In 2019, financial services issuers rated by S&P Global Ratings showed a slight improvement in credit quality and broadly stable ratings, supported by slow, but steady, growth in the global economy. However, lower-for-longer interest rates and flaring trade tensions presented headwinds.

Based on this, fewer financial services issuers were upgraded than in 2018. While upgrades declined modestly, the rate of downgrades fell to its lowest level since 2006, and more than twice as many issuers were upgraded as were downgraded.

The number of financial services defaults rose by one since last year, to 10 in 2019--all from issuers rated in the lowest rating levels (or not rated) as of the beginning of 2019. The highest-rated defaulters in 2019 were rated 'B-'. There were no defaults from investment-grade (rated 'BBB-' and above) financial services issuers for a third consecutive year. Although the financial services default rate has been below average over the past two years, the default rate has incrementally risen for the past three years as economic growth began to slow amid heightened geopolitical and trade tension and periodic bouts of market volatility (see chart 1).

In this study, we review the defaults, rating transitions, and ratings performance of financial services broadly, in 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; and
• Insurance: life insurance, health insurance, property/casualty insurance, reinsurance, bond insurance, mortgage insurance, insurance brokers, and title insurance, as well as insurance-related service providers.

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 II for terms and definitions).

Our findings 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 2019, as no financial services issuers that were rated above 'B-' at the beginning of 2019 defaulted during the year, the Gini coefficient rose to 98.3%, reaching its highest level since 1995. 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 eight 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 80.27%, the three-year is 69.95%, the five-year is 62.33%, and the seven-year is 56.95%. These weighted-average Gini ratios are weighted by yearly issuer counts since 1981 (see Appendix II for details).

Table 1

Defaults In 2019

• By sector, the financial services defaulters in 2019 were four banks, four NBFIs, and one company from the insurance sector (this issuer from the insurance services subsector defaulted twice).
• By country, three of the bank defaults were from Lebanon and one was from Kazakhstan, and all of the NBFI and insurance defaults were from U.S. issuers.
• By rating, defaults were concentrated among the lowest-rated entities: Four of the defaulters were rated 'B-' at the beginning of the year, three were rated 'CCC+', one was rated 'CCC', and one 'CCC-'. One was not rated at the beginning of 2019.
• The speculative-grade (rated 'BB+' and below) default rate for financial services companies rose to its highest level in three years, to 1.69% in 2019 from 1.29% in 2018 (see table 2).
• Among the entities that defaulted in 2019, the average time to default was 9.96 years from the initial rating, up from an average of 3.95 years for the issuers that defaulted in 2018.

Table 2

Defaults in 2019 included three Lebanese banks. These defaults occurred after the Lebanese central bank issued a circular requesting banks to pay half of the interest due on U.S. dollar-denominated term deposits in Lebanese pounds. We viewed this action, as well as other moves from the central bank, as limiting depositors' access to funds, and we considered these changes to be a selective default under our criteria. As a result, we lowered our long-term issuer credit ratings to 'SD' (selective default) on Bank Audi S.A.L., Blom Bank sal, and Bankmed s.a.l. Of the defaulters in 2019, Bankmed S.A.L. had the longest time to default, at 22.4 years after it was assigned an initial rating of 'BB-' in 1997.

Tsesnabank was the other bank that defaulted in 2019, after it amended the terms and conditions of its senior unsecured bond, which we viewed as tantamount to a restructuring since the new offer constitutes less than the original promise to bondholders without providing additional compensation. Following its default, Tsesnabank was reorganized with new owners and a new business model, and the currently rated entity has been renamed First Heartland Jusan Bank JSC.

Four NBFIs defaulted in 2019, and three of these had defaulted in prior years as well. Ditech Holding Corp. filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code in 2019, following a Chapter 11 bankruptcy in 2017. S&P Global Ratings lowered its ratings on Sheridan Investment Partners I LLC and Sheridan Investment Partners II L.P. to 'SD' (and subsequently to 'D') in 2019. Each previously defaulted in 2016.

