratings as effective indicators of relative default risk. The one-year weighted average Gini coefficient for financial services is 79.85%, the three-year is 69.63%, the five-year is 61.47%, and the seven-year is 56.69%. These weighted average Gini ratios are weighted by yearly issuer counts since 1981 (see Appendix II for Gini methodology details).

Table 1

Main Observations For 2018

• The financial services defaulters in 2018 consisted of six NBFIs, two banks, and one confidentially rated entity. No rated insurance companies defaulted in 2018.
• Defaults were concentrated among the lowest-rated financial entities: Two of the defaulters were rated 'B' as of the beginning of the year, one was rated 'B-', three were rated in the 'CCC'/'C' category, one was confidentially rated, and two were not rated.
• Two NBFIs from Turkey defaulted during the year as deteriorating economic conditions and a collapse in the Turkish lira dampened the availability of corporate funding.
• Jersey-based Sterling Mid-Holdings Ltd. had the year's largest financial services default, with nearly $745 million in debt outstanding at the time of default.
• Among the entities that defaulted in 2018, the average time to default was 4.06 years from the initial rating, down from an average of 4.2 years for the issuers that defaulted in 2017.
• Russia-based International Bank of Saint-Petersburg had the longest time to default, at 15.1 years after it was assigned an initial rating of 'CCC' in 2003.
• The company with the shortest time to default was Turkey's Fleetcorp Operasyonel Tasit Kiralama ve Turizm A.S., which defaulted 217 days after it was assigned an issuer credit rating of 'B' on Jan. 4, 2018.
• Financial services entities showed above-average ratings stability in 2018. About 78% of financial services ratings were unchanged during the year, above the 74% weighted average rate.
• Financial services upgrades outnumbered downgrades for a second consecutive year, with a downgrade-to-upgrade ratio of 0.8 to 1.
• Upgrades exceeded downgrades in each of the financial services sectors in 2018. Banks experienced the highest level of upgrades, with 10.84% of rated entities upgraded as the banking sector strengthened in both Spain and Ireland.
• The largest numbers of bank downgrades in 2018 were for companies in the emerging markets, including Brazil and Turkey, which also experienced sovereign downgrades during the year.
• No 'AAA' rated financial services companies were downgraded in 2018.
• No bank that was rated 'AAA' has ever defaulted, and thus the cumulative default rate for 'AAA' banks remains zero over the 15-year horizon.
• S&P Global Ratings assigned initial ratings to 153 financial entities in 2018, 22 more than in 2017. We consider companies that reemerge from default, including from distressed exchanges, to be new entities for the purposes of this study.

Defaults In 2018

The financial services defaulters in 2018 consisted of two banks, six NBFIs, and one confidentially rated entity. The bank defaulters were from Russia and Kazakhstan. Two of the NBFI defaulters were from Turkey, and three more were also from the European region: BrightHouse Group PLC (U.K.), GetBack S.A. (Poland), and Sterling Mid-Holdings Ltd. (Jersey). Additionally, there was one U.S.-based NBFI defaulter, Community Choice Financial Inc.

Defaults of banks and NBFIs are often cyclical. Financial services have recently experienced relatively few defaults, following years of monetary easing and quantitative easing by multiple central banks, and accompanied by growth in the global economy across regions. The financial services default rate has been below average over the past two years (see chart 1).

We calculated default and transition rates based on the number of issuers in the sample period. The default rates we refer to as weighted averages in this study use the number of issuers at the beginning of each year as the basis for each year's weight (see Appendix I for terms and definitions).

Financial services defaulters in 2018 were either rated speculative grade ('BB+' or lower) or not rated as of the beginning of the year. The number of rated defaulters remained unchanged in 2018, at seven, while the total number of defaults (rated and unrated) rose to nine. The speculative-grade default rate for financial services companies rose modestly, to 1.28% in 2018 from 1.25% in 2017 (see table 2).

Table 2

Just one bank defaulted through a regulatory directive in 2018, even though this type of default historically is one of the leading types of bank defaults. The most common cause of default in 2018 was missed principal or interest payments, which accounted for five defaults, including four in the NBFI sector and one from a bank. Two NBFIs defaulted through distressed exchanges (see table 3).

Table 3

Many factors can lead to the default of a financial services company, and these often reflect a material weakness in liquidity or capitalization of the institution. Historically, a typical default from a bank or NBFI involves some type of asset-liability mismatch, wherein an entity with a combination of illiquid assets and accelerating liabilities faces a collapse in confidence (such as in the institution or in the value of the assets) that sparks a "run on the bank" scenario, where depositors, policyholders, or lenders make demands that cannot be met, either due to illiquidity or insolvency.

For many insurers, defaults have often occurred due to unmet insurance policy obligations, rather than due to missed interest or principal payments. Financial stress for insurers can originate from either the asset side of the balance sheet (such as when the safety or liquidity of financial assets has been overestimated) or from the liability side (such as when insurers have aggressively expanded existing product lines or delved into new areas where they had limited experience). Moreover, lapses in management, governance, and enterprise risk management issues have also factored into many insurance company failures.

For regulated entities, default often occurs through a regulatory intervention, which may manifest in many forms, including the closure or winding down of the institution, run-off, a "good bank-bad bank" split, deposit freeze, or a distressed exchange. Alternatively, as we saw during the 2008-2009 period, a regulatory intervention can occur when a government steps in to provide extraordinary support to a systemically important financial institution, thereby averting a potential default. Historically, this type of intervention has been more common for banks than insurers. In S&P Global Ratings' opinion, generally governments have intervened only when an insurer's failure would have had systemic implications for a country's banking system (such as the U.S. government's support of AIG in 2008, during the global financial crisis).

However, the role of government support in ratings on banks has been changing with the establishment in many countries of resolution regimes, which seek to ensure that a systemically important financial institution can be recapitalized or wound down in an orderly manner--for instance, through investor bail-ins rather than through taxpayer bailouts. This has contributed to the emergence of a growing class of "loss-absorbing" debt instruments. We have reflected these regulatory developments in our ratings on these instruments, which are typically rated lower than traditional operating company senior unsecured debt.

Default Rates Remained Below Average For Each Financial Services Sector

The default rate remained low for financial services overall in 2018, and each financial services sector--banks, NBFIs, and insurance--also showed a below-average default rate.

NBFIs had the highest default rate in 2018, at 1.06%, up from 0.86% in 2017. Defaults in this sector increased in part due to economic conditions in Turkey, which had two defaulters in 2018. Turkey also saw unfavorable business and operating conditions as the Turkish lira plunged against other currencies, including the U.S. dollar, which considerably increased the funding risk for Turkey's domestic financial institutions.

The bank sector had a default rate of 0.24% in 2018, unchanged from 2017. Over the past three years, most bank defaults have come from Russia and its former Soviet Republics as companies have dealt with legacy asset quality problems. Defaulters in 2018 included banks in Kazakhstan and Russia, while bank defaults in 2017 had been primarily from Kazakhstan. Historically, banks show a weighted average annual default rate of 0.48%.

The insurance sector had the lowest default rate in 2018, with no defaults, down from 0.12% in 2017. Among the financial services sectors, the insurance sector also has the lowest weighted average annual default rate, at just 0.30% since 1981 (see chart 2). In the past decade, the insurance default rate has not exceeded 0.5%. That high was reached in 2008 in the midst of the financial crisis, when the default rates for banks and NBFIs were notably higher (see table 4).

