Capital markets remained challenging for both issuers and investors last year as evidenced by the plunge in G3 bond issuance in Asia, outside of Japan and Australasia. High interest rates, stubborn inflation, elevated geopolitical risks, and market-defining events such as the banking crisis in the United States weighed heavily on credit conditions. It was against such a difficult market backdrop that rating agencies had to perform their task of identifying risks and assessing the strengths and weaknesses of companies and governments seeking to raise funds to maintain operations and pursue growth.

Rating downgrades were prevalent as illustrated by credit deterioration even among sovereigns. Fitch Ratings took different rating actions on Sri Lanka in 2023, first announcing on July 6 the downgrade of the country’s long-term local currency issuer default rating (IDR) from CC to C, reflecting its view that a sovereign local currency debt restructuring process had begun as parliament approved the government's domestic debt restructuring plan on July 1. Then on July 4, the authorities launched a formal exchange offer to bondholders for those bonds that were eligible for the restructuring.

Fitch announced on September 14 a further downgrade of Sri Lanka's long-term local currency IDR from C to RD or restricted default. The ratings on its local currency bonds tendered in the domestic debt exchange were downgraded from C to D, while the ratings on four other local currency bonds not tendered in domestic debt exchange had been affirmed at C.

But following the successful completion of the comprehensive domestic debt optimization plan, Fitch announced on September 28 the upgrade of the country’s long-term local currency IDR to CCC- from RD. This was driven by the expectation that the debt restructuring would reduce Sri Lanka’s gross financing requirements in the medium term and the effort could potentially hasten the broader process of external debt restructuring.

In another sovereign rating action, Fitch announced on February 14 the downgrade of Pakistan's long-term foreign currency IDR from CCC+ to CCC- reflecting the further sharp deterioration in the country’s external liquidity and funding conditions, and the decline of foreign exchange reserves to critically low levels.

Moody’s Investors Service (Moody’s) followed Fitch’s rating action on Pakistan when it announced on February 28 the downgrade of the country’s sovereign credit rating from Caa1 to Caa3, as its increasingly fragile liquidity and external position raised default risks.   Outside of Asia-Pacific, Fitch captured the headline in early August when it cut the US credit rating from AAA to AA+ citing fiscal deterioration over the next three years and repeated down-the-wire debt ceiling negotiations that threatened the government’s ability to pay its bills.

Moody’s also made a bold call on China when it lowered in early December its outlook on the country’s credit rating from stable to negative even as it affirmed its A1 rating. In doing so, it cited the risks related to structurally and persistently lower medium-term economic growth and the ongoing downsizing of the property sector. It pointed out the increasing risks related to policy effectiveness, including the challenge to design and implement policies that support economic rebalancing while preventing moral hazard and containing the impact on the sovereign's balance sheet.

Fitch on September 25 likewise announced a cut in the outlook for Bangladesh from stable to negative – but affirmed its BB- rating – on the back of the deterioration in external buffers, which it noted increased the vulnerability to shocks. Moody’s, on the other hand, took a rating action on Bangladesh earlier as it announced a downgrade in its rating from Ba3 to B1 due to heightened external vulnerabilities and persistent liquidity risks.

On a brighter note, Fitch announced on December 8 the upgrade of Vietnam's long-term foreign currency IDR from BB to BB+ with stable outlook. The upgrade reflected the country’s favourable medium-term growth outlook, underpinned by robust foreign direct investment inflows, which Fitch expected to continue to drive sustained improvements in its structural credit metrics.

Fitch also revised the outlook for the Philippines from negative to stable in May, reflecting its improved confidence that the country was returning to strong medium-term growth after the Covid-19 pandemic, supporting sustained reductions in government debt/GDP, after substantial increases in recent years.

Fitch likewise affirmed the ratings of various sovereigns in 2023, including those of Australia at AAA, Singapore (AAA), China (A+), Japan (A), India (BBB-), Thailand (BBB+) and Malaysia (BBB+). On the basis of such active sovereign rating actions, Fitch is once again voted as the Triple A Sovereign Rating Agency of the Year – Asia-Pacific in 2024 for the seventh year in a row.

