Default Study 2005 by RAM

8 STRUCTURED FINANCE RESEARCH
(Company No. 208095-U) APRIL 2006

Doc ID: SFR#049/RAM/06 KDN No: PP9298A/12/97
SPECIAL REPORT
2005 Corporate Bond Default &

Rating Transition (1992 – 2005)
Highlights
ANALYSTS: In contrast to the 2 issuers which defaulted in 2004, there were 6 in 2005 - the highest number
Alfred Chan of issuers in default in the last 4 years. All but 1 had already been assigned highly speculative
(603) 7628 1787 rating categories well before their eventual default. Nonetheless, the results from RAM’s annual
alfred@ram.com.my review of default experience and ratings performance showed that default trends have
remained largely stable. For the first time since RAM began monitoring corporate defaults and
rating migrations, we have now provided an account of RAM’s rating performance using the
Siew Suet Ming Gini coefficient – a quantitative indicator to measure the historical ability of ratings to predict
(603) 7628 1771 defaults – and have established that the predictive power of RAM’s ratings show an improving
suetming@ram.com.my trend:
! Six issuers defaulted in 2005; their rated debts collectively amounted to RM1,180 million.
CONTACT: All but 1 of these issuers had already been exhibiting very weak credit profiles with
Chong Kwee Siong speculative-grade ratings, 1 year prior to their eventual defaults.
Head, Structured Finance ! Rating trends in 2005 indicate that the credit quality of RAM-rated entities were stabilising,
Ratings with a narrowing gap observed between economic fundamentals and credit quality.
(603) 7628 1786 ! Ratings performance had been specific in respect of sectoral activity; rating upgrades in
kschong@ram.com.my 2005 largely stemmed from the banking sector, underscored by strengthening
fundamentals, whilst downgrades were more prevalent amongst industrial and consumer-
based entities as such companies had continued to increase their leverage.
! As noted in RAM’s previous studies, the steepening of the yield curve remains prevalent
among A to BBB ratings and, in fact, was more pronounced in 2005. This is a dominant
characteristic in and peculiar to the Malaysian capital market.
GENERAL QUERIES: ! Although the long-run annual Gini coefficient of 66.9% for RAM ratings remains
structfin@ram.com.my undermined by the combined effects of the Asian economic crisis and RAM’s relatively
short rating history, RAM’s accuracy ratio is on the rise (1992-1998: 62.6%). This indicates
the improved predictive power of RAM’s ratings as a reliable measure of default risk.
Analysis of RAM’s rating-transition matrices suggests that ratings behaviour has remained
consistent with long-run credit expectations, showing clear negative correlation between credit
quality and default probability. The consistency of our annual rating studies reinforces the value
of RAM’s credit ratings as accurate predictors of defaults and our reliability as a credit rating
agency. The results of the default study also remain comparable with those of international
rating agencies in the following aspects: (1) the higher the rating, the lower the default
probability, with such likelihood increasing over a longer time horizon; (2) the higher the rating,
the more stable the rating, although rating stability decreases over a longer time span.
With escalating prices of domestic consumer goods and resources against a background of
rising interest rates in 2006, credit prospects for Malaysian rated corporates remain sensitive to
any adverse or sudden changes in the macroeconomic environment – should they be unable to
rein in costs or misgauge the timing of global market prospects. In an era of globalisation, these
challenges have a bearing on how temporary or permanent such effects would have on
corporates’ credit risk profiles.
Rating Agency Malaysia Berhad, No. 19-G, The Boulevard, Mid Valley City, Lingkaran Syed Putra, 59200 Kuala Lumpur
Tel: (603) 7628 1000 Fax: (603) 7628 1700
E-mail: ram@ram.com.my Website: http://www.ram.com.my
T
ABLE OF CONTENTS
Overview of 2005.................................................................................................................................................................................................... 1
The Methodology and Data ................................................................................................................................................................................... 4
RAM-rated Default Profile Since 1992.................................................................................................................................................................... 6
Defaults and Credit Ratings.................................................................................................................................................................................... 7
Rating-Migration Behaviour .................................................................................................................................................................................. 10
Measuring Ratings Performance – the Lorenz Curve .......................................................................................................................................... 13
L
IST OF APPENDICES
Appendix 1: Cumulative Weighted-Average Rating Transitions, 1992 – 2005..................................................................................................... 14

Appendix 2: Cumulative Weighted-Average Rating Transitions, NR-Adjusted, 1992 – 2005 .............................................................................. 15
Appendix 3: 14 Static Pools’ Annual Rating Transitions....................................................................................................................................... 16
Appendix 4: 14 Static Pools’ Annual Rating Transitions, NR Adjusted ................................................................................................................ 23
Appendix 5: Issuers In Default (Published Ratings) ............................................................................................................................................. 30
IST OF TABLES AND FIGURES
L
Table 1: Published Defaults in 2005....................................................................................................................................................................... 1
Table 2: Malaysia’s Real GDP Growth by Expenditure .......................................................................................................................................... 2
Table 3: 1-Year Rating-Migration Behaviour .......................................................................................................................................................... 5
Table 4: Annual Default Summary (1992 - 2005) ................................................................................................................................................... 6
Table 5: Average Time to Default by Rating Category ........................................................................................................................................... 9
Table 6: Summary of Annual Rating Changes ..................................................................................................................................................... 11
Figure 1: New Issuers by Investment and Speculative Grades as at the Beginning of Calendar Year.................................................................. 2
Figure 2: Outstanding Issuers by Investment and Speculative Grades as at the Beginning of Calendar Year...................................................... 2
Figure 3: Outstanding Issuers by Sectors at the Beginning of Each Calendar Year .............................................................................................. 3
Figure 4: Malaysia’s Gross New Issuance of Private Debt Securities by Selected Sectors................................................................................... 3
Figure 5: Cumulative Average Default Rates, 1992 - 2004 vs 1992 - 2005 ........................................................................................................... 7
Figure 6: Cumulative Average Default Rates, 1992 – 2005 ................................................................................................................................... 8
Figure 7: RAM’s Default Curve vs Credit Spread Curve as at 31 December 2005 ................................................................................................ 9
Figure 8: Yield Curve as at End-December 2004 and 2005................................................................................................................................... 9
Figure 9: Cumulative Weighted-Average Rating Stability, 1992 – 2005............................................................................................................... 10
Figure 10: Downgrades vs Defaults (2000 – 2004) .............................................................................................................................................. 11
Figure 11: RAM’s Rating Drift vs Economic Indicators......................................................................................................................................... 12
Figure 12: Cumulative Share of Rated Issuers and Defaults Over 1-Year Time Horizon .................................................................................... 13
Tel: (603) 7628 1000 Fax: (603) 7628 1700
(Company No. 208095-U)
O VERVIEW OF 2005
2005 recorded the highest number of defaults with 6 issuers defaulting on RM1,180 million of rated debt (2004: 2 issuers with
RM97.7 million of rated debt) since the 1997/98 Asian financial crisis. More importantly, and in contrast to the peak defaults in the years
almost immediately after the crisis, all but 1 of the corporates that defaulted in 2005 had already been assigned speculative-grade ratings –
indicative of their riskier credit profiles – a year prior to their eventual defaults. On a cumulative basis, the default rate of issuers with
investment-grade ratings remained much lower compared to those with speculative-grade ratings. The defaults had occurred as a result of
their failure to make timely principal payments on the respective maturity dates, whether or not formally declared as such. Under RAM’s
default criteria, a material default is deemed to have occurred when the issuer seeks to extend the maturity of its rated securities beyond what
had been originally agreed upon, resulting a financially and/or economically weaker position for the bondholders. RAM also considers an
issuer to be in default when it has failed to honour its debt obligations, notwithstanding the fact that the issuer’s debt obligations had been
satisfied by the guarantors of its rated securities. As RAM’s database for corporate defaults has been constructed using the long-term, stand-
alone corporate credit ratings of the issuers as the unit of study, some of which are implicit, not all the defaults captured in the 2005 study are
directly comparable to RAM’s published ratings. Appendix 5 provides a summary account of these issuers’ rating history.
Table 1: Published defaults in 2005

