Moody's: Commodity sectors drive Asia Pacific (ex-Japan) default rates; China defaults biggest recent contributor

Moody's Investors Service says that the Asia Pacific metals & mining and construction & building sectors have been the main drivers of corporate defaults in the region over the past two and a half years, and that the commodity sectors remain at greater risk than other sectors.

"Default activity rebounded in 2014-2016H1 as metals and mining companies and related service providers have come under tremendous pressure due to oversupply issues and weak demand in the commodities sector," says Clara Lau, a Moody's Group Credit Officer.

"Most recently, China has become the biggest contributor to Asian defaults with the backdrop of weakened commodity prices accompanying an economic slowdown," adds Lau.

Between 2014 and 2016H1, the country recorded 27 defaults affecting $10.3 billion of debt, with both figures accounting for roughly two-thirds of the region's -- rated and unrated -- default tally.

Moody's conclusions are contained in its just-released report "Corporate: Default and Recovery Rates of Asia-Pacific Corporate Issuers, Excluding Japan, 1990-2016H1." The report is Moody's fifth study of Asia-Pacific (ex-Japan) corporate issuers and their historical credit performance, migration, default, and recovery experience.

The Asia-Pacific component of Moody's-rated corporate universe, comprising financial and non-financial corporates ,totaled 952 issuers at the end of the first half of 2016, up from 67 at the end of 1990. Meanwhile, the speculative-grade share of these issuers increased to over 20% from virtually zero.

The study highlights that Moody's ratings powerfully rank order default risk at all horizons in Asia-Pacific as they do globally, as the probability of default rises with lower ratings. For example the 5 year default rate for investment grade rated entities in Asia Pacific averages 0.2 per cent compared to 12.8 per cent for those rated speculative grade. Within those rated speculative grade Moody's ratings also effectively rank order those more likely to default with entities rated Ba having a 5.8% likelihood of default over 5 years compared to 15.6 per cent for those rated single B. The rating distributions of Asian and global issuers differ significantly, however, with the Asia-Pacific region having a greater share of higher-rated issuers. As a result, when aggregating across all rated issuers, overall historical default rates are lower in the Asia-Pacific region than globally.