Focus on sustainability

Moody’s continued to be the preferred rating agency for several issuers when raising ESG-related bonds as illustrated by their solely-rated deals, enabling it to retain the honour as the Triple A Green, Blue, Social, Sustainability and Sustainability-Linked Rating Agency of the Year in Asia-Pacific. Sunny Optical Technology (Group) of China priced in January the first offshore sustainability-linked bond issued out of the Chinese corporate space, as well as the first Chinese US dollar corporate bond printed in 2023 amounting to US$400 million with a Moody’s rating of Baa1.

China Construction Bank (CCB) accessed the green bond market last year through different global branches in different currencies with A1 rating only from Moody’s. In May, CCB (London) priced 2 billion yuan (US$278.9 million) and CCB (Sydney) US$500 million. The bank returned to the market in November with the Luxembourg branch raising €300 million (US$322 million), and the Hong Kong branch US$500 million.

Another Chinese lender, Industrial and Commercial Bank of China (ICBC), also relied solely on Moody’s rating when its Dubai and Hong Kong branches arranged in October One Belt One Road (OBOR)-themed green bonds amounting to 1.6 billion yuan and US$500 million, respectively.

Two Singapore dollar green bonds printed in March by Mapletree Pan Asia Commercial Trust amounting to S$150 million (US$111 million) and National University Singapore amounting to S$340 million were also solely rated by Moody’s at Baa1 and Aaa, respectively. Then in June, CapitaLand Integrated Commercial Trust priced a S$400 million green bond, which Moody’s assigned an A3 rating.

South Korean issuer SK On tapped the green bond market in May for US$900 million with a sole rating from Moody’s of Aa3, while Doosan Enerbility issued a US$300 million green bond in July with a Moody’s rating of Aa2. In the case of Swire Properties of Hong Kong, it priced a 2.5 billion yuan green bond in July, rated only by Moody’s at A2.

Moody’s also rated several social bonds, including those from Industrial Bank of Korea, KEB Hana Bank and Hong Kong Mortgage Corporation.

The popularity of ESG as an investment topic makes it a major focus in rating agencies’ market initiatives and Sustainable Fitch once again demonstrated its dedication to address and broaden the discussion on ESG themes on the way to winning for the fifth year in a row the Triple A ESG Rating Agency of the Year Asia-Pacific award in 2024.

Sustainable Fitch aims to have full coverage of labelled bonds, while also providing innovative products such as ESG ratings for global labelled structured bonds and covered bonds. It also provides ESG scores for leveraged finance and a transition assessment analytical product.

The ESG ratings coverage has initially been focused on the ESG labelled debt market – green, social, sustainability and sustainability-linked – on an unsolicited basis, although solicited rating mandates rose sharply in 2023. It aims to achieve full coverage of labelled bonds in terms of variety in the future, including public finance, agency and sovereign debt issuances.

Expertise across segments

Fitch maintains its leadership in covering China’s local government financing vehicles (LGFVs) as its wins the Triple A Public Finance Rating Agency of the Year – Asia Pacific honour for the ninth consecutive year. It is the only credit rating agency that rated 100% of China’s first-time public finance issuances in 2023 as well as garnering the largest share for China’s LGFV sector. Among its landmark transactions are the Guangzhou Development District Holding Group’s US$500 million green bond and the US$750 million bond from REC of India. It also rated the debut bond issuance of Korea Ocean Business Corporation amounting to US$300 million.

In terms of rating actions in the public finance sector, Fitch upgraded the ratings of several entities, including Chengtong Hong Kong Company from BBB+ to A-, Jiangsu Fang Yang Group Company (from BB- to BB) and Zhongyuan Asset Management Company (from BB+ to BBB). In terms of downgrades, Fitch lowered the ratings of Changchun Urban Development & Investment Holdings (Group) Company from BBB+ to BBB, Kunming Industrial Development & Investment Company (from BB to BB-) and Qingdao Jiaozhou Bay Development Group Company (from BBB- to BB+).

Riding on its sole rating role in several fund-raising exercises by Chinese banks, Moody’s retains for the seventh year in a row the Triple A Financial Institution Rating Agency of the Year – Asia Pacific title. As mentioned earlier, Moody’s is the rating agency of choice for Agricultural Bank of China (London), China Construction Bank (Hong Kong, London, Luxembourg and Sydney) and ICBC (Hong Kong, Singapore and Dubai).

