Credit raters unveil default data
It’s the season for credit rating default data. Credit rating agencies issue this data about bonds that defaulted, along with the ratings those bonds had been given. Investors can use this data to see how much default risk they assume when they purchase bonds rated AAA or A or B. It’s a quantitative risk road map for bonds.
The SEC wrote a series of rules that require that raters make this data available to the public. 90 days after the end of the year the data must be placed on the rater’s website. The rating agencies rarely used to publish these statistics for the municipal market (although corporate bond default data was published every year).
Fitch Ratings is the first out of the gate with its ‘quantitative’ measures of default risk. You can see the basic data in the chart above (or page 12, requires registration, which is free). The SEC requires that the rater track how often variously rated bonds default over a 1, 3 and 10-year period. You can see in the table that there were no defaults for Fitch-rated muni bonds until all the way down the scale to A- bonds that had been issued 2-years earlier. Defaults are rare in the Fitch-rated universe. Here is the proof.
The Fitch default study also has a tremendous amount of data about how ratings transition to higher and lower levels over time. The report breaks down muniland into broad categories. Some problem areas, like health care (see below), stand out. These default studies show us that most parts of muniland are pretty safe places to put assets. Stand by for Standard & Poor’s and Moody’s to report their data soon.