The other NBFI to default in 2019 was Stearns Holdings LLC, which was downgraded to 'D' on July 11, 2019, after the company announced a Chapter 11 restructuring.

One Call Corp. was the lone insurance default, and it defaulted twice. This issuer was the largest financial services company to default in the year, with about $3.28 billion in debt outstanding at the time. The company also had the shortest time to default in this year's study--its second default in 2019 came 244 days after it was reassigned an issuer credit rating of 'CCC' on March 1, 2019. One Call Corp. is a U.S. workers' compensation medical cost-containment provider. We group insurance-related service providers, such as One Call, with the insurance industry (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 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, or deposit freeze--or a distressed exchange. Alternatively, as we saw during 2008-2009, a regulatory intervention can also 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.

For many insurers, defaults have often occurred due to unmet insurance policy obligations, rather than 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
• 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.

Defaults in the insurance sector are often cyclical, following industry subsector trends, such as when pricing or reserving become aggressive. 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 defaults 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 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 Appendix I for insurance defaults by subsector).

Financial Services Showed Below-Average Default Rates

While defaults increased incrementally for financial services issuers in 2019, the financial services default rate of 0.46% remained much lower than the 1.67% default rate for nonfinancial corporates (see chart 2). Furthermore, each of the financial services sectors--banks, NBFIs, and insurance--showed below-average default rates for the year.

Even as the default rate fell for NBFIs, this sector had the highest default rate, at 0.84%, down from 1.07% in 2018 and below the sector's long-term weighted average default rate of 1.18%. The number of NBFI defaults fell to four in 2019, from six in 2018.

The bank sector default rate rose to 0.46% in 2019 from 0.24% in 2018, approaching the long-term weighted average default rate of 0.48%. Bank defaults rose to four in 2019 (from three in 2018).

The insurance sector had a default rate of 0.12% in 2019. While this marked an increase from 2018, the sector's default rate remained below its long-term weighted average of 0.29%. Among the financial services sectors, insurance has shown the lowest weighted-average annual default rate, holding below 1% annually since 2001 (see table 4).

The highest annual default rate for insurance was 4.76%, in 1983, but the sector at the time consisted of just 42 rated issuers. Since the number of rated insurers surpassed 100 in 1987, the annual insurance default rate has remained below 1.5%.

Table 4

Financial services entities typically experience less frequent defaults with lower average default rates than nonfinancial entities. However, 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 1981-2019, 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 2017-2019) experienced a much more gradual path to default from a much lower rating level. 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 services 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 26 issuers, while the full history (from 1981-2019) covers 305 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 (1981-2019), 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 3.85 years (see table 5). The standard deviation of the time to default is generally smaller for lower ratings.

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

While no financial services issuer has ever defaulted from the 'AAA' rating level, throughout the 39-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 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. While this issuer was initially rated 'AAA', it was downgraded to 'AA+' in 1981, more than 27 years in advance of its eventual default in 2008. While GMAC Financial was an NBFI at the time of default, the reorganized entity, Ally Financial Inc., has since become a bank holding company.

The four other '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 because of 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 companies' inability 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 U.S. subprime housing sector.

The 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 for financial services companies following the global financial crisis.

Since 2011, S&P Global Ratings has further updated and revised the methodology and assumptions that it applies 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, S&P Global Ratings updated its rating methodology and assumptions in 2011. 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 system wide support programs. The BICRA is the starting point for the issuer credit rating on a bank.

75% Of Financial Services Are Rated Investment Grade

With 2,151 rated issuers globally, financial services accounts for about 30% of global corporate ratings. However, financial services accounts for a much higher portion (at nearly 45%) of global investment-grade issuers. While the majority of nonfinancial corporate issuers are speculative grade, 75% of financial services issuers were rated investment grade as of Jan. 1, 2019.

