Credit rating agencies faced an exceptionally fast-changing environment in 2021, as new lockdowns impacted consumer spending and travel, while towards the end of the year many governments ended their business support programmes.
Bankruptcies of small and medium-sized enterprises (SMEs) are expected to spike this year, putting more pressure on the balance sheets of banks, many of which remain on negative watch.
There are also legislative developments impacting bank credit quality, such as the amended European Union (EU) resolution and recovery rules, and the global implementation of the Basel III capital requirements.
Added to this is the pressure on financial institutions and the business sector from the push towards sustainability.
There is an ever-increasing demand from investors for environmental, social and governance (ESG) information – and how such factors can have potential impact on credit quality in sectors ranging from oil & gas to aviation and real estate. The G in ESG is playing an important role as rating agencies assess the flexibility and responsiveness of senior management in addressing future ESG risks.
In addition to the ratings themselves, investors are also demanding a regular flow of thematic research, for example, following legislative processes on new national covered bond laws (within the framework of the new EU Covered Bonds Directive), the EU taxonomy for sustainable economic activities, data on the energy efficiency of houses and office buildings, and how the pandemic has slowed down bankruptcy court proceedings and loan recoveries.
Strong ABS team
In the European asset-backed securities (ABS) sector, our Rating Agency of the Year Award goes to Moody’s Investors Service, which has built up one of the biggest and strongest global teams of ABS analysts.
Moody's rates most of the big residential mortgage-backed securities (RMBS), commercial mortgage-backed securities (CMBS) and auto loan programmes, and rated the biggest single European deal of the year, the €12 billion (US$13.6 billion) BEST SME 2021 securitization of secured and unsecured loans extended by Rabobank.
ESG considerations are increasingly impacting the RMBS market, via pools of mortgages that qualify as energy-efficient under the Green Bond Principles and the Climate Bond Low Carbon Housing Standards. Moody's rates the well-established Obvion (fully owned by Rabobank) programme out of the Netherlands, one of the pioneers of green RMBS in Europe. The latest deal in the Green Storm series was priced in March.
There is also a steady pipeline of non-performing loan ABS in Europe, as banks move legacy NPLs off their balance sheets – putting themselves in a stronger position as pandemic-related bankruptcies begin to move through the system.
Moody's publishes regular thematic research on NPL trends in markets such as Italy, where loan moratorium programmes ended in December, keeping investors up-to-date with important trends, such as the slowdown in court processes which has been delaying collections. Ratings last year included the Banca Ifis NPL transaction out of Italy.
It has also published regular research updates on the sizeable NPL securitization programmes out of Greece, highlighting regulatory developments at the EU and national level on the state-supported Hercules asset protection scheme, which will run until October 2022.
Our European Covered Bonds Award goes to Berlin-headquartered Scope Ratings.
The EU Covered Bond Directive has partially harmonized the various national frameworks but differences remain. Over the course of 2021, individual countries were transposing the directive into domestic law, and Scope kept the market updated on legislative developments, as well as the credit positive or negative implications of finalized laws.
Scope blends qualitative and quantitative elements in its analysis, which it argues is best suited to the hybrid nature of the bank funding instrument. It also provides transparency on the methodology of the building blocks in its analysis.
In addition to its Covered Bond Quarterly, Scope has also published regular research on the rapid rise in residential house prices across Europe – a topic of increasing concern to covered bond investors looking at the underlying cover pools.
And as ESG considerations grow in influence in the covered bond market, it has reported regularly on the development of the EU taxonomy (classification system) and how this will impact mortgage origination and green covered bond issuance trends. Scope rates the Société Générale SFH programme, whose latest green offering under its Sustainable and Positive Impact Bond Framework was launched last November.
The European ESG Rating of the Year Award goes to S&P Global Ratings, which has invested heavily in its European ESG evaluation team, which publishes regular sectoral reports on how these factors can influence credit quality, in addition to company-specific ESG evaluations.
New evaluations published last year included Air France KLM, which was given a score of 64 from 100, and a Preparedness Opinion of Adequate (No impact). Aside from looking at industry-wide targets to reduce emissions (including sizeable investment in feet renewal), S&P also took into account the capacity of the company to make swift decisions.