Rated amount
Issuer Industry sector Instrument Credit event
(RM million)
Plantation and
Comsa Farms Berhad Redeemable Unsecured Bonds 50.00 Extension of maturity
agriculture
Non-Convertible Redeemable Failure to meet full principal
Inter-Heritage (M) Sdn Bhd Property and real estate 252.78
Secured Bonds payment
Zero Coupon Redeemable Secured
Karambunai Corp Berhad Property and real estate 420.00 Extension of maturity
Bonds
Pasaraya Hiong Kong Sdn Commercial Paper/Medium-Term
Trading and services 120.00 Missed principal payment
Bhd Notes Programme
PPH Resorts (Penang) Sdn Commercial Paper/Medium-Term Missed principal payment,
Property and real estate 50.00
Bhd Notes Programme guarantors stepped in
Sutera Harbour Resorts Tranche 1 Redeemable Secured 60.00
Property and real estate Extension of maturity
Sdn Bhd* Bonds
Tranche 2 Redeemable Secured Cross-default; pari-passu ranking
90.00
Bonds with Tranche 1 Bonds
* Not included in the 2005 Corporate Default Study
Source: RAM
Easing of credit strain observed in 2005. Despite the average annual default rate accelerating from 1.19% to 3.33%
between 2004 and 2005, the general credit trend observed in 2005 vis-à-vis RAM’s rated universe appears to have been
stabilising, with net rating upgrades recorded for the year. Rating volatility also generally eased for other rated corporates
despite the challenging business environment in 2005, with most of the downgrades (excluding downgrades to default
status) already registered in 2004. By and large, all corporates within the different sectors of RAM’s rating universe
remained largely unchanged across all rating categories and cohorts. The rating actions across the industries reflect most
of the RAM-rated corporates’ measured response to the increasingly challenging business environment and their cautious
approach to further debt-funded expansion.
Continued discernment in investment appetite. The Malaysian capital market continued to favour highly rated issuers
in 2005, with many new issues of debt securities compressed within the single-A rating category and above. While new
issuers within RAM’s rating universe included a larger proportion of issuers in the BB and BBB rating categories (2005:
30%; 2004: 12%), they had had to rely on other credit supports to provide leverage for their issue ratings – such as bank
guarantees and structural enhancements – in order to access the capital market. On a cumulative basis, the proportion of
speculative-grade issuers within RAM’s rating universe remained relatively small – partially contributed by the general
improvement in the post-crisis credit profiles of issuers and also the continued discernment in investors’ appetite for highly
rated securities.
SFR#049/RAM/06 -1- APRIL 2006

2005 Corporate Bond Default & Rating Transition Study
Figure 1: New issuers by investment and speculative grades as at the beginning of the calendar year
2004 2005
BB AAA
AAA
BBB 4% B
12% 4%
8% 4%
BB AA
4% 9%
BBB
26%
AA
A 32% A
44% 53%
Source: RAM
Figure 2: Outstanding issuers by investment and speculative grades as at the beginning of the calendar year
Investment-grade Speculative-grade
100%
16% 13% 13%
90% 20%
25%
33% 32%
80%
70% 87% 87%

80% 84%
75%
60% 67% 68%
50%
1999 2000 2001 2002 2003 2004 2005
Source: RAM
Healthier economy forecasted. A stronger GDP growth of 6% has been projected for Malaysia in 2006 (2005: 5.3%),
underscored by signs of recovery in global demand for electronics and an expected upturn in domestic demand,
specifically investment by the private sector. Meanwhile, public investment is also projected to grow moderately to revive
the ailing construction industry, through an increase in public infrastructure projects as well as higher allocations for public
utilities, agriculture, small and medium enterprises and the rural sector. The business environment is expected to remain
challenging in 2006 as consumers check their spending against a background of rising prices and interest rates.
Table 2: Malaysia’s real GDP growth by expenditure

2001 2002 2003 2004 2005e 2006f
Consumption 5.4% 6.1% 7.4% 9.2% 5.8% 5.1%
Private 2.4% 4.4% 6.6% 10.1% 8.0% 6.9%
Public 17.3% 11.9% 10.0% 6.6% -1.5% -1.3%
Investment -2.8% 30.0% 2.7% 3.1% 8.2% 8.7%
Private -19.9% -15.1% 0.4% 15.8% 16.0% 16.3%
Public 14.5% 11.2% 3.9% -3.5% 3.3% 3.4%
Exports -7.5% 4.5% 6.3% 15.6% 8.0% 8.6%
Import -8.6% 6.3% 5.0% 19.8% 7.2% 9.0%
Total 3.1% 4.1% 5.3% 7.1% 5.3% 6.0%
Source: RAM Consultancy Services Sdn Bhd
e = estimate
f = forecast
APRIL 2006 www.ram.com.my