The highest annual default rate for the insurance sector was 4.65%, in 1983, but the sector at the time consisted of just 43 rated issuers. Since the number of rated insurers surpassed 100 in 1987, the annual insurance default rate has remained below 1.5%.

Table 4

While financial services entities typically experience fewer defaults and have lower average default rates than nonfinancial entities, the path to default for financial issuers can be relatively swift. Financial services companies are typically more confidence-sensitive than nonfinancial companies, and the loss of confidence from stakeholders (such as counterparties or funding sources) can contribute to a rapid decline in liquidity and credit quality.

Historically, from 1981-2018, financial services companies that defaulted had a median rating of 'BBB' seven years prior to default, and the median rating remained investment grade (at 'BBB-') until about four years prior to default. From that point, the defaulters experienced a relatively steep descent into default, with the median rating dropping to 'B+' one year prior to default.

In contrast, financial entities that defaulted over the past 12 quarters (from 2016-2018) experienced a much more gradual path to default. Over the past three years, most defaulters were rated in the lowest rating categories several years ahead of their eventual default. The median rating for those financial issuers that defaulted over the past 12 quarters was 'B-' seven years prior to default (see chart 3). Notably, the trailing-12-quarter median default rate for financial entities is based on a much smaller subsample of just 32 issuers, while the full history (from 1981-2018) covers 295 issuers.

In general, financial services entities with higher initial ratings, should they default, tend to show a longer time between the initial rating and the eventual default. The time to default for a defaulting issuer generally correlates with the initial rating. For example, for the entire pool of defaulters (1981-2018), the average time to default for financial entities that were originally rated in the 'AA' category was 13.74 years from initial rating, while those initially rated in the 'B' category experienced an average time to default of just 3.71 years.

Note that in cases where an issuer emerges from a prior default (including distressed exchanges), we consider it a separate entity, and the initial rating is the first recorded after the default event. Table 5 displays the median, average, and standard deviations for the time to default from the original rating. In the last column, the standard deviations of the time to default are generally smaller for lower ratings.

Table 5

While no financial services issuer has ever defaulted from the 'AAA' rating level, throughout the 38-year span of our study, there have been five financial services entities that eventually defaulted after receiving an initial rating of 'AAA'. These defaulters include one NBFI, Ally Financial Inc., formerly known as GMAC Financial, a subsidiary of General Motors Corp. The issuer credit rating on this company was lowered to 'SD' (selective default) from 'CC' following a distressed debt exchange in December 2008. The company was downgraded to 'AA+' in 1981, which was more than 27 years prior to its eventual default in 2008.

The other four 'AAA' rated defaulters were from the insurance sector. This group includes three North American life insurers (Mutual Benefit Life Insurance Co., Executive Life Insurance Co. CA, and Confederation Life Insurance Co.) that defaulted from 1992-1994 on a combination of illiquid assets and insufficient liquidity to meet maturing liabilities. These companies had asset portfolios with heavy concentrations of high-yield bonds, real estate investments, or commercial real estate loans, which lost value and were increasingly illiquid following the 1991-1992 U.S. recession. As policyholders lost confidence in these insurers, they accelerated withdrawals, which exacerbated the inability of the companies to meet liabilities.

The remaining defaulter was bond insurer Ambac Assurance Corp., which was downgraded to 'SD' in 2009 due to being financially weakened through exposure to the subprime housing sector in the U.S. These insurers' defaults occurred as their asset values fell or as liabilities climbed following recession periods. S&P Global Ratings subsequently made adjustments to global insurance criteria to address the issues that caused these failures, including through the introduction of the capital model in 1994 and, more recently, through updates to most of the criteria methodology for financial services companies following the financial crisis.

Since 2011, S&P Global Ratings has further updated and revised the criteria methodology and assumptions that are applied to determine the ratings on financial services companies. Rating methodologies and assumptions were revised in 2011 and 2019 (including a capital model update) for bond insurance, in 2013 and 2019 for insurance companies (including life, health, and property/casualty), in 2014 for NBFIs, and in 2015 and 2019 for mortgage insurance.

For banks, the rating methodology and assumptions were updated in 2011, and the revised criteria also consider the relationship of the banking industry in a country to its financial system as a whole. The banking industry country risk assessment (BICRA) criteria were also updated in 2011, providing a framework to compare global banking systems, including the role of government supervision, regulation, and systemwide support programs. The BICRA score for each country provides an anchor for the stand-alone credit profile of the issuer credit rating on a bank.

The Largest Share Of Financial Services Companies Are In The 'A' Category

The financial services sector has a much higher share of investment-grade issuers than do the nonfinancial sectors. As of Jan. 1, 2019, S&P Global Ratings rated 75% of financial issuers investment grade ('BBB-' or higher), compared with just 39% of nonfinancial issuers. Financial services accounts for 2,144 rated issuers globally, and these issuers are outnumbered by nonfinancial corporates, which account for 5,112 rated issuers.

The 'A' rating category is the largest among financial entities, with 38% of issuers, followed by the 'BBB' category with 26%. The smallest rating categories are 'CCC'/'C' and 'AAA', which combined still account for less than 1% of issuers.

By region, 35% of financial services issuers are based in the U.S., followed by 33% in emerging markets, 23% in Europe, and 9% in the other developed region (Australia, Canada, Japan, and New Zealand). The other developed region has the highest share of financial services issuers that are investment grade (with 97%), followed by Europe (with 87%), the U.S. (with 78%), and emerging markets (with 57%) (see chart 4). Financial services issuers in both the Europe region and the other developed region have a median rating of 'A', while those in the U.S. have a median rating of 'A-'.

Meanwhile, the median rating for financial services issuers is lower (at 'BBB-') in the emerging markets, where more sovereigns have speculative-grade ratings. While the sovereign rating does not act as a ceiling for other ratings, in order for an entity to be rated higher than its sovereign, it would need to show sufficient creditworthiness to withstand a sovereign default.

The NBFI Sector Is The Fastest-Growing Financial Services Sector

The two largest financial sectors are banks and insurance companies, each accounting for roughly 39% of financial services issuers. Although NBFIs represent a smaller share (near 22%) of financial issuers, this has been the fastest-growing sector within financial services over the past decade.

The number of NBFI issuer ratings has grown at a compound annual rate of 5.7% since 2001. In comparison, the number of rated insurance companies has grown at a rate of 1.6%, and banks have grown at a rate of 1.4% (see charts 5 and 6).

NBFIs tend to be unregulated or more lightly regulated than banks and by and large do not benefit from government support. As banks have adjusted to rising capital and new regulatory requirements since the global financial crisis, the NBFI sector has grown as new nonbank lenders, finance companies, and business development companies have entered the market.

NBFIs tend to be lower rated than regulated banks and insurance companies. As of the end of 2018, 38% of NBFIs were speculative grade, compared with 30% of banks and just 12% of insurers.

The median rating for financial services was 'BBB+' at the end of 2018, down from 'A-' at the end of 2012. The growth of NBFI ratings as a share of financial services ratings has contributed to the rising number of speculative-grade ratings for financial services.

Alongside the influx of speculative-grade-rated NBFIs, the investment-grade share of banks has also declined since the Great Recession, down nearly 13% since the end of 2007. In contrast, the investment-grade share of the insurance sector has declined only slightly over the past decade, down 2% since the end of 2007 (see chart 7).