Within speculative grade, financial services has a larger share of issuers with higher ratings than nonfinancials. At the beginning of 2019, 51% of speculative-grade financial services issuers were rated in the 'BB' category, compared with 33% of speculative-grade nonfinancials. Furthermore, financial services had fewer issuers at the lowest rating levels. Just 2% of speculative-grade financial services issuers were rated 'CCC+' or below at the beginning of 2019--much lower than the 8% of speculative-grade nonfinancials that were rated at that level. In part, the lower speculative-grade default rate for financial services reflects this issuer rating distribution.

Among financial services, the 'A' rating category is the largest, accounting for 37% of issuers, followed by the 'BBB' category with 27%. The smallest rating categories are 'CCC'/'C' and 'AAA', accounting for less than 1% of issuers, combined.

By region, 34.5% of financial services issuers are based in the U.S., followed by 33.6% in emerging markets, 23.5% in Europe, and 8.4% in the other developed region (Australia, Canada, Japan, and New Zealand).

Financial services issuers in Europe and the other developed region have a higher portion of financial services issuers that are investment grade than the U.S. and emerging market regions. The other developed region has the highest share of financial services issuers that are investment grade (with 96%), followed by Europe (with 88%). The median rating for financial services in these regions is 'A'.

In the U.S., 78% of financial services are rated investment grade, compared with 58% in the emerging markets (see chart 4). Financial services issuers in the U.S. have a median rating of 'A-', and the median rating is lower (at 'BBB-') in the emerging markets. In part, the lower median ratings for financial services in the U.S. reflects the size of the NBFI sector, which tends to have lower ratings than regulated banking and insurance companies.

Financial services in the emerging markets show a lower median rating than developed market issuers, in part because of the sovereign ratings. The majority of emerging market sovereigns are rated speculative grade. While the sovereign rating does not act as a ceiling for other ratings, for an entity to be rated higher than its sovereign, it would need to show sufficient creditworthiness to withstand a sovereign default.

Even with a majority of financial services ratings in investment grade, the number of speculative-grade ratings has grown since the global financial crisis. Since January 2009, the number of speculative-grade financial services issuers rose by 59%, to 534 at the beginning of 2019 (see chart 5).

The Number Of NBFI Ratings Has Climbed Since The Global Financial Crisis

Since the beginning of 2009, the number of rated NBFIs globally has increased by 58%, while the number of rated banks is largely unchanged, and the number of rated insurance companies has decreased by 3% (see chart 6). With banks adjusting to rising capital and new regulatory requirements since the global financial crisis, the NBFI sector grew with new nonbank lenders, finance companies, and business development companies entering the market. This has contributed to the increase in the number of speculative-grade financial services companies.

However, NBFIs continue to represent a smaller share of financial services ratings (about 22%), as banks account for 40% and insurance for 37%.

NBFIs tend to be unregulated or more lightly regulated than banks and, by and large, do not benefit from government support. As a result, they tend to be rated lower than regulated banks and insurance companies. At the end of 2019, 38% of NBFIs were rated speculative grade, compared with 29% of banks and just 13% of insurers (see chart 7).

The banking and insurance sectors now also contain larger numbers of speculative-grade issuers than they did a decade ago. The proportion of banks rated investment grade has declined by nearly 13% since the beginning of 2009, while the investment-grade share of insurance companies has declined by 2%.

However, over the past five years, bank ratings have steadily, though incrementally, improved. The share of banks rated investment grade climbed to 71% at the end of 2020 from a low of 66% in 2016. Ratings have improved as the banking sector has strengthened balance sheets and expanded bail-in eligible capital reserves.

Annual Global Trends

Rating actions on financial services companies were more positive in 2019 than in 2018. While fewer companies were upgraded, downgrades experienced a steeper decline. With fewer upgrades and downgrades, ratings were highly stable during the year, and the share of ratings that were changed (including upgrades, downgrades, defaults, and withdrawals) fell to 16.71%--its lowest level yet recorded. Rates of both upgrades and downgrades fell during the year, but downgrades fell by more than half (to 3.03% in 2019 from 6.52% in 2018), while the decrease in upgrades was less pronounced (down to 7.89% from 8.68%) (see table 6).