Sectoral profile anticipated to remain unchanged. In line with the narrowing in the market’s investment appetite, the
spreads across the A-rated and BBB-rated bond yields and Malaysian Government Securities (“MGS”) have increased by
approximately 100 and 200 basis points, respectively. Meanwhile, spreads tightened between 12 and 30 basis points
across all tenures at the upper end of the credit scale. While more manufacturing companies may be expanding their
production capacities in tandem with the anticipated upturn in private investment in the domestic economy, the choice of
funding would be driven by the relative cost-competitiveness between issuing private debt securities (“PDS”) and taking up
commercial loans. RAM’s rating portfolio remains dominated by the financial services (25%) and infrastructure & utilities
(22%) sectors – typically the higher-rated sectors within our rating universe. Going forward, we do not expect any
significant variation within the RAM-rated universe in terms of the sectoral profile.
Figure 3: Outstanding issuers by sector at the beginning of each calendar year
35%
2001 2002 2003 2004 2005
30%
25%
20%
15%
10%
5%
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Source: RAM
Figure 4: Malaysia’s gross new issuance of private debt securities by selected sectors
RM million 2001 2002 2003 2004 2005

14,000
12,000
10,000
8,000
6,000
4,000
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Source: Bank Negara Malaysia (“BNM”)
SFR#049/RAM/06 -3- APRIL 2006

In 2005, total PDS issuance (excluding Cagamas Berhad) increased to RM35.7 billion, compared to RM28.0 billion a year
earlier. Most sectors recorded declines of 7% - 28%, except for finance, insurance, real estate and business services,
which leaped 175% to RM13.1 billion following some large issues by Jimah Energy Ventures Sdn Bhd and Projek
Lebuhraya Utara-Selatan Berhad, to name a couple. The strong issuance of residential mortgage-backed securities
(“RMBS”) in 2005 also contributed to this tremendous increase. Excluding the inaugural RMBS issuance in 2004, the
amount of RMBS issued in 2005 summed up to RM4.11 billion.
In consonance with the stronger demand for debt-financing as private investment activities pick up pace and the spillover
of the amounts yet to be drawn down from debt facilities secured in 2005 (estimated at some RM10 billion – RM12 billion),
gross PDS issuance (excluding Cagamas bonds) is estimated at around RM35 billion to RM40 billion in 2006. With these
increases, the total outstanding amount of PDS in the market is envisaged to rise by 11.4% in 20061. These forecasts
assume that the rising trend in the share of PDS vis-à-vis the entire credit market will continue steadily, and that the
relative cost-competitiveness of PDS issuance increases with improving accessibility, liquidity and pricing efficiency in the
bond market. The expected improvement in efficiency will likely come about through a broadening of the investor base,
increasing transparency of market information as well as pricing and trading infrastructure, and the Government’s
continued efforts to enhance the regulatory and market environment.
T
HE METHODOLOGY AND DATA
Consistent with other international studies on corporate ratings performance, RAM’s study on ratings performance focuses on
the historical performance of the issuer’s corporate credit rating and is independent of the number of rated debts issued and
issue size. Adopting an issue-based, as opposed to issuer-based, approach could potentially yield more volatile and downward-biased
outcomes, as this would skew the results towards the default characteristics of issuers with multiple issuers. On the other hand, analysing
ratings performance vis-à-vis issue size would yield little benefit in relation to understanding credit behaviour, as issue size is typically driven
by the individual needs of the issuer’s funding requirements, rather than an indicator of risk appetite. Though no less meaningful, it should be
examined in the context of understanding the macroeconomic environment and the formation process of Malaysia’s capital market. RAM’s
ongoing enhancement of the default model used to generate the results contained within this study may result in some differences compared
to previous studies. Nonetheless, each study is self-contained, with data dating back to the same date – 1 January 1992 – and therefore
eliminates any continuity risk.
There were altogether 389 issuers with stand-alone ratings by RAM between 1 January 1992 and 1 January 2005. These
include all issuers with long-term ratings, holders of implicit long-term ratings, and companies with general-obligation
ratings from various industries. RAM’s annual corporate default study examines the corporates’ credit performance; as
such, all issue-specific credit enhancements – be they in the form of bank guarantees, corporate guarantees or other
forms of securities – are disregarded when examining the issuers’ corporate credit profiles. In the same light, special-
purpose vehicles typically incorporated for the purpose of securitisations are also excluded. Project-financed issuers,
however, have been included given their significance within the Malaysian bond market. All aborted issues have also been
excluded.
Defining default. An important aspect is to clearly define events that constitute a default by an issuer. From a rating
perspective, assessing the credit risk of the issuer's inherent credit strength is primary to the final rating outcome. Of equal
importance is the credit risk that the investors, i.e. bondholders, are exposed to. Simply put, a default or credit event
occurs as soon as any of the binding obligations under the original terms of the agreement between the issuer and the
bondholders has been breached, based on the predication that the bondholders are likely to be exposed to monetary loss.
In some cases, this definition does not conform to the concept of default as explicitly defined in the underlying documents
for the debt instruments or transactions. Technical defaults, such as those arising from covenant violations, are not
included in RAM’s definition of default. RAM’s database for corporate defaults has been constructed using the long-term,
stand-alone corporate credit ratings of the issuers as the unit of study. Consequently, the default rates associated with
1 RAM Consultancy Services Sdn Bhd

each rating category in this study cannot be measured directly against RAM’s published ratings. For RAM’s purposes, an
event of default includes:
! A missed interest and/or principal payment, which is not remedied within the grace period.
! Failure to honour the corporate-guarantee obligations provided to subsidiaries.
! The legal insolvency or bankruptcy of the issuer.
! A distressed exchange in which the bondholders are offered a substitute instrument with inferior terms (e.g. extended
maturities, lower coupons or diminished security package).
Forming static pools. With various obligors having ratings over different time horizons, RAM adopts the static-pool
approach, similar to other international studies. All obligors with outstanding ratings at the beginning of every calendar
year are grouped to form static pools. The pools are static in the sense that their membership remains constant over time.
Given that RAM’s rating history first began in 1992, 14 static pools can be formed for each calendar year. Next, the ratings
of all issuers within each static pool are then compared to their respective ratings at the start of the year, i.e. when the
static pools had been formed at the end of each calendar year. Any rating changes between the beginning and the end of
the calendar year will be disregarded. Entities that have had their ratings withdrawn, as well as those that have defaulted,
will be excluded from subsequent static pools. Apart from a 1-year observation period, ratings are also examined over a
longer duration. It follows that the number of static pools available reduces in tandem with longer observation periods, e.g.
when ratings are monitored over 2 years, there can only be 13 static pools, and so on.
…and transition matrices. All the rating movements from the beginning-of-year (all issuers with outstanding ratings as at
1 January) to end-of-year ratings (as at 31 December) for each calendar-year pool can be summarised in individual rating-
transition matrices, allowing us to form any n-year number of rating-transition matrices. Table 3 illustrates the rating-
migration behaviour over a 1-year transition period. The left column refers to ratings distribution at the beginning of the
year – when the static pools are formed – while the top row refers to ratings at the end of the 1-year observation period.
The table below summarises the rating migrations between the rating categories:
(1) All issuers rated AAA at the beginning of the year were reaffirmed at AAA at the end of the year.
(2) Some 5.56% of the issuers with a beginning-of-year rating of A had been downgraded to BBB by the end of the year.
(3) Of all the issuers with an outstanding BBB rating at the beginning of the year, 8% of them were no longer rated by the
end of the year, as a result of their rated issues being retired or their ratings withdrawn.
(4) About 25% of the C-rated issuers outstanding as at 1 January had defaulted on their obligations by the end of the
year.
Table 3: 1-year rating-migration behaviour