Other highlights were new evaluations of Sber, the largest financial group in Russia and Central and Eastern Europe, and cosmetics giant L'Oreal.
As the need for understanding the impact of ESG on debt issuers everywhere continues to grow, S&P Global Ratings is committed to enhance its focus on ESG, with greater visibility in criteria and transparency in its publications, which already include the monthly ESG in Credit Ratings newsletter, available to all market participants.
In North America, the Asset-Backed Securities Rating Agency of the Year goes to KBRA.
KBRA has built up a particularly strong presence in the US structured finance market, including CMBS and RMBS, and also in the aircraft lease ABS asset class.
Having been hit hard by the pandemic, the flow of aircraft ABS is now getting moving again. In November, KBRA rated the latest aircraft deal from Carlyle Aviation Management, Apollo Aviation Securitization Equity Trust (AASET), as well the as Sprite 2021-1 US transaction serviced by World Star Aviation (UK) Ltd.
In the RMBS space, a highlight of the year was the KBRA rating for Angel Oak Mortgage Trust 2021-2, the first US non-agency RMBS to qualify as a social bond. KBRA promotes transparency in its methodology, as set out in regular updates on its framework for incorporating ESG risk management in credit ratings
In December, KBRA was acquired by Boston-based private equity firm Parthenon Capital Partners, putting in place additional resources to continue its expansion both domestically and internationally – notably in Europe.
The North America ESG Rating Agency of the Year goes to Fitch. Back in 2019, Fitch launched the first of two credit-specific ESG products, ESG Relevance Scores, followed by sector-focused Climate Vulnerability Scores in 2020.
As they are credit ratings-related, these product offerings remain with Fitch. Last September, it launched Sustainable Fitch, which will offer a comprehensive range of ESG Ratings products at both the entity and instrument level for all asset classes globally. The ESG Ratings coverage will initially be focused on the ESG-labelled market, but in time will comprise the entire fixed-income investable universe.
Sustainable Fitch believes it will be able to offer the broadest coverage from a single provider in the ESG information market, giving it an advantage in providing ESG-integrated credit research and analysis via existing ESG Relevance Scores.
Pure ESG analysis and reports via the new ESG Ratings will run alongside ongoing sectoral and thematic ESG research. How these feed into credit analysis will be clearly set out in Fitch’s individual company reports.
In terms of individual ratings combining ESG themes, Fitch rated in May the offering from US originator Angel Oak, which was the first non-agency RMBS to qualify as a social bond (backed by loans to underserved US homebuyers.)
The Covered Bond Rating Agency of the Year Award also goes to Fitch. In addition to its strong presence rating traditional covered bond issuers out of Europe, Fitch is one of the leading providers of ratings for Canadian issuers.
The newest Canadian covered bond programme is from Equitable Bank, which came to market last September, and was assigned an AA rating for its debut offering.
And among established issuers, both Bank of Montreal and HSBC Canada sold their debut euro-denominated benchmark in 2021.
Fitch rates eight programmes from Canada in total. Canadian covered bonds have performed well throughout the pandemic, with all bonds maintaining their pre-pandemic ratings despite negative rating actions taken on the sovereign and on some of the Canadian banks during 2020-2021.
Fitch also offers investors Covered Bond ESG Relevance Scores, and has published thematic research on what it calls global green, social and sustainable (GSS) covered bonds.
Over in the Asia-Pacific (APAC) region, it was also another busy year for credit rating agencies in assessing the credit risks across the broad range of credit spectrum amid the continuing impact of Covid-19. Their rating actions are an important source of information for investors and other buyside stakeholders as the global debt markets plod on against the backdrop of the pandemic and the elevated risks resulting from changes in the regulations.
All three international rating agencies – Fitch, Moody’s and S&P Global – initiated a series of rating downgrades in this part of the world in 2021 amid instances of defaults, as well as further deterioration in liquidity and funding access in several cases involving Chinese property companies.
