Fitch has just published its annual ratings transition report, which makes interesting reading for investors in emerging markets corporate bonds. In the report, Fitch tracks the number of companies that have had their credit ratings upgraded, downgraded, or stay the same within a given calendar year. Fitch has now been rating emerging market (EM) corporate issuers for 32 years, and the report shows both the latest year numbers and the cumulative performance over the entire 32-year period. For comparison, they also have provided cumulative 32-year numbers for developed market corporate issuers. These are summarized in Figure 1 and Figure 2. The highlighted numbers in the diagonal show the percentage of issuers whose ratings stayed in the same major rating category over the course of the year. The numbers to the left of the diagonal are upgrades; those to the right are downgrades. For example, in the BBB row of the EM table, 89.11% of issuer ratings remained BBB over the course of a calendar year, 2.11% were upgraded to A, 4.83% were downgraded to BB, and so forth.

Figure 1: Emerging Markets Cumulative: 1990–2021

Source and date:  Fitch, March 2022

Figure 2: Developed Markets Cumulative: 1990–2021

Source and date:  Fitch March 2022

The tables show that investment grade (IG) ratings for both EM and developed market (DM) issuers are fairly stable, with 85-90% of ratings ending the year where they started. High yield ratings are more volatile. For BB and B credits, 70-80% of ratings remain the same, while for CCC and lower ratings, fewer than half end the year where they started. These results are not particularly surprising. The more interesting numbers come from looking at the differences between the two markets, which are shown in Figure 3. For example, in the A row, 4.41% more EM issuers keep their A ratings than DM issuers do (the difference between 92.91% and 88.50% in the A rows of the two tables above). There are no AAA issuers in EM, so the AAA row has been omitted.

Figure 3: EM minus DM: 1990–2021

Source and date: Fitch, March 2022

Several key points come out of this comparison. First, EM ratings are more stable. All of the numbers in the highlighted diagonal are positive (except for AAs, which is nearly a tie). This means that for every rating category from A down to CCC, EM corporates are more likely than DM corporates to end a given year having the same rating they started with.

Second, EM issuers are less likely to default. The difference in default rates is in column D. For each rating category, the difference is negative, indicating a lower EM default rate. The differences are tiny for all the rating categories from BB up, but are more meaningful for B and especially CCC, where defaults are more likely in both markets.

Third, EM issuers are less likely to have their ratings withdrawn (WD). This is shown in the WD column. Some of this is the result of acquisitions, which are more common in DM. Nevertheless, for investors who need ratings for regulatory or internal purposes, EM issuers are more likely to remain rated.

Fourth, there are particularly favorable numbers for EM in the CCC row. EM CCC issuers are 5.55% more likely than DM issuers to be upgraded to B, and 7.41% less likely to default. This appears to be the result of EM having some good quality companies in weak sovereigns. Although the ratings may be constrained by the sovereign ceiling, the companies might not default if the sovereign does.

None of these results will surprise close observers —prior transition matrices have generally shown the same picture of EM ratings stability and comparability to DM ratings. It is good to note, however, that two years of Covid have not changed the story in any meaningful way.