Tuesday 04, July 2017 by Matthew Amlôt

Moody's: Only half of all sovereign debt issuers now have investment-grade ratings

The proportion of sovereign bond issuers with investment grade ratings continues to fall, driven in part by an increase in riskier emerging market debt issuance, says Moody's Investors Service in a report.

The share of investment-grade sovereign issuers declined to 50 per cent by the end of 2016 from 54 per cent a year earlier. In 1983, all rated sovereign issuers were rated investment-grade, according to Moody's 13th annual report on sovereign defaults. The share of developing and emerging market countries with sovereign bond ratings has increased to about 72 per cent as of year-end 2016 from around 40 per cent in the mid-1990s.

"We have seen a steady increase in the proportion of non-investment-grade issuers since 2012 due to both credit deteriorations and new additions of riskier sovereign issuers," said Elena Duggar, an Associate Managing Director at Moody's.

The annual sovereign default study compiled by Moody's examines the rating histories and default experience of 132 Moody's-rated governments issuing local- and/or foreign-currency bonds between 1983 and 2016.

The report also shows that sovereign default rates are modestly lower than those for corporate issuers. The 10-year issuer-weighted cumulative default rates among Moody's sovereign universe are 1.7 per cent and 18.3 per cent for investment-grade and speculative-grade issuers, respectively over 1983-2016. That compares with rates of 2.3 per cent and 30.6 per cent for investment grade and speculative-grade corporate issuers during the same period.

Issuer-weighted recovery rates on defaulted sovereign bonds -- as measured by trading prices observed at the time of default -- average 54 per cent, compared with a corporate senior unsecured bond recovery rate of 37 per cent. However, on a value-weighted basis, recovery rates on defaulted sovereign debt average only 30 per cent, compared with 33 per cent for senior unsecured corporate bonds.

Mozambique was the only sovereign to default in 2016 after it announced that it was moving ahead with a debt exchange, offering direct government bonds in exchange for Empresa Mocambicana de Atum (EMATUM) notes.

The estimated losses on the EMATUM notes guaranteed by the Government of Mozambique amounted to about 12 per cent, based on the trading price of the notes on the day before the debt exchange.

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