Annual Global Trends

Even though global trade tensions flared in 2018, rating actions for financial services companies were modestly more positive than in 2017. The share of financial services issuers that were downgraded fell to 6.5% (from 7.4%), and the share of issuers that were upgraded rose marginally, to 8.6% (from 8.4%). This led the downgrade-to-upgrade ratio to fall to 0.76 to 1, its lowest level since 2007 (when the ratio fell to 0.26 to 1) (see table 6). A ratio of 1 to 1 would indicate that the percentage of upgrades was equal to the percentage of downgrades. Meanwhile, although the number of rated defaults remained unchanged (at seven) in 2018, total defaults (including those that were unrated) rose to nine during the year.

Table 6

Large spikes in downgrade-to-upgrade ratios generally coincide with notable recessions or other periods of financial stress, particularly for banks and NBFIs. During the immediate aftermath of the housing crash and Great Recession in 2009, the downgrade-to-upgrade ratios spiked for financial services, in particular for banks and NBFIs, while in insurance, the ratio remained lower because much of the housing-related stress was concentrated in the relatively small subsectors of bond insurance and mortgage insurance.

Conditions remained largely stable in 2018 for each of the financial services sectors. For the second consecutive year, both banks and NBFIs experienced more upgrades than downgrades, and the insurance sector experienced more upgrades than downgrades for the first time since 2015 (see chart 8).

2018 Transition Rates And Ratings Performance

An analysis of transition rates over the four quarters ended December 2018 suggests that ratings behavior continues to exhibit consistency with long-term trends, showing a negative correspondence between ratings and the observed frequency of default. Investment-grade-rated financial services issuers globally tend to exhibit greater ratings stability (as measured by the frequency of rating transitions) than their speculative-grade counterparts (see table 7). For instance, 92.7% of issuers rated 'A' at the beginning of 2018 were still rated 'A' by Dec. 31, 2018, whereas the comparable share for issuers rated 'B' was only 82.4%.

The number of 'AAA' rated financial services companies has been dwindling in recent years. For example, at the start of 2008, the number of 'AAA' rated financial services issuers totaled 74 globally. But by the beginning of 2018, there remained just three financial services issuers rated 'AAA', and the ratings on these issuers were unchanged during the year:

• Nederlandse Waterschapsbank N.V. (Netherlands), which has an extremely strong capital base, very strong asset quality, and almost certain likelihood of extraordinary support from the Dutch Ministry of Finance;

• Zuercher Kantonalbank (Switzerland), which benefits from its close ties, including full ownership and a statutory guarantee, to the financially strong Canton of Zurich; and

• Public Sector Pension Investment Board (Canada), which has a stand-alone credit profile of 'aaa' with its large net asset position, continued positive net contributions, and experienced management. The issuer ratings also reflect our opinion of a moderately high likelihood that the Canadian government would provide extraordinary support in the event of financial distress.

Table 7

Annual Default Rates And Ratings Performance

All of our ratings performance studies have found a clear correlation between ratings and defaults: The higher the rating, the lower the observed frequency of default, and vice versa. Over each time span, lower ratings correspond to higher default rates. We found that the same was true when we broke out the data by rating as well as by region. As the Gini ratios show, the ability of financial services ratings to serve as effective measures of relative risk remains intact, particularly across larger pools of issuers.

Many default studies, including this one, also look at transition rates, which gauge the degree to which ratings change--either up or down--over a particular time. Transition studies have repeatedly confirmed that higher ratings tend to be more stable and that speculative-grade ratings generally experience more volatility. Furthermore, although defaulters that are not rated are not captured in the default rate calculations for the year of default (if they were unrated as of the beginning of the static pool period), we do capture them in the longer-term cumulative default rate statistics, which are tied to the year in which the defaulters were last rated.

Fewer defaults are observed among higher-rated entities

Across all ratings and regions, we observe a lower frequency of default among higher-rated entities and a higher rate of default among lower-rated entities. This relationship remains true over time, as the cumulative average default rates illustrate (see chart 9).

The relationship between default rates and ratings is most apparent through the cumulative rates, with the lowest rating categories exhibiting default rates far in excess of those in the investment-grade categories. The lowest investment-grade rating category, 'BBB', has a one-year weighted long-term average default rate (since 1981) of 0.26%. The average default rate more than doubles to 0.69% for the 'BB' category and rises further to 2.76% for the 'B' category and 17.10% for the 'CCC'/'C' category.

The only rating categories that exhibited defaults in 2018 were the two lowest rating categories, 'B' and 'CCC'/'C', and default rates rose for each of these categories. The default rate for the 'B' category increased to 1.63% in 2018 (from 1.22% in 2017), while the default rate for the 'CCC'/'C' category rose to 18.75% (from 16.67%). Only the 'CCC'/'C' category experienced a default rate above its long-term weighted average (17.10%).

For financial services, the pool of issuers rated in each speculative-grade rating category is often relatively small, particularly for the 'CCC'/'C' category. Given the small base of ratings, the default rate for entities rated 'CCC'/'C' has climbed as high as 100% (in 1982, when there was only one financial issuer rated 'CCC'/'C' at the beginning of the year), while the 'B' category default rate peaked at 20% in 1982 (with one default) and 1995 (with four defaults) (see table 8).

Table 8

In contrast, the relationship is slightly more discontinuous when we examine rating transitions across modifiers (the plus or minus after a rating), but these variations are likely a result of sample size considerations, and we do not consider them significant (see table 9).

Additionally, when examining default rates by rating modifier, we see surprisingly high default rates for some investment-grade ratings in certain years. For instance, in 1983, the default rate for 'BBB-' rated financial issuers climbed to 16.67%. Notably, this rate reflected the default of just one issuer, and the default rate for the 'BBB' category as a whole in 1983 was just 4%.

Since 1981, no financial services issuers rated 'AAA' or 'AA+' have defaulted over a one-year horizon. However, over this period, three financial services issuers rated either 'AA' or 'AA-' defaulted:

• General American Life Insurance Co.: After aggressively growing its Guaranteed Investment Contract (GIC) product line in prior years, the company did not have sufficient liquidity and was taken under administrative supervision in 1999, following a spike in surrender rates on these GICs.

• Lehman Brothers Inc.: The company filed for Chapter 11 bankruptcy protection in 2008 following the deterioration of its U.S. subprime housing assets.

• BluePoint Re: This company was taken over by its regulatory authority in 2008 as projected losses mounted on subprime and second-lien residential mortgage-backed security and asset-backed security collateralized debt obligations that it had reinsured.

Table 9

Average transition tables and cumulative default rates

This study--in line with previous default studies--confirms that over the long term (1981-2018), higher ratings are more stable than lower ratings. For financial entities, the highest rating categories, 'AAA', 'AA', and 'A', each displayed stability rates of 87% or higher for a one-year time horizon. Of these three rating categories, the 'A' category had the highest rate of stability, at 88.61%, meaning that 88.61% of 'A' rated issuers remained within that rating category over a one-year horizon. The stability rate was just slightly lower for the 'AAA' and 'AA' categories, although these categories also showed very high stability rates of 87.02% and 87.16%, respectively. In comparison, ratings in the 'B' category had a notably lower stability rate of 75.83% over a one-year horizon (see table 10).

When we examine rating transitions by modifier, the general relationship between rating and stability tends to hold (see table 11). For example, 'A+' rated issuers were still rated 'A+' one year later 77.62% of the time, and 'A-' rated issuers were still rated 'A-' one year later 77.15% of the time. These long-term relationships also broadly hold when transition rates are calculated over longer time horizons and when broken out by region (see table 12), though we do see some exceptions, largely due to sample size considerations, which we do not consider significant.