Table 6

More than twice as many financial services companies were upgraded than downgraded in 2019, bringing the downgrade-to-upgrade ratio down 0.38 to 1--the lowest since 2007. A ratio of 1 to 1 would indicate that the percentage of upgrades was equal to the percentage of downgrades (see table 6).

In 2019, upgrades exceeded downgrades in each of the financial services' sectors, and conditions remained largely stable in 2019 for each of the financial services sectors.

Banks

In 2019, bank upgrades outpaced downgrades for a third straight year as banks showed improving credit quality. The downgrade-to-upgrade ratio fell to 0.25 to 1 (from 0.71 to 1), reaching its lowest level since 2007. The share of banks that were downgraded fell to 2.44% in 2019 (from 7.66% in 2018), and the share of upgrades fell modestly, to 9.64% (from 10.78%).

Banks in the emerging markets accounted for the largest number of downgrades in 2019, led by Argentinian banks. Several Argentinian banks were downgraded on Aug. 20, 2019, after the global scale ratings on Argentina were lowered to 'B-' from 'B'. S&P Global Ratings then lowered its long-term foreign currency sovereign rating on Argentina to 'SD' from 'B-' on Aug. 29, 2019, and again on Dec. 20, 2019, to 'SD' from 'CCC-' as the government unilaterally extended the maturity of short-term paper in August and again in December.

The majority of bank upgrades in 2019 were from companies in Europe and emerging markets, together contributing 90% of the upgrades. European countries with the largest numbers of bank upgrades were the U.K. and Spain. Emerging markets countries with the largest numbers of bank upgrades were Uzbekistan and Taiwan.

NBFI

In 2019, rating actions for NBFIs tended to be more positive than in 2018, and the downgrade-to-upgrade ratio fell to 0.66 to 1 from (from 0.89 to 1). This marked the third consecutive year of NBFI upgrades exceeding downgrades. The share of NBFIs that were upgraded dipped marginally to 7.38% from 7.94%, while the share of issuers downgraded decreased to 4.85% from 7.08%.

U.S. companies accounted for the largest number of NBFI downgrades and all four NBFI defaults in 2019.

Insurance

Insurers had the lowest rate of downgrades in 2019, and this marked the second consecutive year in which more insurance companies were upgraded than were downgraded. The share of insurance issuers that were upgraded modestly declined to 6.32% from 6.99%, while the share of issuers downgraded fell to 2.6% from 5.06%. Within financial services, insurance ratings were the most stable--85.7% of ratings were not changed during the year.

The relative stability and the continued trend of modestly improving ratings for financial services in 2019 reflected generally supportive credit conditions, as global economic growth was positive and financing conditions remained largely accommodative for most issuers for much of the year. We tend to observe large spikes in downgrade-to-upgrade ratios coincide with recessions or other periods of financial stress, particularly for banks and NBFIs. During the immediate aftermath of the housing crash and global financial crisis 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 (see chart 8).

2019 Transition Rates And Ratings Performance

An analysis of transition rates over the four quarters ended December 2019 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).

Table 7

For instance, 93.46% of issuers rated 'A' at the beginning of 2019 were still rated 'A' by Dec. 31, 2019, whereas the comparable share for issuers rated 'B' was only 82.1%.

No 'AAA' rated financial services companies were downgraded in 2019. However, 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 2019, just three financial services issuers remained 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;
• Public Sector Pension Investment Board (Canada), in addition to the stand-alone credit profile of 'aaa', the 'AAA' issuer rating also reflects our opinion of a moderately high likelihood that the Canadian government would provide extraordinary support in the event of financial distress; and
• Zuercher Kantonalbank (Switzerland), which benefits from its close ties, including full ownership and a statutory guarantee, to the financially strong Canton of Zurich.