But they also initiated rating upgrades on several corporates and financial institutions on the back of improvements in their operations, prudent financial management, stronger capital structure and improving credit diversification that mitigates structural subordination risk.
As noted globally, rating agencies continue to scale up and enhance their capabilities in addressing the requirements for ESG initiatives across different sectors in APAC. Fitch further demonstrates its commitment to push ahead in its ESG approach as it retains the ESG Rating Agency of the Year Award in 2021. Following the formation of its global ESG research team in 2020, Fitch, as mentioned earlier, announced in September 2021 the launch of Sustainable Fitch.
The new ESG Ratings from Sustainable Fitch assess the ESG performance and profile of entities and instruments. They are backed by clear methodologies, with source data derived using the same principles and platforms that underpin Fitch credit ratings. The ESG Ratings solution is built with the objective of providing a comprehensive suite of ESG analytical tools.
Moody’s is voted in the broader Green, Social, Sustainability and Sustainability-linked Rating Agency of the Year. Several issuers are comfortable in accessing the international bond market with a single rating from Moody’s such as the Singapore branch and the Hong Kong branch of ICBC when they priced their US$1.05 billion and US$1 billion green bonds, respectively, in October 2021. Axis Bank also printed its inaugural sustainability bond amounting to US$600 million in September with a single rating from Moody’s. Shinhan Card followed suit in June when it priced its first social Formosa bond amounting to US$300 million.
Other sustainable finance issuers that tapped the market with bond deals solely rated by Moody’s include Adani Green Energy, Shinhan Financial Group, China Development Bank (Hong Kong), Industrial Bank (Hong Kong), Ping An Real Estate Capital, KB Kookmin Card and Woori Card.
Fitch is once again selected as the Sovereign Rating Agency of the Year for its pro-active stance in tracking economic developments and factoring them into the ratings, thus providing consistent rating views on sovereigns in Asia-Pacific in 2021. It downgraded Sri Lanka in December 2021 from CCC to CC, reflecting its view of an increased probability of a default event in coming months in the light of the country’s worsening external liquidity position.
On the other hand, Fitch upgraded Maldives in October from CCC to B- to reflect a stronger recovery for the tourism sector than previously expected, and an improved, though still challenging refinancing outlook for its external debt over the next few years. Another recipient of a Fitch rating upgrade was Taiwan in September, from AA- to AA, on the back of the economy’s outperformance versus peers during the Covid-19 pandemic, a further strengthening of the external sector and continued fiscal prudence.
Meanwhile, Fitch affirmed India’s rating of BBB- with negative outlook twice in 2021, in April and in November, providing frequent updates to the market about the country’s economic recovery from the health crisis, accelerated vaccination rates and easing financial sector pressures.
The Public Finance Rating Agency of the Year award goes to Fitch for the seventh year in a row as it continues to maintain a strong coverage of this sector, particularly in China. But the competition is apparently making strides in building their capability as well with their analytical skills and more in-depth coverage of local government financing vehicle (LGFV) companies.
Several public finance-related bond transactions in 2021 had Fitch-only rating. Housing and Development Board of Singapore accessed the Singapore dollar bond market six times in 2021 raising a total of S$5.25 billion (US$3.9 billion) with a single rating from Fitch. China Jianyin Investment, a key state-owned investment platform, uses Fitch for all its offshore issuances, including its subsidiary fund raisings. Hangzhou Fuyang City Construction Investment Group printed in June a US$328 million deal with a Fitch-only rating, representing the first LGFV offshore issuance in Fuyang district in Hangzhou City.
Moody’s retains the Financial Institution Rating Agency of the Year, underpinned by its strength in rating on sole basis the banks’ forays in the sustainable finance space. The bond transactions in 2021 by different branches of Agricultural Bank of China – Hong Kong, London, New York, Macau and Singapore – carried Moody's-only rating. Meanwhile, the issuances of perpetual capital securities by HDFC Bank, Kasikornbank and Krungthai Bank likewise only had Moody's ratings when they tapped the bond market last year.
