The credit landscape in Asia remained under severe pressure in 2022 amid one of the toughest market backdrops seen in decades. Rising interest rates, higher inflation and elevated geopolitical tensions were among the factors that impacted the fund-raising capabilities of both issuers and borrowers, raising their liquidity and refinancing risks.
This resulted in a higher number of negative rating actions for the year, outpacing the positive ones. A number of investment-grade credits saw their ratings downgraded into non-investment grade or high-yield category.
Sovereigns were not spared from these demotions. Moody’s Investors Service downgraded Laos’ credit rating in June from Caa2 to Caa3 due to increased liquidity and external vulnerability risks facing the country, its high debt metrics, as well as institutional and governance weaknesses that compound such vulnerabilities. In the face of narrowing financing options, even to meet limited financing needs, Laos’ reliance on external and domestic commercial financing will increase, resulting in a higher exposure to market sentiment, according to Moody’s.
Fitch Ratings followed suit in August and downgraded Laos’ long-term foreign currency issuer default rating from CCC to CCC- on the back of a further increase in external liquidity risks, driven by the spike in commodity prices and tightening global financing conditions.
Pakistan also suffered a rating downgrade with Fitch lowering its credit rating in October from B- to CCC+ after revising its outlook in July from stable to negative. The downgrade reflected the further deterioration in the country’s external liquidity and funding conditions, and the decline in its foreign exchange (FX) reserves. This was partly a result of the widespread flooding, which undermined the country’s efforts to rein in its fiscal and current account deficits.
Moody’s likewise downgraded Pakistan’s rating in October from B3 to Caa1 underpinned by the higher government liquidity and external vulnerability risks, as well as the increased debt sustainability risks in the aftermath of the devastating flooding.
Pakistan’s rating woes continued into the new year when Fitch further downgraded the sovereign to CCC- in February 2023 due to further sharp deterioration in external liquidity and funding conditions, and the decline of FX reserves to critically low levels.
Sri Lanka was hit by multiple rating downgrades from Fitch in 2022 – first in April from CC to C, then to restricted default in May. In December, Fitch lowered the country’s long-term local currency issuer default rating from CCC to CC.
Fitch’s rating action in April came in the wake of Ministry of Finance’s announcement that it had suspended normal debt servicing of several categories of its external debts, including bonds issued in the international capital markets and foreign currency-denominated loan agreements or credit facilities with commercial banks or institutional lenders.
Moody’s also downgraded Sri Lanka’s sovereign rating in April from Caa2 to Ca, likewise driven by the government’s announcement of its suspension of debt servicing on external public debt repayments.
Fitch had taken other notable rating actions in 2022 that included revising the outlook for both Japan and India from negative to stable in March and June, respectively. The outlook revision for Japan was due to Fitch’s rising confidence in the stabilization of the country’s debt ratio over the medium term as uncertainty over the impact of the Covid-19 pandemic on the macroeconomic and fiscal outlook was gradually fading.
For India, the outlook revision reflected Fitch’s views that the downside risks to medium-term growth have diminished due to the country’s rapid economic recovery and easing financial sector weaknesses.
Based on these proactive and significant rating actions, Fitch is once again voted in 2022 – and for the sixth year in a row – as the Triple A Sovereign Rating Agency of the Year - Asia Pacific.
Steadfast on ESG
The challenging market environment, though, did not deter the issuers/borrowers from pursuing their environmental, social and governance (ESG) strategy and net-zero commitments. Such continuing focus underpins the rating agencies’ drive to enhance their ESG methodologies and offer market stakeholders clear, consistent and transparent assessments.
For the fourth consecutive year – and since this award category was first put up for grabs in 2019 – Fitch is selected as the Triple A ESG Rating Agency of the Year - Asia Pacific. Based on The Asset’s analysis, Fitch’s ESG methodologies are more accurate in assessing ESG risks, since there is a balance in embedding ESG considerations, i.e., the “S” side in government-related entities and the “E” side in renewables companies.