Over the long term (1981-2018), heightened ratings stability is broadly consistent with higher ratings. A key observation when analyzing transition matrices that present averages computed over multiple static pools is that the standard deviations associated with each transition point in the matrix are large relative to the averages (outside of stability rates).

Table 10

Table 11

Table 12

Lower Ratings Are Consistent With Higher Default Vulnerability

Lower ratings continue to exhibit higher default rates over each time span (for example, as in the one- to 15-year time horizons shown in table 13). This generally holds true across regions as well, though some exceptions occur when the number of defaults is low or when the underlying population of issuers is very small--such as among the highest and lowest rating categories, or at the rating modifier level (see tables 14 and 15).

Investment-grade-rated issuers seldom default, so the number of defaults among these rating categories is particularly low. This small sample size can result in historical default rates that appear counterintuitive. The cumulative default rates by rating modifier do not imply, for example, that 'AAA' rated companies are riskier than 'AA+' rated companies, but rather that both are highly unlikely to default. By rating modifier, each of the ratings from 'AAA' to 'A' exhibits a 15-year cumulative default rate below 2.5%.

Table 13

Table 14

Table 15

Gini Ratios And Lorenz Curves

A quantitative analysis of the performance of S&P Global Ratings' credit ratings shows that ratings on financial services issuers correlate with the level of default risk across several time horizons. To measure ratings performance, we plotted the cumulative share of defaulters against the cumulative share of issuers by rating in a Lorenz curve to visually render the accuracy of the rank ordering (for definitions and methodology, see Appendix II). Over the long term, the global weighted average one-year Gini coefficient for banks is 83.34%, higher than that of NBFIs (72.41%) and insurance (74.63%) (see table 16).

Table 16

As expected, the Gini coefficients decline over time because longer time horizons allow for greater opportunity for credit degradation among higher-rated entities. For example, in the one-year global Lorenz curve, 81.7% of defaults occurred in the speculative-grade category, while speculative-grade ratings constituted only 17.2% of all financial services ratings. In the five-year Lorenz curve, speculative-grade issuers constituted 59.9% of defaulters and only 15.3% of the entire sample.

If the rank ordering of ratings had little predictive value, the cumulative share of defaulting corporate entities and the cumulative share of all entities at each rating would be nearly the same, producing a Gini ratio of zero (see charts 10-12). The quick deterioration of Gini ratios also reflects issuers' vulnerability to a loss of confidence, even among highly rated entities (as also shown in the path to default in chart 3). Among the three financial services sectors, insurance companies exhibit Gini ratios that are lower over the three-year horizon and longer, which reflects, in part, the four insurance companies that had previously been rated 'AAA' and eventually defaulted.

Banks: Rating Action Trends And Ratings Performance

Bank ratings were generally stable through 2018. The share of banks that were downgraded fell to 7.71% in 2018 (from 8.46% in 2017), and the share of upgrades fell modestly, to 10.84% (from 11.05%) (see table 17). Banks in the emerging markets accounted for the largest number of bank downgrades in 2018. By country, banks in Brazil, Kazakhstan, and Turkey had the highest numbers of downgrades.

Many of the downgrades in Brazil followed the lowering of the long-term sovereign credit rating to 'BB-' from 'BB' on Jan. 11, 2018, after Brazil made slower-than-expected progress in putting in place meaningful legislation to correct structural fiscal slippage and rising debt levels. The following day, S&P Global Ratings lowered the long-term global scale ratings on 15 Brazilian financial institutions to 'BB-' from 'BB'.

In Kazakhstan, downgrades were elevated as the competitive landscape of the banking system became increasingly challenging for smaller banks, in our view.

Many of Turkey's bank downgrades also followed the downgrade of the sovereign, which was twice downgraded in 2018. The foreign currency long-term sovereign credit rating was lowered to 'BB-' from 'BB' in May amid macroeconomic balances, including a deteriorating current account and fiscal deficit. The long-term foreign currency sovereign credit rating was subsequently lowered again, to 'B+', in August, following extreme volatility in the Turkish lira. In conjunction with each of these sovereign downgrades, the ratings on six Turkish financial institutions, including five banks, were also lowered. The issuers showed high reliance on external debt, which heightened their vulnerability to shifts in investor sentiment, foreign yields, and global liquidity conditions.

The majority of bank upgrades in 2018 were from companies in Europe. The European countries with the largest numbers of bank upgrades were France, Spain, the U.K., and Ireland. Several banking groups in Ireland were upgraded after S&P Global Ratings revised upward its industry risk assessment for Ireland's banking industry on Dec. 17, 2018, after the Irish banking system demonstrated better wholesale funding access and took steps to sell down problematic loan portfolios.

In Spain, several banks were upgraded after the long-term sovereign credit rating on Spain was raised to 'A-' on March 23, 2018. The rating actions took into consideration the banks' more balanced funding profiles, funding costs at all-time lows, and restored access to the external funding markets. Russian banks also experienced an elevated number of upgrades in 2018, after the foreign currency long-term sovereign credit rating on Russia was raised to 'BBB-' from 'BB+' on Feb. 23, 2018.

Globally, the 'AAA' category showed the highest stability rate among banks in 2018, at 100%, followed by the 'AA' category at 94.92%. All categories experienced above-average stability except for the 'CCC'/'C' category. No bank that was rated 'AAA' has ever defaulted, and thus the cumulative default rate for 'AAA' rated banks remains zero over the 15-year horizon (see tables 22-23).

In table 24, we see that defaulting banks initially rated in the 'A' category took an average of 12.24 years from the initial rating to default, and the 'AA' category had a slightly shorter average time to default of 12.1 years. All five banks that defaulted after initial ratings in the 'AA' category were first rated in the early 1980s.

In the one-year Lorenz curve, speculative-grade issuers constituted 89% of defaulters and only 20% of bank ratings, while over a five-year horizon, speculative-grade issuers constituted 70% of defaulters and 18% of banks (see charts 13-15). Over the long term (1981-2018), the global weighted average one-year Gini coefficient for banks is 83.34%, the three-year average is 76.04%, and the five-year average is 70.72%.

Table 17

Table 18

Table 19

Table 20

Table 21

Table 22

Table 23

Table 24

Nonbank Financial Institutions: Rating Action Trends And Ratings Performance

In 2018, rating actions for NBFIs tended to be less positive than in 2017, even though upgrades continued to outnumber downgrades. The default rate for the sector increased to 1.06% in 2018 from 0.86% in 2017. The share of NBFIs that were upgraded dipped to 7.6% from 10.13%, while the share of issuers downgraded decreased to 6.79% from 7.97% (see table 25).

U.S. companies accounted for the largest number of NBFI downgrades in 2018, but only one U.S. NBFI (Community Choice Financial Inc.) defaulted during the year. More NBFI defaults in 2018 came from Europe (with three) and the emerging markets (with two). Both of the emerging market NBFI defaults were from Turkey.

In 2018, the investment-grade rating categories showed high stability. The 'AAA', 'AA', 'A', and 'BBB' rating categories showed stability rates of 100%, 87.8%, 89.2%, and 89.7%, respectively, while the 'CCC'/'C' category had the lowest stability rate, of just 42.9% for the year (see table 26). The 'AAA' category continues to show the highest one-year average stability rate (since 1981) for NBFIs, at 89.25%, followed by the 'AA' category at 88.17% and the 'A' category at 87.24%.