Ratings at end of year (1-year transition)
AAA AA A BBB BB B C D NR
AAA 100.00% - - - - - - - -
Ratings at beginning of year
AA - 97.73% - - - - - - 2.27%
A - 1.85% 83.33% 5.56% - - - - 9.26%
BBB - - 16.00% 72.00% - - - 4.00% 8.00%
BB - - - 8.33% 75.00% - - 8.33% 8.33%
B - - - - - 100.00% - - -
C - - - - - - 75.00% 25.00% -
Inv-grade 7.52% 33.08% 36.84% 15.79% - - - 0.75% 6.02%
Spec-grade - - - 4.00% 36.00% 36.00% 12.00% 8.00% 4.00%
Source: RAM
NR = not rated
Inv-grade = investment grade
Spec-grade = speculative grade
In this study, obligors that have had their ratings withdrawn, as denoted by NR (not rated), are subtracted from the
denominator. Ratings are typically withdrawn when issues mature, are retired early or are aborted. While it is important to
present calculated default rates after adjusting for ‘NR’ ratings, to provide a more accurate description of the number of
SFR#049/RAM/06 -5- APRIL 2006

issuers at risk of defaulting, RAM’s NR-adjusted default ratios will be necessarily inflated given the short data-
accumulation period and the market’s historical preference for certain tenures.
…and cumulative weighted average. Finally, all static pools with similar transition periods are aggregated to arrive at the
cumulative transition matrices – representing the long-run average rating-migration behaviour, weighted by the total
number of rated issuers within each rating category. Expressed in percentages, this reveals the cumulative average
transition rates (including NR-adjusted); the results for the 1-year up to 3-year transition rates are provided in Appendices
1 and 2.
Sample-size constraints. Because RAM's rating universe is constrained by a small sample pool, the calculated default
probability associated with each RAM rating is potentially magnified as the number of observations decreases or the time
frame lengthens. An implication of this is that pool formation across rating categories plays a crucial role in estimated
default rates. In fact, non-investment-grade corporates make up less than 20% of RAM’s default database, amplifying the
estimated default rate towards the lower end of the credit spectrum. Few RAM-rated obligors initially had worse than a BB
rating; credit deterioration only became obvious in the lead-up to 1997. In such cases, bond ratings had been
systematically downgraded, with 'B' and lower ratings appearing only that year or later. These factors point to 2 things:
seemingly improving default probabilities as the rating-transition horizon moves beyond 3 years; and less reliable default-
rate estimates for non-investment-grade ratings.
R
AM-RATED DEFAULT PROFILE SINCE 1992
For the first time in 4 years, RAM’s annual average default rate increased to 3.33% in 2005 (2004: 1.17%), with 6 issuers
defaulting on their debt obligations. More importantly, however, the default experience last year did not exhibit the same
characteristics seen during the crisis; the suddenness and severity of the economic and financial crisis of 1997/98 had affected issuers even
further up the credit curve – including investment-grade-rated issuers. In contrast, the profile of the 2005 defaults showed that all but 1 had
been rated speculative-grade at the point of initial rating – indicative of their already-weak credit profiles.
Table 4: Annual default summary (1992 - 2005)

Total number of Investment grade Speculative grade Rated amount
Year Default rate (%)
issuers in default default rate (%) * default rate (%) * (RM)
1992-96 - - - - -
1997 1 0.56% - 4.17% 30,000,000
1998 16 8.74% 4.05% 28.57% 3,820,058,747
1999 4 2.52% 0.94% 5.77% 1,850,000,000
2000 6 2.94% 0.86% 9.26% 1,875,000,000
2001 4 2.86% 1.52% 4.65% 2,756,909,122
2002 - - - - -
2003 3 1.90% 0.75% 8.00% 225,000,000
2004 2 1.17% - 9.09% 97,655,072
2005 6 3.33% - 25.00% 1,181,604,000
Cumulative 42 2.30% 0.74% 9.12% 11,836,226,941
Source: RAM
* As a percentage of investment- and speculative-grade static pool, respectively.
RAM’s default profile over the last 15 years (since 1992) is very much reflective of the experience of the domestic
economy, and exhibits the same peaks and troughs seen in 1998 and 2001. With rapid credit deterioration brought about
by the intensity of the crisis, almost a third of the issuers in default had still had investment-grade ratings up to a year
before their eventual defaults. With the measured momentum of economic improvement, RAM-rated issuers have
demonstrated a more restrained pace of expansion, as reflected in the general reduction in default incidences and smaller
average volume of defaults in the years following the crisis. On a cumulative basis, a total of 42 companies had defaulted
between January 1992 and 31 December 2005, with a total rated debt amount of RM11.84 billion. Whilst the earlier
defaults had been caused by a larger number of investment-holding companies (making up almost a third of defaults),
most of the defaults in 2005 had originated from the property & real-estate sector.