Moody’s also rated in 2023 the bond issuances of South Korean banks such as Industrial Bank of Korea, KEB Hana Bank, Export-Import Bank of Korea, NongHyup Bank and Shinhan Bank .

In terms of rating actions, Moody’s raised the deposit ratings of China Merchants Bank in May from A3 to A2 due to the bank's entrenched retail banking franchise; improved financial metrics in profitability, capital and funding; resilient asset quality as well as reduced risk in its off-balance-sheet wealth management products.

Moody’s also raised the deposit ratings of Taipei Fubon Bank in September from A2 to A1, driven by the bank’s strong funding and liquidity, resilient asset quality, as well as an improved market position and capitalization following the merger with Jih Sun International Bank on April 1 2023.

Moody’s also retains the Triple A Corporate Rating Agency of the Year – Asia Pacific accolade. It solely rated a number of corporate bond issuances last year such as the US$400 million sustainability-linked bond by Sunny Optical and the green bonds by Doosan Enerbility and SK On, both of South Korea, amounting to US$300 million and US$900 million, respectively.

It also solely rated the 2.5 billion yuan green bond by Swire Properties of Hong Kong, as well as the green bonds by two Singaporean issuers, Mapletree Pan Asia Commercial Trust amounting to S$150 million and CapitaLand Integrated Commercial Trust amounting to S$400 million.

In other ESG-related bond deals, Moody’s was involved in rating the US$1 billion sustainability bond by Korea Electric Power, the US$1 billion inaugural green bond by LG Energy Solution, the US$700 million social bond by Korea Land and Housing, and the multi-currency social bonds by Hong Kong Mortgage Corporation comprising of HK$9.5 billion (US$1.21 billion), 5 billion yuan and US$650 million, among others.

Moody’s likewise rated a number of first-time corporate issuers such as Mineral Industri Indonesia, which was assigned a Baa2 rating, Taiyuan Iron & Steel (A3), SK Broadband (A3), Jinan Energy Group (Baa1) and CSCEC International Construction Company (A3).

While activity in the high-yield space remains muted and the volume of bond issuances is now just a tiny fraction of what it used to be, the rating agencies continue their active monitoring of this credit segment. An analysis by The Asset showed Moody’s was ahead in the rating actions involving high-yield credits such as Dalian Wanda Commercial Management Group, Country Garden Services, Sino Ocean Group Holding, Lippo Malls Indonesia Retail Trust and PT Agung Podomoro Land. As a result, Moody’s is once again voted as the Triple A High Yield Rating Agency of the Year – Asia Pacific for 2024.

It is important for rating agencies to be ahead of the curve and issue warnings to investors on potential credit risks, especially for high-yield names. Fitch is a repeat winner as the Triple A Investment Grade Rating Agency of the Year – Asia Pacific with its coverage of this credit segment across the different sectors from sovereigns to public finance, corporates and financial institutions. These include investment-grade offerings from first-time issuers out of Greater China, China LGFVs, India’s public finance, Indonesian corporates and financial institutions as well as Singapore banks.

The first-time issuers rated as investment-grade by Fitch include Taiyuan Iron & Steel (Group) Company, which was assigned an A rating, ICIL Aero Treasury (A), Tianfeng Securities (BBB-), Foshan Construction & Development Group (BBB+) and Haiyan State-Owned Assets Management (BBB-). From Indonesia, Pertamina Geothermal Energy secured a first-time BBB- rating from Fitch, Pertamina Hulu Energy was assigned a debut rating of BBB, while Pertamina International Shipping was assigned a rating of Baa3.

Fitch also took rating actions on a number of investment-grade credits. It downgraded China Great Wall Asset Management Company twice – first from A from A- in early August and later to BBB+ which it announced on September 1, citing weak capitalization and lack of transparency over the company’s delay in publishing its 2022 financial report.

Hong Kong-based Hysan Development Company also suffered a rating downgrade from A- to BBB+ in September as a its financial profile weakened as a result of rising leverage under the persistently high interest rate environment.

Other investment-grade companies, though, continued to thrive in the challenging credit environment, earning rating upgrades from Fitch. Contemporary Amperex Technology Company saw its rating raised from BBB+ to A- in June, reflecting its increasingly robust business profile. Tata Steel saw its rating upgraded from BB+ to BBB- in October following a reduction in uncertainty and financial risks from its UK operations.