As in other sectors, issuers with higher ratings in the NBFI sector tend to show lower rates of default, and lower-rated entities tend to experience higher default rates. Over the one-year horizon, investment-grade NBFIs show a cumulative default rate of just 0.32%, considerably lower than the cumulative default rate of 3.16% for speculative-grade NBFIs over a one-year horizon. NBFI ratings continue to correlate with the level of default risk across several time horizons. Even though one NBFI that was initially rated 'AAA' subsequently defaulted, the cumulative default rate for 'AAA' rated NBFIs remains zero over the 15-year horizon because that issuer rating was lowered from 'AAA' more than 25 years prior to the eventual default.

Over a long-enough time horizon, however, the default rate for NBFIs in the 'BBB' category can grow larger than that of the 'BB' category. The average cumulative default rate for 'BB' rated NBFIs reaches its highest level of 8.37% after 13 years, and over the same period, the 'BBB' average cumulative default rate is slightly higher, at 9.23%. However, the 'BBB' average cumulative default rate continues to grow, reaching 11.07% in year 15, since higher-rated issuers tend to have longer times to default (see tables 30 and 31).

On average, NBFI defaulters that were originally rated in the 'BBB' category experienced a longer time to default, with a larger variance, than those that were initially rated in the 'BB' category. The average time to default is 6.8 years for an NBFI originally rated in the 'BBB' category, compared with 4.4 years for an NBFI originally rated 'BB' (see table 32).

In the one-year Lorenz curve, speculative-grade issuers constitute 82% of defaulters and only 32% of NBFI ratings (see chart 16). Over the long term (1981-2018), the global weighted average one-year Gini coefficient for NBFIs is 72.41%, the three-year average is 63.51%, and the five-year average is 57.16%.

Table 25

Table 26

Table 27

Table 28

Table 29

Table 30

Table 31

Table 32

Insurance: Rating Action Trends And Ratings Performance

The insurance sector experiences cyclical periods of rising defaults. These cycles tend to follow industry trends of aggressive pricing or reserving and do not necessarily follow the broader business cycle. While some insurance company defaults have been due to idiosyncratic causes, several cycles have seen periods of rising insurance defaults that followed periods of rising risk.

From 1991-1994, life insurance companies accounted for seven of the nine insurance defaults, and these failures reflected the insurers' holdings of illiquid assets that could not be used to sufficiently meet liabilities that came due. From 2002-2004, most of the insurance defaults were from either property/casualty or reinsurance companies, and these failures followed years of aggressive underpricing with inadequate reserves set aside in casualty lines. In 2008-2010, during the housing crash and in its immediate aftermath, the majority of insurance defaults were from bond insurance, mortgage insurance, and reinsurance companies that had built up exposures to the subprime housing market (see chart 19).

Insurers had the lowest rate of downgrades in 2018 among the financial services sectors, and for the first time since 2015, more insurers were upgraded than were downgraded. Among financial services, the insurance sector had the highest share of unchanged ratings in 2018, at 81.3%, and ratings were generally stable across rating categories. Last year marked the first time in four years with no insurance defaults (see table 33).

As in other sectors, issuers with higher ratings in the insurance sector tend to show lower cumulative average default rates, and vice versa (see table 38). While only five financial entities that were previously rated 'AAA' have eventually defaulted, four of these were from the insurance sector, as reflected in the cumulative default rates and Gini ratios for insurance.

While the cumulative average default rate for 'AAA' rated insurers is zero over a one-year horizon, the rate rises to 0.92% over a five-year horizon, which is somewhat higher than the default rate for 'AA' category insurers over the same period (at 0.75%) (see tables 38 and 39). For the four issuers that were initially rated 'AAA', the average time to default was 12.3 years, which was considerably longer than the average time to default for insurers originally rated in the 'B' category, at 5.7 years (see table 40).

Despite these defaults from companies that were previously rated 'AAA', insurance sector ratings continue to correlate with the level of default risk across several time horizons. For example, in the one-year global Lorenz curve, 68% of defaults occurred in the speculative-grade category, while speculative-grade-rated companies constituted only 9% of all insurance sector ratings (see chart 20). In the three-year Lorenz curve, speculative-grade issuers constituted 49% of defaulters and only 8% of insurance ratings (see chart 21), and in the five-year Lorenz curve, speculative-grade issuers constituted 40% of defaulters and only 8% of insurance ratings (see chart 22). Over the long term (1981-2018), the global weighted average one-year Gini coefficient for insurance is 74.63%, the three-year average is 57.10%, and the five-year average is 44.30%.

Table 33

Table 34

Table 35

Table 36

Table 37

Table 38

Table 39

Table 40

Appendix I: Methodology And Definitions

This long-term corporate default and rating transition study uses the CreditPro database of long-term local currency issuer credit ratings. The analysis excludes public information ("pi") ratings and ratings based on the guarantee of another company or government entity. We also do not include short-term issuer ratings. S&P Global Ratings does not require all issuers with rated debt to have an issuer credit rating. Therefore, if an issuer has rated debt but not an issuer credit rating, we assign a proxy rating so that the CreditPro corporate dataset accurately represents the complete universe of ratings. The local currency senior unsecured rating is the preferred debt-level rating used for the proxy because this rating is usually consistent with the issuer credit rating. In a small number of cases, we use the subordinated debt rating or the senior secured rating as the proxy.

An S&P Global Ratings issuer credit rating is a forward-looking opinion about an obligor's overall creditworthiness. This opinion focuses on the obligor's capacity and willingness to meet its financial commitments as they come due. It does not apply to any specific financial obligation because it does not take into account the nature and provisions of any single obligation, its standing in bankruptcy or liquidation, statutory preferences, or the legality and enforceability of the obligation. Counterparty credit ratings, corporate credit ratings, and sovereign credit ratings are all forms of issuer credit ratings. Issuer credit ratings can be either long-term or short-term.

Our ongoing enhancement of the database used to generate this study could lead to outcomes that differ to some degree from those reported in previous studies. However, this poses no continuity problem because each study reports statistics back to Dec. 31, 1980. Therefore, each annual default study is self-contained and effectively supersedes all previous versions.

Issuers included in this study

This study analyzes the rating histories of 5,226 financial services companies that S&P Global Ratings rated as of Dec. 31, 1980, or that were first rated between that date and Dec. 31, 2018. These include banks, nonbank financial institutions, and insurance companies around the world with long-term local currency ratings. Structured finance vehicles, public-sector issuers, and sovereign issuers are the subjects of separate default and transition studies, and we exclude them from this study.

To avoid overcounting, we exclude subsidiaries with debt that is fully guaranteed by a parent or with default risk that is considered identical to that of a parent. The latter are companies with obligations that are not legally guaranteed by a parent but that have operating or financing activities that are so inextricably entwined with those of the parent that it would be impossible to imagine the default of one and not the other. At times, however, some of these subsidiaries might not yet have been covered by a parent's guarantee, or the relationship that combines the default risk of parent and subsidiary might have come to an end or might not have begun. We included such subsidiaries for the period during which they had a distinct and separate risk of default.

Issuers with withdrawn ratings

S&P Global Ratings withdraws ratings when an entity's entire debt is paid off or when the program or programs rated are terminated and the relevant debt extinguished. For the purposes of this study, a corporate rating may also be withdrawn as a result of mergers and acquisitions. Others are withdrawn because of a lack of cooperation, particularly when a company is experiencing financial difficulties and refuses to provide all the information needed to continue surveillance on the ratings, or at the entity's request.

Definition of default

An obligor rated 'SD' (selective default) or 'D' (default) is in default on one or more of its financial obligations, including rated and unrated financial obligations but excluding hybrid instruments classified as regulatory capital or in nonpayment according to terms. An obligor is considered to be in default unless S&P Global Ratings believes that such payments will be made within five business days of the due date in the absence of a stated grace period, or within the earlier of the stated grace period or 30 calendar days.

