By Edward I. Altman
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Extra info for Corporate Bond Rating Drift: An Examination of Credit Quality Rating Changes over Time
Upgrade percentages also tended to increase in the most recent subperiod, but not nearly as much as downgrades. Thls confirms the conclusion that bond ratings, in general, were far less stable in the later decade. The reasons for this reduction in stability are many, including more economic and interest rate volatility, increased corporate leverage, lower cash flow and earnings coverages, and perhaps a greater propensity on the part of rating agencies to move more quickly and decisively to discover a firm's deterioration and reflect it in a downgrade.
The sample size for this category, 39 issues, was quite small, however. The CCCs also showed a complete reversal from the first decade to the second, with downgrades (to default) dominating upgrades in the more recent period. Economic Sector Results We also analyzed bond rating drift for companies classified by economic sector. The sectors analyzed and the number of issues by year of issue for each sector are shown in Table 7. Industrial issues include all that are not finance, public utility, or foreign issues.
91 Noninvestment grade. period. The assumptions are that (1) all five bonds were originally issued with a 10-year maturity and purchased at par at the beginning of the expected three-year investment horizon; (2) yields will decrease by 100 basis points by the end of the holding period, except for the NIG issue; (3) yield spreads between any of the two investment-grade categories remains constant at 25 basis points; and (4) expected returns are based on the use of the MKV-S model. Table 22 also presents expected total returns over three years, given the bond's beginning and ending ratings.
Corporate Bond Rating Drift: An Examination of Credit Quality Rating Changes over Time by Edward I. Altman