Moody’s retains the Triple A Structured Finance Rating Agency of the Year – Asia Pacific as it acted as the sole rating agency in several landmark deals. It solely rated the Class A1 notes of Hong Kong Mortgage Corporation’s US$404.8 million asset-backed securities (ABS), representing the sustainability tranche of the deal. The underlying asset pool consisted of 35 loans for 25 projects spread across Asia-Pacific, the Middle East and Latin America and spanning sectors that include power generation and distribution, renewables, education and telecommunications.

In another deal, Moody’s solely rated the four classes of notes in the US$410.3 million infrastructure ABS for Bayfront Infrastructure Management, which also included a dedicated sustainability tranche. The underlying portfolio is spread across 40 individual loans and bonds, 33 projects, 15 countries and 10 industry sub-sectors.

Moody’s also rated the covered bonds by Korea Housing Finance Corporation. It was the international rating agency of choice in a number of China onshore ABS deals, such as the 2-billion-yuan Fuyuan 2023-3 retail auto mortgage loan securitization, the 4-billion-yuan Toyota Glory 2023 Phase 1 retail auto loan securitization, and the 10-billion-yuan Rongteng 2023-4 retail auto loan securitization.

Local rating agencies

By country, Credit Rating Information and Services Limited (CRISL) is again voted as the Triple A Rating Agency of the Year in Bangladesh. It conducted a total of 8,265 rating actions from January to October 2023, the majority of which were for SMEs. It has separate rating methodologies for various economic sectors, which are regularly reviewed as per local regulatory requirements and international best practices.

CRISL upgraded a total of 170 ratings under different sectors during the first 10 months of 2023 based on company fundamentals, expansion plans, future cash flow and business prospects. On the other hand, 23 ratings were downgraded during the same period amid a deterioration of company fundamentals, weak cash flow, and operational and business risks.

China Lianhe Credit Rating is also a repeat winner as the Triple A Rating Agency of the Year for China. The agency boasts transparency in its rating actions with its reports always available to investors. It has the highest number of issuer ratings among LGFVs, and local investment and development companies (LIDCs).

CSPI Credit Ratings Company is once again selected as the Triple A Public Finance Rating Agency of the Year for China. It conducted 156 rating actions in 2023, of which 106 were issuer ratings and 50 issuance ratings. It rates various provincial governments, including Jiangsu, Jilin, Shandong, Henan, Guangdong, Liaoning, Sichuan and Zhejiang, as well as the autonomous regions of Inner Mongolia and Xinjiang Uygur.

China Chengxin Credit Rating (CCXI) continues to be a key participant in rating China onshore structured finance deals. In being selected yet again as the Triple A Structured Finance Rating Agency of the Year for China, it was involved in rating a number of auto loan securitizations. These include the 3-billion-yuan Generation 2023-4 retail auto loan green securitization with Genius Auto Finance as the originator/servicer.

CCXI was the domestic rating agency involved in the 2-billion-yuan Fuyuan 2023-3 retail auto mortgage loan securitization with Ford Automobile Finance (China) as the originator/servicer, and in the 4-billion-yuan Toyota Glory 2023 Phase 1 retail auto loan securitization with Toyota Motor Finance (China) as the originator/servicer.

Activity outside of Asia

Debt markets were shaken as the US Federal Reserve and the European Central Bank engaged in a series of interest rate hikes to tame inflation. 

The cost-of-living crisis has been slowly feeding through consumer ABS transactions such as auto ABS and residential mortgage-backed securities (RMBS), with consumers struggling to adjust to higher monthly payment schedules. The delayed effects of rate hikes are still to be fully felt, with excess savings that built up during Covid cushioning the impact, and downgrades are likely to be seen in 2024. 

Meanwhile, the work-from-home trend has triggered a crisis in the commercial real estate sector in both Europe and North America, where a wave of downgrades already got underway during the past year.

Amid these developments, Fitch stood out and is named the Triple A Asset Backed Securities Rating Agency of the Year – Americas. As the delayed impact of the high interest rate environment reverberates across segments such as auto ABS and RMBS, investors are looking for thematic research to keep up with fast-moving developments.