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

The lower frequency of default among higher-rated entities and higher rate of default among lower-rated entities remains true over time (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 0.24%. The average default rate more than doubles to 0.65% for the 'BB' category and rises further to 2.69% for the 'B' category and 17.72% for the 'CCC'/'C' category.

The only rating categories that exhibited defaults in 2019 were the two lowest, 'B' and 'CCC'/'C'. The default rate for the 'B' category fell to 1.59% in 2019 (from 1.64% in 2018), while the rate for the 'CCC'/'C' category more than doubled, to 41.67% (from 18.75%). Only the 'CCC'/'C' category experienced a default rate above its long-term weighted average (17.72%).

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 25% in 1982 (with one default) (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) or by sector, but these variations are likely a result of sample size considerations, and we do not consider them significant (see table 9 for default rates by rating modifier and Appendix I for default rates by sector).

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 3.7%.

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 (1981-2019), 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 88.85%, meaning that 88.85% 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 87.05% and 87.4%, respectively. In comparison, ratings in the 'B' category had a notably lower stability rate of 76.22% 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 78.13% of the time, and 'A-' rated issuers were still rated 'A-' one year later 77.57% 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 (1981-2019), 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 (see Appendix III). Over the long term, the global weighted-average one-year Gini coefficient for banks is 83.57%, followed by insurance (74.84%) and NBFIs (73.64%) (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, 82.3% of defaults occurred in the speculative-grade category, while speculative-grade ratings constituted only 17.4% of all financial services ratings. In the five-year Lorenz curve, speculative-grade issuers constituted 61.7% of defaulters and only 15.7% 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.

Appendix I: Detailed Default And Transition Statistics By Financial Services Sector

Bank rating action trends and ratings performance

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

Table 25

Table 26

Table 27

Table 28

Table 29

Table 30

Table 31

Table 32

Insurance rating action trends and ratings performance

Table 33

Table 34

Table 35

Table 36

Table 37

Table 38

Table 39

Table 40

Appendix II: 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 is self-contained and effectively supersedes all previous versions.

Issuers included in this study

This study analyzes the rating histories of 5,282 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, 2019. 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, 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. While the 'R' rating was in place during the many of the years covered in this study, it was removed from all ratings scales on July 5, 2019 (see "S&P Global Ratings Definitions," Aug. 7, 2020).

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:  Angola, Argentina, Armenia, Aruba, Azerbaijan, Bahamas, Bahrain, Bangladesh, Barbados, Belarus, Belize, Bhutan, 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, Kenya, 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.  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 pools 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 1983-2019. From Jan. 1, 1981, to Dec. 31, 2019, a total of 5,195 first-time-rated financial services entities were added to form new static pools, while we excluded 307 defaulting companies and 2,922 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, 2019, had 39 one-year transitions, while companies first rated on Jan. 1, 2019, had only one. Table 7 displays the summary of one-year transitions in the investment-grade and speculative-grade rating categories in 2019. 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, 2019, 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 1981-2017 with the ratings at the end of the years 1983-2019. 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 39 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, please refer to Appendix I of "2019 Annual Global Corporate Default And Rating Transition Study," published April 29, 2020.

Appendix III: 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 IV: Defaults In Profile

In 2019, nine financial services companies that had been publicly rated by S&P Global Ratings defaulted on US$10.93 billion of debt. This appendix provides summaries of the events leading up to each publicly rated default and, in some cases, events following the default. We also list the defaulting instruments rated by S&P Global Ratings for each company.

Ditech Holding Corp.

• US$1.5 billion first-lien term bank loan due 2020
• US$250 million 9.00% payment-in-kind toggle notes bank loan due Dec. 31, 2024
• US$250 million 9.00% second-lien due Dec. 31, 2024
• US$1.16 billion first-lien guaranteed senior secured bank loan due June 30, 2022

On Jan. 18, 2019, S&P Global Ratings lowered its issuer credit rating on Pennsylvania-based Ditech Holding Corp. to 'SD' from 'CCC'. The downgrade followed Ditech's decision to forgo a $9 million interest payment due on the company's second-lien notes due 2024. The payment was originally due on Dec. 17, but it was subject to a 30-day grace period that ended on Jan. 16. The company also entered into a forbearance agreement with an ad hoc group of lenders representing more than 50% of the total credit exposure under the first-lien credit agreement.