In 2022, Fitch published the first ESG entity rating for a Chinese international public finance issuer and the first pre-initial public offering ESG entity rating for an Indonesian renewable energy company. It is also a sector pioneer in introducing ESG considerations to structured finance. In November, it launched its ESG ratings for global labelled structured bonds and covered bonds.
Fitch also demonstrated its ESG commitment by strengthening its ESG rating team last year, hiring a total of 15 analysts – 10 in Singapore and five in Hong Kong.
Moody’s is a repeat winner as the Triple A Green, Social, Sustainability and Sustainability-linked Rating Agency of the Year - Asia Pacific as it was able to capture a large amount of the deal flow for ESG-related debt offerings in 2022 in a declining issuance environment in line with the lower volume in the G3 conventional bond market.
In several deals, Moody’s rated the transactions on a sole basis, such as the likes of ICBC, which printed multi-currency green bonds through its different branches in Dubai, Singapore, Hong Kong and London, as well as Agricultural Bank of China (ABC), which priced green bond transactions through its Hong Kong and New York branches.
Other ESG-related bond deals rated solely by Moody’s in 2022 included the US$300 million green bond for Hangzhou Water Group Company of China, the US$300 million green and sustainability bond for Lotte Property & Development Company of South Korea, the US$400 million sustainability bond for KB Kookmin Card, the US$400 million social bond for Shinhan Card, and the US$400 million renewable energy-themed green bond for China Merchants Bank (Sydney).
In 2022, Moody’s has transferred its Second Party Opinion (SPO) business, including the analytical staff, from Moody’s ESG Solutions to Moody’s Investors Service. The transfer enhances Moody’s capacity to provide SPOs to meet growing global market demand for independent and comparable assessments of green, social, sustainability and sustainability-linked debt issuances.
China public finance
Fitch continues to command leadership in China’s local government financing vehicle (LGFV) sector as well as for new Chinese public finance issuances as it retains the Triple A Public Finance Rating Agency of the Year - Asia Pacific award for the eighth year in a row. It was the first international credit rating agency to introduce a new analytical tool for the Chinese public sector and published in November 2022 the Fitch analytical comparative tool for Chinese local governments and LGFVs covering the third quarter of the year.
Fitch published the first ESG entity rating on the Chinese public finance issuer, Science City (Guangzhou) Investment Group, and provided an SPO on the sustainable finance framework of Deyang Development Holdings Group.
In terms of deals, Fitch rated on a sole basis all the seven bond issuances of Housing & Development Board (HDB) of Singapore in 2022 totalling S$7.05 billion (US$5.27 billion), including three green bonds amounting to S$3.30 billion. Fitch has replaced Moody’s as the sole rating agency for HDB.
Fitch was also the rating agency of choice for Chinese public finance debut issuers in 2022, including Guangdong Provincial Communications Group, which issued a US$500 million bond, Guangzhou Development District Investment Group (US$400 million), Hangzhou Shangcheng District Urban Construction (US$300 million), and Yichun Development Investment (US$210 million).
As part of its continuing outreach strategy, Fitch, through webinars and roundtables, was active in engaging market stakeholders on the latest credit rating issues and implications facing LGFVs during a period of increasing uncertainty.
Six years in a row
The Triple A Financial Institution Rating Agency of the Year - Asia Pacific is given to Moody’s for the sixth year in a row. Apart from solely rating the green bonds issued by the different branches of ICBC and ABC, Moody’s also rated on a sole basis the bond offerings of China Construction Bank (Singapore), China CITIC Bank International, and the dual-currency bonds issued by China Development Bank (Hong Kong).
In Thailand, Moody’s rated the bond deals by Bangkok Bank and Export-Import Bank of Thailand, while in Singapore, it rated the covered bonds printed by DBS and UOB, as well as the bank capital securities issued by OCBC Bank. In South Korea, it rated the ESG-related bonds priced by Industrial Bank of Korea, Export-Import Bank of Korea, Shinhan Bank, Kookmin Bank, and Woori Bank.