Fitch has created a Structured Finance encyclopedia for newcomers to the ABS asset class, covering the fundamentals of the sector, such as key risk factors and regulatory considerations.

It rates most of the major auto ABS issuers in the US, including programmes from Ford, Nissan and Toyota, and provides regular updates on the various global markets via its Auto Index reports.

In the green auto ABS segment, Fitch rated in December the Tesla Electric Vehicle Trust 2023-1. It used 2006-2008 recessionary proxy data since Tesla Finance has limited performance history which does not include a full economic cycle.

Fitch also has a long tradition in esoteric transactions. Deals last year included the latest aircraft engine lease securitization, Willis Engine Structured Trust VII.

The firm has a strong track record rating transactions in Latin America, including diversified payment rights from institutions such as Banco Pichincha from Ecuador and Banco Davivienda from Costa Rica.

And last December it assigned a BBB rating to a Peruvian sol-denominated senior securitized notes by the Metropolitan Municipality of Lima (MML). The notes are backed by future collections of property transfer and vehicle ownership taxes. 

Morningstar DBRS picks up the Triple A Covered Bond Rating Agency of the Year – Americas award. The rating agency has strong coverage across global covered bond programmes, including in Europe and Asia, but with its origins in Toronto the firm has traditional strength with Canadian issuers.

Last year institutions such as the Royal Bank of Canada, Toronto Dominion Bank and Canadian Imperial Bank of Commerce were exceptionally busy with euro-denominated benchmark offerings. Deal volume out of Canada into the euro market was €17 billion, and analysts are forecasting a similar level in 2024.  

The rapid rise in interest rates in Canada, the spike in inflation and property bubbles which have built up in some cities, require close monitoring of the underlying mortgage cover pools from investors. Most analysts are projecting a fall in property prices in 2024, but with conservative loan-to-value ratios, the underlying cover pools look stable so far.

The DBRS Monthly report on Canadian covered bonds closely tracks property value trends in major Canadian cites, and there is regular thematic research on subjects such as the cost-of-living crisis. In addition to written research, DBRS also runs a series of online discussions, such as the Canadian Bank Outlook, with its key analysts fielding questions from participants.

In addition to domestic Canadian dollar offerings, the latter part of 2023 also saw an uptick in USdDollar offerings, with Royal Bank of Canada tapping the market in December.

Over in Europe, S&P Global Ratings (S&P) wins the Triple A Asset Backed Securities Rating Agency of the Year – Europe award. Not only was 2023 a rapidly changing environment of interest rate hikes and inflation; both the European Union and the United Kingdom have seen a busy pipeline of regulatory changes. Recent S&P commentary includes how the Financial Conduct Authority probe into discretionary commission models will affect UK auto ABS transactions.

The arrival of electric vehicles (EVs) in ABS pools has added another complicating factor. EVs have depreciated in value faster than internal combustion engine vehicles. Based on figures from specialist automotive pricing data providers, sales of EVs are coming off typical three-year lease deals but values have not held up as well as expected.

S&P has published a stream of thematic research on EVs in ABS pools. It rates most of the major auto ABS issuers, including the Volkswagen Driver programme. And in December it rated the first Simple Transparent and Standardized (STS) offering (which complies with the EU STS framework) from multi-brand auto loan and lease provider CA Auto Bank, a subsidiary of Crédit Agricole.

The cost-of-living crisis has also been a big theme for RMBS. S&P has published thematic research in print and video form on interest rate reset risk and property price bubbles in the UK, and various continental European cities, such as the November Primer on France's RMBS Market and the recent UK RMBS Case Study. Clearly presented interactive dashboards visualize a range of scenarios for different markets.

Green RMBS is another segment on the rise, and S&P has rated the sterling-denominated Tower Bridge Funding transactions from Belmont Green, the parent company of Vida Homeloans in the UK.

Commercial mortgage-backed securities are facing extremely challenging times, as work from home has reduced demand for office workspace, and left the market still finding new price levels on office buildings. The uncertainty about future demand for office space and the potential impact on fundamentals and valuations have been addressed in a series of recent publications.

Moody’s is chosen the Triple A Covered Bond Rating Agency of the Year – Europe.

The EU covered bond market has been the subject of radical regulatory changes over the past few years. Investors have needed a steady flow of up-to-date research on programme structures, as there are still national differences within the framework of the EU Covered Bond Directive.