A 'D' rating is assigned when S&P Global Ratings believes that the default will be a general default and that the obligor will fail to pay all or substantially all of its obligations as they come due. An 'SD' rating is assigned when S&P Global Ratings believes that the obligor has selectively defaulted on a specific issue or class of obligations but will continue to meet its payment obligations on other issues or classes of obligations in a timely manner. S&P Global Ratings lowers its rating on an obligor to 'D' or 'SD' if the obligor is conducting a distressed exchange offer.

'R' (regulatory intervention) indicates that an obligor is under regulatory supervision owing to its financial condition. This does not necessarily indicate a default event, but during the period of regulatory supervision, the regulators may have the power to favor one class of obligations over others or to pay some obligations and not others. Preferred stock is not considered a financial obligation; thus, a missed preferred stock dividend is not normally equated with default. While the 'R' rating was in place during the period covered in this study, it was subsequently removed from all ratings scales on July 5, 2019 (see "S&P Global Ratings Definitions," Sept. 18, 2019).

We deem 'D', 'SD', and 'R' issuer ratings to be defaults for the purposes of this study. A default is assumed to take place on the earliest of:

• The date S&P Global Ratings revised the rating(s) to 'D', 'SD', or 'R';
• The date a debt payment was missed;
• The date a distressed exchange offer was announced; or
• The date the debtor filed for, or was forced into, bankruptcy.

When an issuer defaults, it is not uncommon for S&P Global Ratings to subsequently withdraw the 'D' rating. For the purposes of this study, if an issuer defaults, we end its rating history at 'D'. If any defaulting entity reemerges from bankruptcy--or otherwise restructures its defaulted debt instruments, thereby reestablishing regular, timely payment of all its debts--we reenter this issuer into the database as a new entity. Its rating history after the default event is included in all calculations as entirely separate from its experience leading up to its earlier default.

Many practitioners use statistics from this default study to estimate the "probability of default" and "probability of rating transition." It is important to note that S&P Global Ratings' credit ratings do not imply a specific probability of default.

Regional definitions

Within this study, tables and charts often present specific geographic regions. Some countries can be included in multiple regions, and S&P Global Ratings does not have corporate ratings within every country. The regions covered in this study are:

U.S. and tax havens:  the U.S., Bermuda, and the Cayman Islands

Other developed:  Australia, Canada, Japan, and New Zealand

Europe:  Austria, Belgium, British Virgin Islands, Bulgaria, Channel Islands, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Gibraltar, Greece, Guernsey, Hungary, Iceland, Ireland, Isle of Man, Italy, Jersey, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Monaco, Montenegro, Netherlands, Norway, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, Switzerland, and the U.K.

Emerging markets:  Argentina, Armenia, Aruba, Azerbaijan, Bahamas, Bahrain, Bangladesh, Barbados, Belarus, Belize, Bolivia, Bosnia-Herzegovina, Brazil, Brunei Darussalam, Cambodia, Chile, China, Colombia, Costa Rica, Curacao, Dominican Republic, Egypt, El Salvador, Fiji, Gabon, Georgia, Ghana, Grenada, Guatemala, Honduras, Hong Kong, India, Indonesia, Israel, Jamaica, Jordan, Kazakhstan, Korea (Republic of), Kuwait, Lebanon, Liberia, Macao, Malaysia, Marshall Islands, Mauritius, Mexico, Mongolia, Morocco, Namibia, Netherlands Antilles, Nigeria, Oman, Pakistan, Panama, Papua New Guinea, Paraguay, Peru, Philippines, Qatar, Russia, Saudi Arabia, Singapore, South Africa, Sri Lanka, Syrian Arab Republic, Taiwan, Thailand, Togo, Trinidad and Tobago, Tunisia, Turkey, Turks and Caicos Islands, Ukraine, United Arab Emirates, Uruguay, Uzbekistan, Venezuela, and Vietnam

Calculations

Static pool methodology.  We conduct our default studies on the basis of groupings called static pools. For the purposes of this study, we form static pools by grouping issuers (by rating category, for example) at the beginning of each year, quarter, or month that the database covers. Each static pool is followed from that point forward. All companies included in the study are assigned to one or more static pools. When an issuer defaults, we assign that default back to all of the static pools to which the issuer belonged.

We use the static pool methodology to avoid certain pitfalls in estimating default rates, ensuring that default rates account for rating migration and can be calculated across multiperiod time horizons. Some methods for calculating default and rating transition rates might charge defaults against only the initial rating on the issuer, ignoring more recent rating changes that supply more current information. Other methods may calculate default rates using only the most recent year's default and rating data, which may yield comparatively low default rates during periods of high rating activity because they ignore prior years' default activity.

The pools are static in the sense that their membership remains constant over time. Each static pool can be interpreted as a buy-and-hold portfolio. Because errors, if any, are corrected by every new update and because the criteria for inclusion or exclusion of companies in the default study are subject to minor revisions as time goes by, it is not possible to compare static pools across different studies. Therefore, every update revises results back to the same starting date of Dec. 31, 1980, so as to avoid continuity problems.

Entities that have had ratings withdrawn--that is, revised to not rated--are surveilled with the aim of capturing a potential default. Because static pools only include entities with active ratings as of the beginning date of a given pool, we exclude companies with withdrawn ratings, as well as those that have defaulted, from subsequent static pools. If the rating on an entity is withdrawn after the start date of a particular static pool and the entity subsequently defaults, we will include it in that static pool as a default and categorize it in the rating category of which it was a member at that time.

For instance, the 1981 static pool consists of all companies rated as of 12:00:01 a.m. on Jan. 1, 1981. Adding those companies first rated in 1981 to the surviving members of the 1981 static pool forms the 1982 static pool. All rating changes that took place are reflected in the newly formed 1982 static pool through the ratings on these entities as of 12:00:01 a.m. on Jan. 1, 1982. We used the same method to form static pools for 1983-2018. From Jan. 1, 1981, to Dec. 31, 2018, a total of 5,077 first-time-rated financial services entities were added to form new static pools, while we excluded 295 defaulting companies and 2,762 companies that were no longer rated.

Consider the following example: An issuer is originally rated 'BB' in mid-1986 and is downgraded to 'B' in 1988. This is followed by a rating withdrawal in 1990 and a default in 1993. We would include this hypothetical company in the 1987 and 1988 pools with the 'BB' rating, which was the rating on the issuer at the beginning of those years. Likewise, it would be included in the 1989 and 1990 pools with the 'B' rating. It would not be part of the 1986 pool because it was not rated as of the first day of that year, and it would not be included in any pool after the last day of 1990 because the rating had been withdrawn by then. Yet each of the four pools in which this company was included (1987-1990) would record its 1993 default at the appropriate time horizon.

Default rate calculation.  We calculated annual default rates for each static pool, first in units and later as percentages with respect to the number of issuers in each rating category. We combined these percentages to obtain cumulative default rates for the 38 years the study covers (see chart 9 and tables 13-15, 22-23, 30-31, and 38-39).

Issuer-weighted default rates.  All default rates that appear in this study are based on the number of issuers rather than the dollar amounts affected by defaults or rating changes. Although dollar amounts provide information about the portion of the market that is affected by defaults or rating changes, issuer-weighted averages are more useful measures of the performance of ratings.