Moody’s regains the Corporate Rating Agency of the Year that it previously won in 2019. A head of credit research at an asset manager in Hong Kong notes that Moody’s has a broader universe of corporate coverage and provides more comprehensive fundamental analysis of this sector. Moody’s assigned first-time rating to several corporates from across the region, including Hibiscus Petroleum of Malaysia (B1), China Yangtze Power (A2), Wheelock & Company of Hong Kong (A3), Adani Green Energy Restricted Group of India (Ba2), NAVER Corporation of South Korea (A3), Changi Airport Group of Singapore (Aaa), and Dat Xanh Group of Vietnam (B2).
For Investment Grade Rating Agency of the Year, the award goes to Fitch, which it last won in 2019. It continues to publish reports and commentaries on a regular basis on this sector. Some of the investment-grade deals that carried Fitch-only rating include Aluminum Corporation of China, AVIC International, Sichuan Development and Indonesia Infrastructure Finance.
Among the sovereigns, those that accessed the bond market in 2021 with Fitch rating include Republic of Indonesia, Republic of Korea and the Republic of the Philippines, while first-time issuers that were assigned investment-grade rating from Fitch include Hualu Holdings Company (A-), Yuanta Futures (AA-), Shaoxing Communications (BBB+), Guoren Property & Casualty Insurance (A-) and HCL Technologies (A-).
Moody’s is the High Yield Rating Agency of the Year for the fourth year in a row. There was a plethora of downgrade rating actions in this space in 2021 – reflecting the challenges faced by Chinese property companies. There were several instances of multiple rating downgrades last year, involving the likes of China Evergrande, China Aoyuan Group, China Fortune Land Development and Fantasia Holdings Group due to various reasons such as missed payment of bonds, weak recovery prospects, elevated liquidity and refinancing risks, and deteriorating financial matrix.
The Structured Finance Rating Agency of the Year is awarded to Fitch, which has enhanced its coverage of the China ABS market. A securitization banker notes that Fitch is able to hold on to its quality analysts covering the China market. Fitch assigned its first-time rating on Class A1/A2 to Bavarian Sky China programme, printing an 8 billion yuan (US$1.26 billion) auto ABS in June 2021. It also rated the first green-labelled Chinese auto ABS transaction – BYD Dynasty 2021 Phase II – for BYD Auto Finance.
In November, Fitch announced that it has updated its consumer ABS rating criteria, which outlines the agency’s methodology for analyzing credit risk in ABS backed by consumer receivables globally.
For our country awards, Credit Rating Information and Services Limited wins the Rating Agency of the Year in Bangladesh for the second consecutive year. It continued to perform rating assignments across different sectors, including banks and non-bank financial institutions, corporates and SMEs. It conducted 5,756 rating actions during January-October 2021 amid the challenging environment due to Covid-19. It has taken several initiatives to keep investors connected through education and outreach programmes.
China Lianhe Credit Rating wins the Rating Agency of the Year for China. It enhanced its ESG framework in terms of rating methodology. It rated the green yuan Panda bond from Hungary, as well as 49 other green bond issuers. In terms of deals, China Lianhe assigned ratings on 76 green bond issues and four green ABS transactions during the review period. It also initiated a series of rating actions involving industrial and commercial enterprises, and public finance companies.
Pengyuan International distinguished itself as the Public Finance Rating Agency of the Year in China. It assigned global credit ratings on provincial governments in China, which is one of the most essential credit sectors in China. It is the first and only credit rating agency to assign rating to municipal level governments of China, such as the municipal government of Beijing.
The Malaysian Rating Corporation (MARC) is once again voted as the Rating Agency of the Year in Malaysia for the fourth year in row. The group embarks on a corporate realignment as it strengthens its growth prospects going forward. It transfers its regulatory licence as a credit rating agency with the Securities Commission Malaysia and Bank Negara Malaysia-accredited External Credit Assessment Institution status to a wholly-owned MARC Ratings Limited.
In addition to providing credit ratings and research reports on the slew of issuers across the debt capital markets, MARC also offers industry analyses, rating reports and rating indices for issuers and investors, both domestic and offshore.
For the complete list of winners, please click here.