Moody’s also rated first-time bank issuers out of Vietnam – Viet A Commercial Joint Stock Bank (B2) and Viet Capital Bank (B3) – and Bank of Jiangsu of China (Baa2).
The award for Triple A Corporate Rating Agency of the Year - Asia Pacific also goes to Moody’s for the third time in four years. It rated several landmark transactions in 2022, including the three-tranche, US$4 billion bond offering by Reliance Industries. It also has a strong presence in South Korea, which boasts regular and frequent issuers in the US dollar bond market.
Moody’s solely rated the €90 million (US$96.15 million) notes issued by Heng Yuan International Company and guaranteed by Ningbo Haishu Development and Construction Investment Group, and the US$300 million inaugural issuance by Hubei United Development Investment Group.
Moody’s other sole rating assignments in 2022 included the green and sustainability bond offering by Lotte Property & Development Company for US$300 million, the subordinated perpetual securities by Power Construction Corporation of China (US$500 million), the green bond by Henan Railway Construction & Investment Group (US$400 million), and the senior notes by China Tourism Group Corporation (US$700 million) and DFZQ (US$300 million).
Several first-time corporate issuers across the region were also rated by Moody’s, including AGL Australia (Baa2), CNOOC Gas and Power Group of China (A3), Sarawak Energy of Malaysia (A3), Korea Credit Guarantee Fund (Aa2), Syngenta Group of China (Baa1), First Pacific Company (Baa3), Freeport Indonesia (Baa3), and SCB X Public Company Limited of Thailand (Baa2).
Leadership in LGFV sector
The accolade for Triple A Investment Grade Rating Agency of the Year - Asia Pacific is awarded to Fitch for the second consecutive year, partly in recognition of its leadership in the LGFV sector and its strong engagement with Chinese state-owned enterprises. Several issuers under this rating category came into the bond market in 2022 with a Fitch-only rating such as China Railway Group, which raised US$500 million in June. In doing so, the company dropped another rating agency when it priced the deal.
Other corporates that printed deals in 2022 with Fitch-only ratings included Aluminum Corporation of China (US$600 million), AVIC International Leasing Company (US$450 million), CapitaLand Ascott Reit (S$165 million), Guangzhou Development District Investment Group (US$400 million), Lianyungang Port Group (US$250 million), Quzhou State-owned Capital Operation (US$470 million), Qingdao City Construction (US$750 million), and Hefei Industry Investment (US$500 million).
Fitch also rated the inaugural bond transactions of Freeport Indonesia (US$3 billion) and Syngenta Group (US$500 million), among others.
For the fifth year in a row, the Triple A High Yield Rating Agency of the Year - Asia Pacific award is given to Moody’s. It was ahead of the competition in downgrading several Chinese high-yield credits to reflect their continuing struggle to stay afloat amid the challenging market conditions in the property and industrial sectors.
Based on The Asset analysis, these downgrade rating actions of Moody’s in which it came out ahead of the competition involved Radiance Group, China SCE Group, CIFI Holdings, SJM Holdings, Ronshine China Holdings, Shimao Group Holdings, Guangzhou R&F Properties, Zhongliang Holdings and Kaisa Group.
There were also instances in 2022 in which Moody’s was the first to cut the Chinese companies’ investment-grade credits down to the high-yield territory, such as Sino-Ocean Group and Country Garden – both from Baa3 to Ba1.
Moody’s also rated first-time high-yield issuers, including Viet A Commercial Joint Stock Bank (B2), Viet Capital Bank (B3), SAEL Limited (Ba3), Deer Investment Holding (B2), and Kalyan Jewellers (B2).
Structured finance markets
Moody’s wrested the Triple A Structured Finance Rating Agency of the Year - Asia Pacific award from Fitch in 2022, thus regaining the honour that it last won in 2018. It was involved in deals arranged in the major structured finance markets in the region last year – China, Japan, Singapore, and South Korea.