Average cumulative default rate calculation.  The cumulative default rates in this study average the experience of all static pools by first calculating marginal default rates for each possible time horizon and for each static pool, weight-averaging the marginal default rates conditional on survival (survivors being nondefaulters), and accumulating the average conditional marginal default rates. We calculated conditional default rates by dividing the number of issuers in a static pool that default at a specific time horizon by the number of issuers that survived (did not default) to that point in time. Weights are based on the number of issuers in each static pool. Cumulative default rates are one minus the product of the proportion of survivors (nondefaulters).

Transition analysis.  Transition rates compare issuer ratings at the beginning of a period with ratings at the end of the period. To compute one-year rating transition rates by rating category, we compared the rating on each entity at the end of a particular year with the rating at the beginning of the same year. An issuer that remained rated for more than one year was counted as many times as the number of years it was rated. For instance, an issuer continually rated from the middle of 1984 to the middle of 1991 would appear in the seven consecutive one-year transition matrices from 1985 to 1991. If the rating on the issuer was withdrawn in the middle of 1991, it would be included in the column representing transitions to not rated ("NR") in the 1991 transition matrix. Similarly, if it defaulted in the middle of 1991, it would be included in the column representing transitions to 'D' in the 1991 one-year transition matrix.

All 1981 static pool members still rated on Jan. 1, 2018, had 38 one-year transitions, while companies first rated on Jan. 1, 2018, had only one. Table 7 displays the summary of one-year transitions in the investment-grade and speculative-grade rating categories in 2018. Each one-year transition matrix displays all rating movements between letter categories from the beginning of the year through year-end. For each rating listed in the matrix's leftmost column, there are nine ratios listed in the rows, corresponding to the ratings from 'AAA' to 'D', plus an entry for "NR" (see table 12).

The only ratings considered in these calculations are those on entities at the beginning of each static pool and those at the end. All rating changes that occur in between are ignored. For example, if an entity was rated 'A' on Jan. 1, 2018, and was downgraded to 'BBB' in the middle of the year and then upgraded to 'A' later in the year (with no other subsequent rating changes), this entity would be included only in the percentage of issuers that began the year at 'A' and ended the year at 'A'. This also applies to transition matrices that span longer time horizons. If an issuer defaults or if the issuer rating is withdrawn in the middle of the year, then it would be considered rated 'D' or not rated as of Dec. 31 of that particular year.

Multiyear transitions.  Multiyear transitions were also calculated for periods of two up to 10 years. In this case, we compared the rating at the beginning of the multiyear period with the rating at the end. For example, three-year transition matrices were the result of comparing ratings at the beginning of the years 1981-2016 with the ratings at the end of the years 1983-2018. Otherwise, the methodology was identical to that used for single-year transitions.

We calculated average transition matrices on the basis of the multiyear matrices just described. These average matrices are a true summary, the ratios of which represent the historical incidence of the ratings listed in the first column changing to the ones listed in the top row over the course of the multiyear period (see tables 10, 19, 27, and 35). Transition matrices that present averages over multiple time horizons are also calculated as issuer-weighted averages.

Rating modifiers.  We use rating modifiers (plus and minus signs) to calculate upgrade and downgrade percentages, as well as the magnitude of rating changes, throughout this study. However, some transition tables may use full rating categories for practical reasons. In other words, the use of a rating category suggests that transitions to, for example, 'AA-' from 'AA' or to 'BBB-' from 'BBB+' are not considered to be rating transitions because the rating remained within the rating category.

Standard deviations.  Many of the tables and charts in this study display averages of default rates, transition rates, and Gini ratios. Often these are issuer-weighted averages. Prior studies have shown that fluctuations in default rates and transitions can vary greatly depending on many circumstances specific to particular time frames, industries, and geographic regions. As a supplement to many of the averages and time series presented in this study, standard deviations are also shown to provide a gauge of the dispersion of data behind these averages.

Time sample.  This update limits the reporting of default rates to the 15-year time horizon. However, the data were gathered for 38 years, and all calculations are based on the rating experience of that period. In addition, average default statistics become less reliable at longer time horizons as the sample size becomes smaller and the cyclical nature of default rates has a bigger effect on averages.

For a detailed explanation of our methodology and calculations, please refer to Appendix I of "2018 Annual Global Corporate Default And Rating Transition Study," published April 9, 2019.

Appendix II: Gini Methodology

To measure relative ratings performance, we utilize the Lorenz curve as a graphical representation of the proportionality of a distribution, and we summarize this via the Gini coefficient. For this study, the Lorenz curve is plotted with the x-axis showing the cumulative share of issuers, arranged by rating, while the y-axis represents the cumulative share of defaulters, also arranged by rating. For both axes of the Lorenz curve, the observations are ordered from the low end of the ratings scale ('CCC'/'C') to the high end ('AAA').

As an example, if 'CCC'/'C' rated entities made up 10% of the total population of issuers at the start of the time frame examined (x-axis) and 50% of the defaulters (y-axis), then the coordinate (10, 50) would be the first point on the curve. If S&P Global Ratings' corporate ratings only randomly approximated default risk, the Lorenz curve would fall along the diagonal. Its Gini coefficient--which is a summary statistic of the Lorenz curve--would thus be zero. If corporate ratings were perfectly rank ordered so that all defaults occurred only among the lowest-rated entities, the curve would capture all of the area above the diagonal on the graph (the ideal curve), and its Gini coefficient would be 1 (see chart 23).

The procedure for calculating the Gini coefficients is illustrated in chart 23: Area B is bounded by the random curve and the Lorenz curve, while area A is bounded by the Lorenz curve and the ideal curve. The Gini coefficient is defined as area B divided by the total of area A plus area B. In other words, the Gini coefficient captures the extent to which actual ratings accuracy diverges from the random scenario and aspires to the ideal scenario.

Appendix III: Defaults In Profile

In 2018, eight financial services companies that had been publicly rated by S&P Global Ratings defaulted on US$1.55 billion of debt. Here we provide summaries of the events leading up to each default. In some cases, we include events following the default. We also list the defaulting instruments that S&P Global Ratings rates for each company.

BrightHouse Group PLC

• EUR220 million 7.875% notes due May 15, 2018

On Feb. 5, 2018, S&P Global Ratings lowered its long-term issuer credit rating on U.K.-based rent-to-own provider BrightHouse Group PLC to 'D' from 'CC'. The downgrade followed BrightHouse's announcement on Feb. 2, 2018, that it had completed a debt exchange offer. We viewed the transaction as a distressed exchange because investors would receive less than what was promised on the original securities. We therefore considered the exchange as tantamount to a default on the company's obligations.

The ratings on the issuer were withdrawn on May 10, 2018.

Table 41

Bank of Astana JSC

• KZT20 billion 9.50% notes due Jan. 27, 2020
• KZT10 billion 12.00% secured notes due Dec. 21, 2025

On May 4, 2018, S&P Global Ratings lowered its long-term issuer credit rating on Kazakhstan-based Bank of Astana JSC to 'D' from 'CCC'. The downgrade followed official announcements by the Bank of Astana on May 2 and April 28, 2018, that in our understanding imposed extensive temporary restrictions on cash operations and debit operations on due dates for both corporate and retail clients. We understood that, because of a low liquidity cushion, the bank was unable to process most of its payments in full and on time, or to pay back the majority of corporate clients that have requested payment.

On Nov. 27, 2018, S&P Global Ratings discontinued its 'D' issuer credit rating on Bank of Astana JSC following the National Bank of Kazakhstan's revocation of Bank of Astana's banking license on Sept. 19, 2018. We understood that the authorities had started the process of settling the bank's obligations to creditors in accordance with bankruptcy law.