On Feb. 12, 2019, we lowered our issuer credit rating on Ditech Holding Corp. to 'D' from 'SD' following the company's restructuring support agreement with certain lenders holding more than 75% of its term loan, as well as its voluntary filing for reorganization under Chapter 11 of the U.S. Bankruptcy Code.

On Oct. 2, 2019, we raised our issuer credit rating on Ditech Holding Corp. to 'CCC-' from 'D'. We subsequently withdrew our ratings on Ditech Holding at the company's request. The outlook was negative at the time of withdrawal.

Ditech Holding exited its Chapter 11 bankruptcy when it entered into an asset purchase agreement with New Residential Investment Corp. to acquire the forward business and Mortgage Assets Management LLC to acquire stock and assets of the reverse business.

Table 41

Tsesnabank

• KZT10 billion floating-rate medium-term notes series 12 due June 4, 2023
• KZT3 billion 8.00% medium-term notes series 17 due April 10, 2019
• KZT5 billion 9.00% subordinated notes due June 4, 2028
• KZT6 billion 8.00% subordinated notes due July 31, 2019
• KZT4 billion 8.00% subordinated notes July 31, 2019
• KZT5 billion 8.00% subordinated notes due June 4, 2020
• KZT10 billion 8.00% subordinated notes due April 10, 2021
• KZT5 billion 8.00% subordinated notes due April 10, 2021
• KZT5 billion 8.00% subordinated notes due April 10, 2021
• KZT3.482 billion 7.50% senior unsecured notes due July 11, 2027
• KZT10 billion 7.10% senior unsecured notes due June 4, 2023

On Feb. 1, 2019, S&P Global Ratings lowered its long- and short-term issuer credit ratings on Kazakhstan-based Tsesnabank to 'SD' from 'B-'. On Jan. 29, 2019, Tsesnabank had amended the terms and conditions of its senior unsecured bond, extending the maturity and lowering the coupon rate. We viewed these changes as tantamount to a restructuring, since the new offer constituted less than the original promise to bondholders and did not provide additional compensation.

On Feb. 6, 2019, Kazakhstan-based securities firm First Heartland Securities purchased 99.8% of Tsesnabank's ordinary shares and recapitalized the bank for KZT70 billion. Government-backed Problem Loans Fund bought an additional KZT604 billion of loans from Tsesnabank at book value, therefore providing substantial liquidity support to the bank. We believed this would support the bank's capacity to sustain its financial commitments.

On Feb. 20, 2019, we raised our long- and short-term issuer credit ratings on Tsesnabank to 'B-' from 'SD'. The outlook was stable. The upgrade followed the ownership change, recapitalization by the new owner, a significant cleanup of Tsesnabank's operations, and the additional asset sale to Problem Loans Fund.

On Aug. 12, 2019, S&P Global Ratings revised the outlook on First Heartland Jusan Bank (formerly known as Tsesnabank) to positive from stable, reflecting the new management team, gradual progress in the bank's financial rehabilitation, and the possibility of achieving a more sustainable business position in the local market.

Table 42

One Call Corp.

• US$1.3 billion first-lien term loan B bank loan due Nov. 27, 2020
• US$228.223 million 10.00% second-lien notes due Oct. 1, 2024
• US$30 million 7.50% first-lien notes due July 1, 2024
• US$56.64 million revolver bank loan due Aug. 28, 2020
• US$56.64 million revolver bank loan due Aug. 28, 2022
• US$610 million 8.875% notes due Dec. 15, 2021
• US$998 million first-lien term loan B bank loan due Nov. 27, 2022
• US$339.81 million 7.50% first-lien payment-in-kind notes due July 1, 2024

On Feb. 21, 2019, S&P Global Ratings lowered its long-term issuer credit rating on New Jersey-based U.S. workers' compensation medical cost-containment provider One Call Corp. to 'SD' from 'CC'. The company completed a debt exchange plan on its first- and second-lien notes that we viewed as a distressed exchange.