It assigned international ratings on such China deals for Generation 2022-3 retail auto loan securitization amounting to 4.06 billion yuan (US$591 million), Rongteng 2022-4 retail auto loan securitization (10 billion yuan), Toyota Glory Specialty 2022 Phase 1 retail auto loan securitization (4 billion yuan), and Bavarian Sky China Leasing 2022-1 retail auto lease securitization.
Moody’s solely rated the four classes of investment-grade notes for Bayfront Infrastructure Management when it securitized infrastructure loans totalling US$402.7 million in September 2022. The deal was part of Bayfront’s mandate to bring private capital to address the large infrastructure financing gap in Asia-Pacific.
The other sole rating assignments in 2022 for Moody’s involved Supreme Twenty-First and Supreme Twenty-Second Securitization Specialty Company asset-backed securities transactions originated by Lotte Card of South Korea amounting to 400 billion won (US$308.6 million) in March and 300 billion won in August, respectively. It also rated on a sole basis the Green Ritz Series 13 residential mortgage-backed securities originated by Aruhi Corporation of Japan amounting to 4.32 billion yen (US$29.8 million).
China Lianhe Credit Rating is the Triple A Rating Agency of the Year – China, demonstrating leadership in rating Chinese offshore bond transactions in 2022. Its rating methodology and research reports incorporate local China insider’s perspective, offering its extensive investors’ reach a best-in-class rating opinion.
CSPI Ratings is again selected as the Triple A Public Finance Rating Agency of the Year – China on the back of its strong focus on and strength in rating local government credits. Some global investors have started to pick up its global ratings in allocation to onshore local government bonds. It currently rates 28 provincial governments and 332 prefecture-level governments across the country.
China Chengxin Credit Rating (CCXI) is chosen as the Triple A Structured Finance Rating Agency of the Year – China. Between January and October 2022, it provided initial rating services for asset-backed securities transactions amounting to 359.09 billion yuan (or 37.57% of the total) and for asset-backed notes amounting to 163.09 billion yuan (43.57%).
Credit rating agencies outside of the Asia-Pacific likewise had to operate in an exceptionally rapidly changing environment in 2022, with a surge in inflation, fast rising interest rates, and entire industries having to reorganize as a result of the Ukraine War and sanctions imposed on Russia.
The squeeze on household budgets is feeding through into the property market. Higher interest rates are leading to falling property prices in many countries, and residential mortgage-backed securities and covered bond portfolios are being closely monitored.
In addition to the individual credit ratings, investors needed up-to-date thematic research, for example addressing the cost-of-living crisis and its impacts. They also relied on the rating agencies to track legislative developments, such as the EU implementation of the Basel III capital requirements, where the likely final shape of the EU law can only be estimated as it works its way through the legislative process.
The rating agencies have been closely tracking regulatory developments surrounding sustainability, such as the EU Taxonomy, the classification system which sets out which activities can be considered sustainable. This would for example include the energy efficiency of a steel plant, and these corporate data feed back into the financial system via the green asset ratio for bank balance sheets.
There continue to be strategic moves in the ESG area, such as the December 2022 acquisition by Standard & Poor's of the Shades of Green business from Norway-based Center for International Climate Research (Cicero). But approaches differ from one agency to another on how to link credit and ESG considerations.
In Europe, our Triple A Asset Backed Securities Rating Agency of the Year Award - Europe goes to Fitch Ratings.
Fitch has a long-established presence in all sectors of the securitization market, including RMBS, CMBS, auto loans and non-performing loans.
Last year there was heavy EU auto ABS issuance, both from bank lenders and captive auto lenders. Fitch rated the Koromo Italy securitization of auto balloon loans originated by Toyota Financial Services Italy and the First Swiss Mobility transaction. There were also new deals from the global Driver programme from Volkswagen (including a Belgian deal) and the Bavarian Sky programme from BMW.
In September 2021 Fitch Group announced the creation of Sustainable Fitch, and launched a new ESG ratings product. Over the course of 2022 it was further integrating ESG factors into credit scores, via its existing system of ESG Relevance Scores.