D
EFAULTS & CREDIT RATINGS
On the whole, the behaviour and performance of the RAM ratings pooled over the last decade for the default analysis have
not deviated markedly from our expectations. Juxtaposed against RAM’s 2004 corporate default study, the default rates of
the investment-grade ratings have improved slightly, with delinquency within the speculative grade registering an increase contributed by the
entry of lowly rated defaulters in 2005. A broad comparison vis-à-vis other major studies of a similar nature suggests that RAM's rating
performance has been consistent with international experience, and draws the same conclusions as our earlier studies.
Figure 5: Cumulative average default rates, 1992 – 2004 vs 1992 – 2005

Cumulative Weighted Average 1-Year Cumulative Weighted Average
8.0% 40.0%
2004 Study 2005 Study
2004 Study 2005 Study
6.0% 30.0%
4.0% 20.0%
2.0% 10.0%
- -
1-yr 2-yr 3-yr AAA AA A BBB BB B C
2-Year Cumulative Weighted Average 3-Year Cumulative Weighted Average

40.0% 40.0%
2004 Study 2005 Study 2004 Study 2005 Study
30.0% 30.0%
20.0% 20.0%
10.0% 10.0%
- -
AAA AA A BBB BB B C AAA AA A BBB BB B C
Source: RAM
Notwithstanding the higher default estimates and the problem of a small sample base, 2 things have been observed as
ratings move further down the credit spectrum. Firstly, the risk of default increases as ratings get downgraded.
Conversely, the higher the rating, the less likely it is to default. Secondly, as ratings drop, so do the stability of these
ratings. More importantly, RAM's ratings in supporting credit decisions have been verified by a large body of economic
theory. The consistency of the results over the average 1-, 2-, and 3-year rating transitions for the various static pools
further demonstrates the stability of these findings. The similar default patterns that have emerged across all the static
pools also suggest that RAM's rating standards have been consistent over time; this reinforces RAM’s credibility as a
reliable credit rating agency and provides supports for our credit decisions. Despite the challenges of sample bias,
statistical reviews across all calendar cohorts have consistently shown that there is a clear negative correlation between
ratings and default occurrences, with lower-rated companies having a higher chance of default than higher-rated ones.
Appendices 1 through 4 summarise the complete results for the various pools, and provide strong illustrations for these
relationships.
SFR#049/RAM/06 -7- APRIL 2006

Figure 6: Cumulative average default rates, 1992 – 2005
70%
60%
50%
40%
30%
20%
10%
-
1-yr 2-yr 3-yr 1-yr 2-yr 3-yr
Default rates Default rates, NR adjusted
AAA - - - - - -
AA - - - - - -
A 0.9% 2.0% 3.7% 0.9% 2.3% 4.5%
BBB 1.2% 4.3% 8.0% 1.4% 5.7% 12.5%
BB 7.4% 14.3% 19.2% 8.9% 20.6% 33.6%

B 4.5% 10.8% 14.9% 5.1% 14.5% 23.9%
C 30.6% 33.3% 37.0% 37.9% 50.0% 66.7%
Source: RAM
Gap still exists between risk and reward curves. Over the span of a year, the credit-spread curve2 has generally shifted
upwards, while the default-rate curve (individual ratings from AAA to BBB and speculative-grade collectively) has tapered
down slightly. While there is correlation between RAM’s default experience and the credit curves, the gap between both
the curves continues to be apparent from AA to A ratings and from A to BBB ratings, possibly contributed by a
combination of the following factors:
! RAM’s limited sample size, more so for speculative-grade ratings.
! Relatively unseasoned data, dominated by the experience of the 1997/98 Asian financial crisis.
! Pricing inefficiencies and the small volume of secondary trading.
! Flushed liquidity in the money market, coupled with investors’ selective investment criteria.
Whilst the first 2 limitations can be overcome in time, pricing inefficiencies and the investing culture of domestic investors
are driven by market behaviour which can be seen even in developed countries. As bonds are only traded at selected
yields and tenures, the volume of secondary trading, even at the lower end of the 'A' category, is relatively small. This
therefore results in imperfect pricing and leads to potentially wider spreads than necessary. The advent of an independent
bond-pricing agency in the domestic market – Bondweb Malaysia Sdn Bhd – is seen as a first step towards promoting an
equitable bond-pricing environment for market participants. Over the last year, there has been an upward adjustment in
the credit risk-premium curve (especially A- and BBB-rated papers) whilst the A/BBB spread has widened more than the
BBB/speculative-grade spread as at end-December 2005 (Figure 7). The higher risk premium for BBB-rated papers
coincides with investors’ narrowing risk appetite, as highlighted earlier.
2 Only the risk element on the yield curve is observed, to facilitate comparison with the default-rate curve. The former – known as the credit-spread curve – is calculated by
stripping the risk-free yield curve (MGS) from the yield curve.

Figure 7: RAM’s default curve vs credit-spread curve as at 31 December 2005

Credit spread curve Default rate curve
25.0%
19.7%
20.0%
15.0%
8.0%
10.0%
3.7%
5.0%
-
0.4% -
0.8% 5.9% 8.5%
- 2.4%
AAA AA A BBB BB & <
3-Year
Source: RAM and Bondweb Malaysia Sdn Bhd
Figure 8: Yield curve as at end-December 2004 and 2005
18%
14%
10%
6%
2%
3-yr 5-yr 7-yr 10-yr 3-yr 5-yr 7-yr 10-yr
As at 31-December-2004 As at 31-December-2005
MGS 3.16% 3.82% 4.30% 4.95% 3.52% 3.69% 3.86% 4.14%
AAA 3.59% 4.24% 4.85% 5.63% 3.96% 4.40% 4.80% 5.41%
AA 4.04% 4.75% 5.46% 6.24% 4.37% 4.83% 5.34% 5.97%
A 4.96% 5.71% 6.41% 7.18% 5.94% 6.71% 7.36% 8.12%
BBB 7.61% 8.46% 9.24% 10.15% 9.46% 10.45% 11.37% 12.21%
BB & below 11.91% 13.10% 14.26% 15.34% 12.05% 13.09% 14.11% 15.23%
Source: Bondweb Malaysia Sdn Bhd
Table 5: Average time to default by rating category