Table 42

GetBack S.A.

• PLN30 million 6.00% unsecured notes due Sept. 16, 2018
• PLN20 million 5.55% unsecured notes due Sept. 21, 2018
• PLN20 million 5.73% unsecured notes due Sept. 22, 2018
• PLN1.52 million 6.00% unsecured notes due Oct. 2, 2018
• PLN10 million 6.00% unsecured notes due Dec. 14, 2018
• PLN9.423 million 5.98% unsecured notes due Dec. 19, 2018
• PLN9.82 million 5.98% unsecured notes due Dec. 29, 2018
• PLN20 million 5.9% unsecured notes due Jan. 29, 2019
• PLN13.503 million 5.72% unsecured notes due Feb. 28, 2019
• PLN20 million 5.84% unsecured notes due Feb. 28, 2019
• PLN6.497 million 5.71% unsecured notes due March 17, 2019
• PLN30 million unsecured notes due April 10, 2019
• PLN3.02 million 5.6% unsecured notes due June 24, 2019
• PLN18.5 million 6.2% secured notes due Aug. 8, 2019
• PLN6.605 million 6.22% secured notes due Sept. 16, 2019
• PLN6 million 5.76% unsecured notes due Sept. 18, 2019
• PLN6 million 5.8% unsecured notes due Oct. 1, 2019
• PLN7.564 million 5.72% unsecured notes due Oct. 5, 2019
• PLN16.317 million 5.71% unsecured notes due Oct. 22, 2019
• PLN5 million 5.68% unsecured notes due Oct. 30, 2019
• PLN11.299 million 5.79% unsecured notes due Nov. 27, 2019
• PLN20 million unsecured notes due Dec. 30, 2019
• PLN13.279 million unsecured notes due Jan. 30, 2020
• PLN139.3 million 6.1% senior unsecured notes due May 10, 2020
• PLN40 million 5.9% senior unsecured notes due Dec. 30, 2020
• PLN40 million senior unsecured notes due Feb. 16, 2021
• PLN25 million 5.7% senior unsecured notes due April 30, 2021
• PLN12.1479 million 6.11% senior secured notes due Sept. 14, 2021

On April 24, 2018, S&P Global Ratings suspended its 'B' issuer credit rating on Poland-based financial company GetBack S.A. after it was unable to secure sufficient information to accurately assess the ratings on GetBack.

On May 17, 2018, S&P Global Ratings reinstated its 'B' long-term issuer credit rating on GetBack and lowered the rating to 'D'. The downgrade came after the company stopped servicing interest and principal on all of its financial obligations, beyond any possible grace period, and was pursuing an arrangement with its creditors.

On Aug. 6, 2018, we withdrew our ratings on GetBack S.A. at the issuer's request.

Table 43

Fleetcorp Operasyonel Tasit Kiralama ve Turizm A.S.

On Aug. 9, 2018, S&P Global Ratings lowered its long- and short-term issuer credit ratings on Turkey-based operational car leasing and fleet management company Fleetcorp Operasyonel Tasit Kiralama ve Turizm A.S. to 'SD' from 'B/B'. The rating was lowered after we received public information that Fleetcorp had failed to pay at least one of its outstanding debt obligations in full and on time. At the end of July 2018, Fleetcorp's CEO and its chief financial officer both resigned, and no replacement had been appointed at the time of this rating action.

On Nov. 5, 2018, S&P Global Ratings lowered its global and national scale issuer credit ratings on Fleetcorp to 'D' from 'SD'. The rating action followed the issuer's filing for "ordinary concordat" (before bankruptcy), a bankruptcy protection scheme in the Turkish legal system. By this move, we believed, Fleetcorp had defaulted on the majority of its TRY1.5 billion of debt with suppliers and financial institutions.

On Dec. 19, 2018, S&P Global Ratings withdrew its 'D' global and national scale issuer credit ratings on Fleetcorp after the court officially declared the issuer as bankrupt on Nov. 6, 2018.

Table 44

Derindere Turizm Otomotiv Sanayi ve Ticaret A.S.

• TRY56.22 million unsecured floating notes

On Sept. 5, 2018, S&P Global Ratings lowered its long- and short-term issuer credit ratings on Turkey-based fleet leasing company Derindere Turizm Otomotiv Sanayi ve Ticaret A.S. to 'SD' from 'CCC+/C'. The downgrade followed the issuer's failure to redeem its TRY50 million short-term bond due on Aug. 31, 2018.

Derindere's profitability and cash flow generation capacity had been badly hit by the severe deterioration of the economic environment in Turkey and by the unfavorable business and operating conditions in the Turkish fleet leasing sector. The steady weakening of the Turkish lira, increasing domestic interest rates, and Turkish banks' unwillingness to lend after Fleetcorp's selective default had increased the refinancing risk in the sector.

On Sept. 28, 2018, we withdrew the ratings at the issuer's request.

Table 45

International Bank of Saint-Petersburg

On Oct. 17, 2018, S&P Global Ratings lowered its long-term issuer credit rating on International Bank of Saint-Petersburg (IBSP) to 'D' from 'B-'. The downgrade of IBSP reflected our view of the Central Bank of Russia's (CBR's) regulatory intervention, which included its appointment of a temporary administration at IBSP on Oct. 15, 2018, and the imposition of a three-month payment moratorium on IBSP. In our view, this would prevent IBSP from meeting its obligations over that period.

On Nov. 2, 2018, S&P Global Ratings withdrew its 'D/D' long- and short-term issuer credit ratings on IBSP. This followed the CBR's revocation of IBSP's banking license on Oct. 31, 2018, which was based on IBSP's failure to comply with federal laws and due to the decrease in the bank's capital adequacy ratio below the minimum level of 2% set by the regulator.

Table 46

Community Choice Financial Inc.

• US$395 million 10.75% notes due May 1, 2019
• US$42 million 9.00% notes due Dec. 31, 2020
• US$25 million 12.75% notes due May 1, 2020
• US$10 million 10.75% notes due May 1, 2019
• US$25 million 12.75% notes due May 1, 2020
• US$42 million 1L guaranteed senior secured bank loan due Sept. 6, 2020

On Nov. 5, 2018, S&P Global Ratings lowered its issuer credit rating on U.S.-based financial service provider Community Choice Financial Inc. (CCFI) to 'D' from 'CC'. The rating action followed CCFI's decision to defer a $13.72 million Nov. 1 interest payment on its senior secured notes and enter into a 30-day grace period. The missed payments were on the company's outstanding $247 million senior secured notes due May 2019 and $13 million senior secured notes due May 2020. Any default on the senior secured notes would likely trigger a cross-default provision on CCFI's $42 million first-lien secured revolver.

Subsequently, on Dec. 13, 2018, the ratings were withdrawn.

Table 47

Sterling Mid-Holdings Ltd.

• US$55 million 10.50% notes due June 15, 2020
• US$745 million 12.00% PIK toggle notes due June 16, 2020

On Dec. 13, 2018, S&P Global Ratings lowered its long-term issuer credit rating on Sterling Mid-Holdings Ltd. to 'SD' from 'CCC-'. The rating action followed Sterling's decision to restructure its debt agreements on its $922.8 million payment-in-kind (PIK) toggle notes due 2020 (2016 notes) and its $55 million 10.5% cash pay notes due 2020 (2014 notes) so that the company could continue making PIK interest payments on the notes owned by its financial sponsor, Lone Star.

Table 48

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