We mentioned a recent "Fitch Default Study" in our "Link of the Day" last Thursday, but we only excerpted a couple of sentences. Today, we highlight some more sections from the Summary of the recent study. The Fitch paper, which "offers insight into the rating migration and default experience of Fitch rated ... short-term debt issuers over the past two decade," says, "As with Fitch's long-term issuer ratings, Fitch's global corporate short-term issuer ratings or issuer default ratings (IDRs) have exhibited a strong ability to differentiate default risk."

It explains, "Defaults have been infrequent at the very top of the rating scale, at the 'F1+' or 'F1' levels, and have also been modest further down the rating spectrum, with most occurring during economic recessions and affecting the speculative grade categories of 'B' or 'C'. The average 12-month default rate on Fitch's 'F1+' ratings since 1990 was 0.06%, compared with 0.07% for 'F1' ratings, and 0.10% and 0.42% for the 'F2' and 'F3' rating categories, respectively."

Fitch also says, "Of the 54 Fitch-rated short-term corporate IDR defaults since 1990, 33 occurred in 2008−2009 and 13 in 2001−2002. Nearly 70% of these carried speculative grade ratings at the beginning of the year prior to default. Most years observed had no short-term corporate IDR defaults. Further, few issuers had commercial paper (CP) outstanding at the time of default.... Fitch recorded the lowest default rates over average 30-day horizons for the period spanning 1990−2009 with 60-day, 90-day, 180-day, and 270-day periods showing steady (albeit moderate) increases in the frequency of default at each consecutive rating level."

Finally, the study adds, "The deep recession that followed Lehman's filing further hurt credit quality, sending the downgrade rate on long-term corporate IDRs to a new high of 26.7%. Similarly, the downgrade rate on corporate short-term IDRs hit a high of 13.3% in 2009, above 2008's similarly bleak 9.2% rate and above the previous highs of 8.1% and 7.8% recorded in 2001 and 2002, respectively. Across the smaller universe of Fitch-rated global SF short-term securities, there have been few defaults historically. The five defaults in fact all occurred in the two year period of 2007−2008 and emanated from the market value CDO and structured investment vehicle (SIV) sectors. All five defaults however carried F1+ ratings either a year prior to default or at issuance. On an average 12-month basis, the vast majority of Fitch rated SF short-term securities either carried the same rating year over year, or matured with full payment."

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