Issuers in default (1992 - 2005)
Ratings Average years to eventual default Number of issuer ratings
AA 6.00 2
A 4.68 10
BBB 4.19 25
BB 2.05 26
B 2.15 12
C 1.44 16
Source: RAM
Correlation between ratings and average time to default. Default studies are a study of default magnitude and the
characteristic pattern of credit behaviour at each rating level. Rating paths, however, is an important area of study, as the
credit profile of an issuer will generally exhibit signs of deterioration before its eventual default. The speed and magnitude
of the rating downgrade would really depend on the severity of the deterioration in the credit profile. Simply put, an obligor
SFR#049/RAM/06 -9- APRIL 2006

that has been assigned a stronger rating will demonstrate better resilience against downside risks, compared to a lower-
rated issuer. Accordingly, a higher-rated company would generally take a longer time before eventually defaulting. Table
5, which shows the average years to default from all ratings assigned to the defaulted obligors, demonstrates a correlation
between the rating and the time taken for eventual default. We note, however, that part of the results may be influenced by
the rating histories of the issuers – limited by the maturities of their rated debt securities, which on average comes to 6
years. About 88% of the 42 defaulters had rating histories of 5 years or less.
R
ATING-MIGRATION BEHAVIOUR
Although default rates may be one of the most commonly used tools for pricing risk, the study of ratings and defaults has
broader applications beyond this singular task. For investors, credit professionals or risk managers, how a rating behaves
over time is also another important consideration. For example, investors may be restricted to holding only bonds with high credit quality.
Given that constraint, their priority would lie in ascertaining the likelihood of their investments’ ratings being downgraded during their holding
period. Conversely, investors may want to arbitrage on expectations of a rating upgrade, to generate profits. Likewise, risk managers need to
manage the overall risks of their portfolios to determine their exposure limits. Although ratings are essentially forward-looking, exogenous risks
or uncertainties beyond the control of the obligors can influence the stability or predictability of ratings. Because of exogenous factors, ratings -
although forward-looking - may change. It is for obvious reasons, therefore, that portfolio managers and investors are interested in not only
default probabilities but also in rating stability and credit behaviour on the way to default, i.e. the transition of ratings from a particular rating
grade to another.
Positive correlation between quality of ratings and stability. By observing rating-transition matrices, we can see how a
rating moves between the various categories from the beginning to the end of the period under study. For instance, the
rating-transition ratios that lie on the diagonal of the matrices track the proportion of rated obligors that have maintained
their ratings over that specific time frame. While exhibiting a lower default probability, investment-grade ratings inversely
demonstrate greater resilience against rating changes – i.e. rating upgrades, downgrades and defaults – compared to
speculative-grade ratings. Once more, RAM’s ratings continue to show a positive correlation in terms of the quality of
ratings vis-à-vis their stability, consistent with international rating agencies although the rates are still not entirely
comparable. In just over a year, AAA-rated issuers had still been rated AAA some 95.8% of the time, while C-rated
obligors had still been rated C around 47.2% of the time. After 3 years, 87.0% of AAA-rated issuers remained at AAA while
only 14.8% of C-rated obligors were reaffirmed at C.
Figure 9: Cumulative weighted-average rating stability, 1992 – 2005
100%
80%
60%
40%
20%
-
AAA AA A BBB BB B C
1-yr 95.83% 90.86% 81.34% 69.96% 58.60% 71.91% 47.22%
2-yr 91.53% 81.99% 64.59% 47.41% 29.06% 49.40% 30.00%
3-yr 86.96% 73.36% 49.66% 30.45% 14.51% 36.49% 14.81%
Source: RAM

Defaults preceded by downgrades. Generally, a rise in the default rate was accompanied by an increase in the level of
downgrades the preceding year (see Figure 10). For instance, the annual default rate stood at 3.33% in 2005; most of the
defaulters had had their credit strength downgraded in 2004, which had reported a higher downgrade ratio of 5.85%.
Again, the annual default rate in 2004 had come up to 1.17% while the downgrade rate in 2003 had been higher at 1.90%.
Table 6: Summary of annual rating changes

Issuers as Downgrades/
Year Upgrades Downgrades* Defaults Withdrawn Changes# Reaffirmed
at 1 January upgrades
1992 2 - - - - - 100.00% n/a
1993 11 - 9.09% - - 9.09% 90.91% n/a
1994 47 2.13% 4.26% - - 6.39% 93.61% 2.00
1995 90 4.44% 3.33% - - 7.77% 92.23% 0.75
1996 147 2.04% 4.08% - 2.72% 8.84% 91.16% 2.00
1997 178 3.37% 15.17% 0.56% 2.25% 21.35% 78.65% 4.50
1998 183 - 34.43% 8.74% 4.92% 48.09% 51.91% n/a
1999 159 3.77% 7.55% 2.52% 18.24% 32.08% 67.92% 2.00
2000 170 7.65% 7.06% 2.94% 14.71% 32.36% 67.64% 0.92
2001 175 4.00% 1.14% 2.86% 17.14% 25.14% 74.86% 0.29
2002 156 6.41% 4.49% - 12.82% 23.72% 76.28% 0.70
2003 158 3.80% 1.90% 1.90% 5.70% 13.30% 86.70% 0.50
2004 171 1.17% 5.85% 1.17% 7.02% 15.21% 84.79% 5.00
2005 180 5.00% 0.56% 3.33% 11.67% 20.56% 79.44% 0.11
Weighted
n/m 3.67% 8.16% 2.30% 8.92% 23.05% 76.95% 1.74
average
Source: RAM
* Excludes downgrades to D, shown separately in the default column.
# Changes = Upgrades + Downgrades + Defaults + Withdrawn
n/a = not applicable

n/m = not meaningful
Figure 10: Downgrades vs defaults (2000 – 2005)
8.0%
7.06%
Downgrades Defaults
5.85%
6.0%
4.49%
4.0%
2001: 2.94%
1.90% 2005: 3.33%

2003: 1.90%
2.0% 1.14%
2004: 1.17%
0.0% 2002: 0.00%

2000 2001 2002 2003 2004
Source: RAM
Closing gap in fundamentals. Transition matrices, besides being simple in their interpretation, also represent a concise
description of the general behaviour of credits across different time horizons. As Figure 10 shows, RAM's rating actions
have been broadly consistent with the dynamic changes taking place at the macroeconomic level: the number of rating
downgrades far outpaced upgrades between mid-1997 and early 1999, reflecting the continued decline in credit quality
during the downturn. This further reinforces the strong correlation between high default frequencies and lower credit
ratings. In our previous study, we had highlighted the divergent gap between credit quality and economic fundamentals, as
represented by RAM’s rating drift (indicator of the general direction of credit quality) and the Industrial Production Index
(“IPI”). Although it is acknowledged that RAM’s universe of ratings does not perfectly mirror the diverse Malaysian
SFR#049/RAM/06 - 11 - APRIL 2006

economy, it nonetheless provides a reasonable proxy for broader economic trends; with the reversal of general credit
trends in 2005, the observed gap between credit quality and economic fundamentals has also narrowed.
Figure 11: RAM’s rating drift vs economic indicators
GDP growth RAM's net downgrades and defaults IPI growth