As 2023 began, some countries were still finishing off the details on domestic laws to comply with the EU Directive. Moody's closely tracked the final stages of drafting the Italian law, which was not published until the end of March.

Moody's has also kept investors informed as legislation such as the EU Taxonomy, Sustainable Finance Disclosure Regulation, and Corporate Sustainable Reporting Directive Finance took shape.

Covered bond issuance was very strong in Europe in 2023, with another record year for new euro-denominated benchmark issuers. This was against the background of surging ECB interest rates, putting an end to the rapid rise in property prices in many European cities.

More issuers are also entering to green or social space. In November, Rabobank issued its first green covered bonds under its Dutch law programme, within its Sustainable Funding Framework of May 2023 (aligned with the 2021 ICMA Green Bond Principles).

Moody's also gave an Aa3 rating to the recent green covered bond from Crédit Agricole Italia, which launched the first-ever Italian green covered bond back in 2021. And it rated the recent offering of German Shipping Pfandbrief from Hamburg Commercial Bank.

Credit rating agencies in the EU are directly supervised by the European Securities and Markets Authority (ESMA), which has a set of operational requirements, including rotation periods for lead analysts, other analysts, and committee members approving ratings.

There is a four-year rotation, with a two-year cooling-off period in between assignments. This requirement to rotate staff has worked in favour of Moody's sizeable teams of banking and covered bond analysts, and its dominant market position.

When it comes to ESG coverage in Europe and the Americas, KBRA is a leader. The agency is chosen as the Triple A ESG Credit Rating Agency of the Year in both regions.

A backlash emerged last year against the role of ESG in global investing. Big institutional investors in the US have begun a trend of voting against ESG resolutions at shareholder meetings. And states such as Texas have barred banks from underwriting bond offerings if they take a hard stance against lending to oil companies.

This backlash has spilled over into the credit rating space. Though rating agencies have always stressed that only ESG factors with a direct impact on creditworthiness are taken into consideration in the rating process, many have published ESG scores alongside credit ratings – often on the cover page.

KBRA has always spoken out against this tendency to mix credit and ESG ratings together, and the firm does not offer ESG scoring or second opinions as an independent service, which many of its competitors have done via acquisition of ESG firms.

The KBRA view was a minority one back in 2020 and 2021, but the argument now looks to be moving in its favour. For example, publishing an ESG rating alongside the credit rating has been discontinued at one rating agency, while another simply observes that they have "toned it down a bit".

KBRA focuses exclusively on factors that can directly impact credit quality. These could include reputational risk, which can lead to investors avoiding buying debt offerings, or customer boycotts in an age of increased activism.

The rating agency recognizes that every issuer, regardless of industry or sector, may face pressures from its stakeholders as regards ESG preferences. Like all its peers, KBRA considers the “governance” element in ESG as very important, but it has rejected the concept of ESG scores that combine “environmental” and “social” factors. 

Nonetheless, its ESG analysts have set out the methodology to be used by its credit analysts across the company. And it publishes regular thematic research. A 2023 Carbon Series piece looked at whether UK companies are prepared for climate transition, highlighting regulatory pressure for companies to develop and disclose credible climate transition plans at a time when investors and consumers are more focused on greenwashing.

Reputational risk associated with social factors can also have a credit impact. One ESG research piece looked at how fast western companies were disengaging with Russia after the invasion of Ukraine and the possible impact on global reputation and branding.

In the US, KBRA also tracked state legislation, such as Texas laws on state entities doing business with companies (including investment banks) that discriminate against oil and gas industries. A number of Republican-led states have restricted the use of ESG issues in pension fund investments.

Certainly 2023 was the year when the ESG backlash gained momentum. However, though ESG funds experienced an outflow in the US towards the end of 2023, the investor focus on sustainability will undoubtedly continue to be of great importance going forward.

More investors are demanding that not only are environmental and social factors split more clearly, but also that ESG and credit assessments are more clearly labelled and separated.

For the moment, the market trend has shifted in favour of the KBRA approach, and over the course of 2024 new patterns are likely to emerge across the credit rating business, as the various rating agencies fine-tune their processes on how they integrate ESG into credit ratings.

To see the full list of winners for the Triple A Rating Agency Awards 2024 please go here.

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