Earlier, on Feb. 8, 2019, we had lowered our long-term issuer credit rating on One Call to 'CC' from 'CCC+' and placed the rating on CreditWatch with negative implications following the company's announcement on Feb. 6, 2019, of a proposed exchange offering for its $404 million second-lien notes due 2024.

On March 1, 2019, we raised our long-term issuer credit rating on One Call to 'CCC' from 'SD'. The outlook was negative. One Call completed the debt exchanges on its first-lien term loan, first-lien notes, and second-lien notes, and the outlook reflected our view of the potential for another distressed exchange or breach on the revolver financial covenant over the next 12 months.

On Oct. 7, 2019, we lowered our long-term issuer credit rating on One Call to 'CC' from 'CCC' and placed the rating on CreditWatch with negative implications. The downgrade was based on One Call's decision not to make its required interest payment on Oct. 1, 2019, for its second-lien notes due 2024. The company was working with its lenders to resolve the missed payment during the 30-day grace period. We believed an eventual payment, reorganization, distressed exchange, or default were all potential outcomes.

On Oct. 31, 2019, we lowered our long-term issuer credit rating on One Call to 'SD' from 'CC' following the company's announcement that it completed a distressed debt exchange for preferred and common equity. Certain lenders, led by KKR & Co. Inc. and GSO Capital Partners, agreed to exchange large portions of their first- and second-lien debt for preferred and common equity, giving them majority control of the company.

On Nov. 4, 2019, we raised our long-term issuer credit rating on One Call to 'B-' from 'SD' following completion of a recapitalization that would significantly lessen its debt load and enhance its financial flexibility.

Table 43

Sheridan Investment Partners II L.P.

• US$388 million bank loan
• US$800 million term loan bank loan due 2020

On May 31, 2019, S&P Global Ratings lowered its long-term issuer credit ratings on Sheridan Production Partners II-A L.P., Sheridan Investment Partners II L.P., and Sheridan Production Partners II-M L.P. (collectively referred to as "Sheridan Fund II") to 'SD' from 'CCC-'. The downgrade reflected that Sheridan Fund II entered into agreements with its creditors to defer debt service payments on its revolving credit facility and secured term loan to July 31. The term and revolver lenders would not receive $9 million in interest payments on the original May 31 due date, and $1.4 million in amortization payments on the term loan due at the end of June would not be made at that time. We view such missed payments, with no additional consideration for the deferral, as a default.

On Sept. 17, 2019, we lowered our long-term issuer credit ratings on Sheridan to 'D' after it entered a restructuring support agreement with respective lenders.

Later, on Dec. 12, 2019, we withdrew our issuer credit ratings on the company at its request.

Table 44

Sheridan Investment Partners I LLC

• US$255 million revolver bank loan due May 31, 2019
• US$900 million term loan B-2 bank loan due Oct. 1, 2019

On May 31, 2019, S&P Global Ratings lowered its long-term issuer credit ratings on Sheridan Production Partners I-A L.P., Sheridan Investment Partners I LLC, and Sheridan Production Partners I-M L.P. (collectively referred to as "Sheridan Fund I") to 'SD' from 'CCC-'. The rating action followed the extension of the fund's $168 million maturing revolving credit facilities to June 14, 2019, and the fund's proposal to extend the revolver and term loan maturities to match the expected 2022 end of the fund.

On Oct. 3, 2019, S&P Global Ratings downgraded Sheridan Investment Partners I LLC to 'D' from 'SD' after it decided to cease interest payments. The company had obtained waivers from the majority if term loan and revolving credit facilities lenders regarding the payment of cash interest and the maturity of the credit facilities as it negotiated a potential restructuring transaction.