30%
20%
10%
0%
-10% 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
-20%
-30%
-40%
-50%
Source: RAM and BNM Monthly Statistics
Strong sectoral-based rating behaviour observed in 2005. While there were net rating upgrades in 2005, i.e. a reversal
of the credit trend observed in 2004, the credit improvements were largely sector-specific. As a proportion of all the rating
actions in 2005, the banking sector contributed almost all of the rating upgrades – a testimony to the further improvement
in the sector’s credit fundamentals – prompted by financial institutions’ earlier efforts to reduce exposure to chunky
corporate loans and refocus on retail lending. Following the various post-crisis mergers, local banks have emerged with
stronger capitalisation positions, better asset quality and risk management, and more robust earning profiles and are
gearing up for imminent liberalisation. Such sustained progress has been observed in HSBC Bank Malaysia Berhad,
Standard Chartered Bank Berhad, AmMerchant Bank Berhad, Affin Bank Berhad and Affin Holdings Berhad. Meanwhile,
the rating upgrades for development banks – Sabah Development Bank Berhad and Bank Pembangunan Malaysia
Berhad – had been prompted by RAM’s decision to give greater weight to the respective roles of the Sabah and Selangor
state governments.
Meanwhile, rating volatility generally eased for other rated corporates although the business environment remained
challenging in 2005, with most of the rating downgrades already having occurred in 2004. By and large, all corporates
within the different sectors of RAM’s rating universe remained largely unchanged. Issuers in the infrastructure & utilities
sector demonstrated some improvement in their credit profiles while the industrial-products sector exhibited some
deterioration in their risk profiles, largely driven by a more globally competitive environment. There was only 1 downgrade
between rating categories, i.e. BSA International Berhad, from A3 to BBB1. The company had expanded its business
operations in China and Germany, which had in turn led to a higher-than-anticipated debt level vis-à-vis its working capital
and capital expenditure, compounded by a keenly competitive business environment. With escalating consumer and
resource prices against a background of rising interest rates, credit prospects for Malaysian rated corporates remain
sensitive to any adverse or sudden changes in the macroeconomic environment this year – especially if they are unable to
rein in costs or misgauge the timing of global market prospects. In an era of globalisation, these challenges have a bearing
on how temporary or permanent such effects will have on their credit risk profiles.

M
EASURING RATING PERFORMANCE – THE LORENZ CURVE
For the first time since RAM began monitoring ratings performance and tracking corporate defaults, we have now
provided an account of our rating performance using the Gini coefficient – a quantitative indicator used to measure the
historical ability of ratings to predict defaults. To measure ratings performance, or rather the accuracy of ratings, the cumulative share of
issuers by rating is plotted against the cumulative share of defaulters in a Lorenz curve, to provide a visual representation of the accuracy of
the rank ordering. The cumulative results for the period 1992 to 2005 for the one-year transition is shown in Figure 12. For example, 26.2% of
defaults had been rated C a year before and the C-rated issuers (including non-defaulters) collectively accounted for 2.0% of the total issuers.
This cumulative percentage of defaults leapt to 73.8% as a result of speculative-grade issuers (BB and lower), while the cumulative
representation of speculative issuers remained in the teens at 18.6%. As such, the Lorenz curve spiked up steeply at the lower end of the
rating scale, before flattening out at the higher-rating categories. If the rank ordering of ratings had little predictive value, the cumulative share
of defaulting corporate entities and the cumulative share of all entities would be nearly the same, i.e. the unbiased line.
Figure 12: Cumulative share of rated issuers and defaults over 1-year time horizon
Lorenz curve Unbiased line
Cumulative Cumulative proportion
Ratings
AA AAA proportion of issuers of defaults
100% A
BBB C 2.0% 26.2%
Cumulative % of defaults
80% B 6.8% 35.7%

BB
60% BB 18.6% 73.8%
BBB 45.2% 88.1%
40% B A 76.3% 100.0%
C
20% AA 96.1% 100.0%
0% AAA 100.0% 100.0%
0% 20% 40% 60% 80% 100%

Cumulative % of issuers
Source: RAM
Based on the area above the unbiased line occupied by the Lorenz curve, we can measure the relative predictive power of
ratings – the wider the area, the better the accuracy, and the higher the Gini coefficient. The Gini coefficient is highest at
100%, signifying absolute accuracy. Conversely, 0% indicates no predictive power. At the extreme, anything under the
unbiased line implies an ineffective predictive power. RAM’s long-run (1992 - 2005) one-year cumulative weighted-
average Gini coefficient stands at 66.9%.
Improving predictive power of RAM ratings. Although the long-run annual Gini coefficient of 66.9% for RAM ratings is
still undermined by the combined effects of the Asian economic crisis and RAM’s relatively short rating history, it has been
on an increasing trend (1992-1998: 62.6%). This indicates the improving predictive power of RAM’s ratings as a reliable
measure of default risk. With a measured pace of economic growth and ratings stability, the Gini coefficient is envisaged
to continue trending upwards.
SFR#049/RAM/06 - 13 - APRIL 2006

APPENDIX 1: CUMULATIVE WEIGHTED-AVERAGE RATING TRANSITIONS, 1992 – 2005
End-of-Year Rating (1-year transition)

AAA 95.83% 1.39% - - - - - - 2.78%
Beginning-of-Year Rating
AA 1.39% 90.86% 3.32% 1.39% - - 0.28% - 2.77%

A - 2.99% 81.34% 7.75% 0.35% 0.35% - 0.88% 6.34%
BBB 0.21% 0.41% 4.32% 69.96% 9.05% 1.23% 1.03% 1.23% 12.55%
BB - - 0.47% 6.51% 58.60% 6.98% 3.26% 7.44% 16.74%
B - - - - 5.62% 71.91% 5.62% 4.49% 12.36%
C - - 2.78% - - - 47.22% 30.56% 19.44%
Inv-grade 5.04% 23.40% 33.29% 26.16% 3.09% 0.54% 0.40% 0.74% 7.33%
NI-grade - - 0.59% 4.12% 38.53% 23.24% 8.53% 9.12% 15.88%

AAA 91.53% 3.39% - - - - - - 5.08%
AA 2.57% 81.99% 5.79% 3.22% - - - - 6.43%

A - 5.03% 64.59% 13.48% 1.81% 1.01% 0.20% 2.01% 11.87%
BBB 0.43% 0.43% 6.68% 47.41% 13.36% 1.51% 1.94% 4.31% 23.92%
BB - - 1.48% 8.87% 29.06% 11.33% 4.43% 14.29% 30.54%
B - - - - 8.43% 49.40% 6.02% 10.84% 25.30%
C - - 3.33% - - - 30.00% 33.33% 33.33%
Inv-grade 4.81% 21.34% 27.80% 22.31% 5.33% 0.90% 0.75% 2.25% 14.50%
NI-grade - - 1.27% 5.70% 20.89% 20.25% 7.28% 15.19% 29.43%