The Triple A Covered Bond Rating Agency of the Year Award - Europe goes to Standard & Poor's.
In the covered bond asset class, there was a boom in new issuance last year. And 2022 was a year of significant regulatory change in the market, as the European Union Covered Bond Directive was applied by national jurisdictions, partially harmonizing the various national frameworks.
In spite of EU harmonization, differences remain between jurisdictions. Early in 2022 S&P closely tracked national legislative processes with detailed research, keeping investors up to date on evolving structural features, and their credit-positive or credit-negative implications.
Once national laws were in place, it published detailed research on individual markets, such as Spanish Covered Bonds: Harmonization Achieved Through Royal Decree Law, which set out the new features of the jurisdiction most impacted by the harmonization process.
The Triple A ESG Credit Rating Agency of the Year – Europe goes to Moody's Investors Service.
Moody’s credit analysis seeks to incorporate all issues that can materially impact credit quality, including ESG and climate risk, and notes that the impact of an SOP can help attract and access funding from responsible investors, and diversify and extend an issuer’s investor base.
Moody’s has systematically integrated ESG considerations into credit analysis, and has more than 5,000 ESG assessments of large-cap companies. The firm has also provided over 500 SOPs on sustainable debt offerings. Last year’s highlights included two deals from Italy, a sustainability-linked bond from Enel and a green bond from Tema. In the sovereign and sub-sovereign segment, Moody’s rated a Kingdom of Belgium green bond and an Ile-de-France green and sustainability bond.
Green or social covered bonds, as well as RMBS and auto ABS, are all increasing in issuance volume. The strong global coverage of Moody’s allows the firm to give investors detailed information on regional differences in ESG standards.
Traditional and esoteric
The winner of our Triple A Asset Backed Securities Award - Americas is KBRA.
KBRA has built up a strong ABS rating presence, not only in traditional segments such as RMBS, CMBS and auto loans, but also in more esoteric asset classes such as aircraft lease and railcar securitizations, as well as residential solar loans.
Residential solar loan transactions have become a fast-growing sector of the US securitization market, and deals rated include the Sunnova Helios transaction for Houston-based Sunnova Energy and Mosaic Solar Loan Trust from California-based specialty finance company Solar Mosaic.
KBRA has long been at the forefront of rating aircraft deals, and has published thematic research keeping investors up to date in a fast-moving environment. Given the global composition of aircraft lease portfolios, this requires coverage of regional market trends, and recent thematic reports include the prospects for growth in the Latin American market.
In the railcar securitization space, KBRA rated the GBX Leasing 2022-1 transaction, backed by 3,300 railcars leased by GBX Leasing.
The rating agency also has a growing presence in project and infrastructure bonds, including North American municipal toll road deals. Last year it rated the New Terminal One (NTO) project under construction at New York’s JFK International Airport.
KBRA also wins our award for Triple A ESG Credit Rating Agency of the Year - Americas. The agency’s approach to incorporating ESG factors into credit ratings is different from that of its competitors. And given current signs of a backlash against the ESG investing movement, and claims that it has become politicized or facilitates greenwashing, the agency is stepping up its push to have better industry clarification on what is meant by financial risk versus non-financial impact in the analysis of ESG issues.
KBRA argues that ESG factors require more nuanced analysis to determine and understand financial materiality. It focuses on ESG issues strictly in the context of how these factors are currently affecting the risk of default, or how they may affect the risk of default over the longer term. And it centres its approach around three anchor ESG topics – climate change with particular focus on greenhouse gas emissions, stakeholder and reputational risk, and cybersecurity – while including commentary on any ESG factor that does or has the potential to impact the risk of default.
In the Covered Bonds – Americas segment, our Triple A Rating Agency of the Year is DBRS Morningstar.
DBRS had a busy year rating issues out of the booming Canadian market, in addition to its well-established position in traditional European jurisdictions, where the many programmes that it rates had to be re-assessed in light of the application of the EU Covered Bond Directive.
For the complete list of winners, please click here.
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