Later, on Dec. 12, 2019, we withdrew our issuer credit ratings on the company at its request.

Table 45

Stearns Holdings LLC

• US$250 million 9.375% notes due Aug. 15, 2020

On July 11, 2019, S&P Global Ratings lowered its issuer credit rating on California-based mortgage lending services company Stearns Holdings LLC to 'D' from 'CCC+' following the company's announcement of an agreement with its majority equityholder, Blackstone, to implement a restructuring plan. This restructuring would be implemented through a Chapter 11 bankruptcy filing.

On Nov. 21, 2019, we raised the issuer credit rating on Stearns to 'CCC' from 'D' after it emerged from Chapter 11 bankruptcy on Nov. 5, with funds of Blackstone, Stearns' financial sponsor, acquiring 100% stake in the company. Subsequent to the upgrade, we withdrew our issuer credit rating on the company at its request.

Table 46

Bank Audi S.A.L.

• US$350 million 6.75% medium-term subordinated note due Oct. 16, 2023

On Dec. 4, 2019, Lebanon's central bank issued a circular requesting banks to pay half of the interest due on U.S. dollar-denominated term deposits in the local currency, Lebanese pounds. This move, following a number of other measures, further limited depositors' access to their funds. S&P Global Ratings viewed these changes as consistent with its definition under its criteria of a selective default of rated banks in Lebanon. As a result, we lowered the foreign and local currency issuer credit ratings on Bank Audi S.A.L., Blom Bank S.A.L., and Bankmed S.A.L. to 'SD' from 'CCC'.

Earlier, on Nov. 14, 2019, S&P Global Ratings had lowered its issuer credit ratings on the three banks to 'CCC' from 'B-' on rising liquidity pressure.

Table 47

Bankmed s.a.l.

On Dec. 4, 2019, Lebanon's central bank issued a circular requesting banks to pay half of the interest due on U.S. dollar-denominated term deposits in the local currency, Lebanese pounds. This move, following a number of other measures, further limited depositors' access to their funds. S&P Global Ratings viewed these changes as consistent with its definition under its criteria of a selective default of rated banks in Lebanon. As a result, we lowered our foreign and local currency issuer credit ratings on Bank Audi S.A.L., Blom Bank S.A.L., and Bankmed S.A.L. to 'SD' from 'CCC'.

Earlier, on Nov. 14, 2019, S&P Global Ratings had lowered its issuer credit rating on the three banks to 'CCC' from 'B-' on rising liquidity pressure.

Table 48

Blom Bank sal

• US$300 million 7.5% senior unsecured notes due May 4, 2023

On Dec. 4, 2019, Lebanon's central bank issued a circular requesting banks to pay half of the interest due on U.S. dollar-denominated term deposits in the local currency, Lebanese pounds. This move, following a number of other measures, further limited depositors' access to their funds. S&P Global Ratings viewed these changes as consistent with its definition under its criteria of a selective default of rated banks in Lebanon. As a result, we lowered our foreign and local currency issuer credit ratings on Bank Audi S.A.L., Blom Bank S.A.L., and Bankmed S.A.L. to 'SD' from 'CCC'.

Earlier, on Nov. 14, 2019, S&P Global Ratings had lowered its issuer credit rating on the three banks to 'CCC' from 'B-' on rising liquidity pressure.

Table 49

Related Criteria

• Methodology And Assumptions For Analyzing Bond Insurance Capital Adequacy, July 1, 2019
• Insurers Rating Methodology, July 1, 2019
• Issue Credit Rating Methodology For Nonbank Financial Institutions And Nonbank Financial Services Companies, Dec. 9, 2014
• Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011
• Banks: Rating Methodology And Assumptions, Nov. 9, 2011

Related Research

• S&P Global Ratings Definitions, Aug. 7, 2020
• 2019 Annual Global Corporate Default And Rating Transition Study, April 29, 2020
• What May Cause Insurance Companies To Fail--And How This Influences Our Criteria, June 13, 2013