Fitch conducted a study of defaulted corporate issuers which had Fitch investment-grade ratings within five years of default. There were 89 such defaults by corporate issuers, representing 31.6% of Fitch's total defaults between 2000 and 2013. Of these, 85% were in the 'BBB' ratings category within five years prior to default, and 60% of the same pool were downgraded to speculative-grade at least two years prior to default.
Fitch's analysis found that defaults are generally clustered within industries during recessions or industry-specific stress events. Approximately 67% of defaults occurred during the recessions of 2001 and 2009, which were preceded by a rapid collapse in asset prices principally equity in the tech, telecom and utility sectors in 2001 and U.S.-based residential mortgages in 2008. Liquidity declined dramatically in these assets, with a negative impact on issuers' ability to restructure capital.
Fitch's analysis found that defaulted industrial companies often endure multiple years of credit deterioration, defaulting on an average of 731 days after reaching the 'BB' rating category. Defaults by financial institutions were quicker, an average 297 days. As credit intermediaries, financial institutions are subject to more cliff risk than industrials.
Fitch's credit ratings frameworks include both quantitative and qualitative metrics and demonstrate the relative risk of default. Fitch notes that quantitative metrics alone are not sufficiently predictive of default during systemic crisis, particularly for financial institutions. These metrics were not materially different than peers during 2008 and 2009, since liquidity and contagion can overwhelm historical factors.
The full report 'Drivers of Investment-Grade Defaults' is available at 'www.fitchratings.com' or by clicking on the link.
Additional information is available at 'www.fitchratings.com'.
Eileen A Fahey, +1 312-368-5468
Regional Credit Officers,
Source: Fitch Ratings
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