AAA 86.96% 6.52% - - - - - - 6.52%
AA 4.25% 73.36% 8.49% 4.25% - - - - 9.65%

A - 6.64% 49.66% 16.70% 3.66% 1.14% 0.46% 3.66% 18.08%
BBB 0.68% 0.45% 7.50% 30.45% 13.41% 2.05% 1.36% 7.95% 36.14%
BB - - 1.55% 5.70% 14.51% 11.92% 4.15% 19.17% 43.01%
B - - - - 5.41% 36.49% 5.41% 14.86% 37.84%
C - 3.70% - - - - 14.81% 37.04% 44.44%
Inv-grade 4.57% 18.95% 23.01% 18.44% 6.35% 1.18% 0.68% 4.31% 22.50%
NI-grade - 0.34% 1.02% 3.74% 10.88% 17.01% 5.44% 19.73% 41.84%

APPENDIX 2: CUMULATIVE WEIGHTED-AVERAGE RATING TRANSITIONS, NR-ADJUSTED, 1992 – 2005

AAA 98.57% 1.43% - - - - - - -
AA 1.42% 93.45% 3.42% 1.42% - - 0.28% - -

A - 3.20% 86.84% 8.27% 0.38% 0.38% - 0.94% -
BBB 0.24% 0.47% 4.94% 80.00% 10.35% 1.41% 1.18% 1.41% -
BB - - 0.56% 7.82% 70.39% 8.38% 3.91% 8.94% -
B - - - - 6.41% 82.05% 6.41% 5.13% -
C - - 3.45% - - - 58.62% 37.93% -
Inv-grade 5.44% 25.25% 35.92% 28.23% 3.34% 0.58% 0.44% 0.80% -
NI-grade - - 0.70% 4.90% 45.80% 27.62% 10.14% 10.84% -

AAA 96.43% 3.57% - - - - - - -
AA 2.75% 87.63% 6.19% 3.44% - - - - -

A - 5.71% 73.29% 15.30% 2.05% 1.14% 0.23% 2.28% -
BBB 0.57% 0.57% 8.78% 62.32% 17.56% 1.98% 2.55% 5.67% -
BB - - 2.13% 12.77% 41.84% 16.31% 6.38% 20.57% -
B - - - - 11.29% 66.13% 8.06% 14.52% -
C - - 5.00% - - - 45.00% 50.00% -
Inv-grade 5.62% 24.96% 32.51% 26.10% 6.24% 1.05% 0.88% 2.64% -
NI-grade - - 1.79% 8.07% 29.60% 28.70% 10.31% 21.52% -

AAA 93.02% 6.98% - - - - - - -
AA 4.70% 81.20% 9.40% 4.70% - - - - -

A - 8.10% 60.61% 20.39% 4.47% 1.40% 0.56% 4.47% -
BBB 1.07% 0.71% 11.74% 47.69% 21.00% 3.20% 2.14% 12.46% -
BB - - 2.73% 10.00% 25.45% 20.91% 7.27% 33.64% -
B - - - - 8.70% 58.70% 8.70% 23.91% -
C - 6.67% - - - - 26.67% 66.67% -
Inv-grade 5.90% 24.45% 29.69% 23.80% 8.19% 1.53% 0.87% 5.57% -
NI-grade - 0.58% 1.75% 6.43% 18.71% 29.24% 9.36% 33.92% -
SFR#049/RAM/06 - 15 - APRIL 2006

2005 Corporate Bond Default & Rating Transition Study (1992 – 2005)
APPENDIX 3: 14 STATIC POOLS’ ANNUAL RATING TRANSITIONS

1992 static pool 1993 static pool
! 1-year transition ! 1-year transition
1992 AAA AA A BBB BB B C D NR 1993 AAA AA A BBB BB B C D NR
AAA AAA
AA 100% AA 100%
A 100% A 50% 50%
BBB BBB 100%
BB BB
B B
C C
Inv-grade 50% 50% Inv-grade 36% 9% 55%
NI-grade NI-grade
AAA AAA
AA 100% AA 75% 25%
A 100% A 50% 50%
BBB BBB 80% 20%
BB BB
B B
C C
Inv-grade 50% 50% Inv-grade 27% 18% 45% 9%
NI-grade NI-grade
AAA AAA
AA 100% AA 75% 25%
A 100% A 50% 50%
BBB BBB 60% 40%
BB BB
B B
C C
NI-grade NI-grade


AAA 100% AAA 100%
AA 88% 13% AA 100%
A 100% A 3% 94% 3%
BBB 96% 4% BBB 94% 6%
BB 25% 75% BB 14% 29% 57%
B B 100%
C C
Inv-grade 2% 16% 28% 51% 2% Inv-grade 2% 17%35% 43% 2%
NI-grade 25% 75% NI-grade 13% 25% 50% 13%
AAA 100% AAA 100%
AA 88% 13% AA 100%
A 9% 82% 9% A 3% 84% 10% 3%
BBB 87% 13% BBB 3% 89% 8%
BB 25% 75% BB 14% 14% 29% 14% 29%
B B 100%
C C
Inv-grade 2% 19%23% 49% 7% Inv-grade 2% 17%33% 43% 4% 1%
NI-grade 25% 75% NI-grade 13% 13% 25% 13% 13% 25%
AAA 100% AAA 100%
AA 88% 13% AA 85% 8% 8%
A 73% 18% 9% A 16% 58% 19% 6%
BBB 83% 13% 4% BBB 6% 67% 28%
BB 25% 50% 25% BB 14% 14% 29% 14% 29%
B B 100%
C C
Inv-grade 2% 16% 21% 49% 7% 2% 2% Inv-grade 2% 20% 26% 38% 12% 2%
NI-grade 25% 50% 25% NI-grade 13% 13% 38% 13% 25%
SFR#049/RAM/06 - 17 - APRIL 2006


AAA 100% AAA 100%
AA 90% 5% 5% AA 88% 8% 4%
A 2% 92% 4% 2% A 6% 76% 13% 5%
BBB 2% 93% 4% 2% BBB 2% 77% 20% 2%
BB 6% 81% 6% 6% BB 5% 80% 15%
B 100% B 100%
C C 50% 50%
Inv-grade 3% 16% 36% 41% 2% 1% 2% Inv-grade 3% 18% 33% 36% 8% 1% 2%
NI-grade 6% 72% 11% 6% 6% NI-grade 4% 67% 21% 4% 4%
AAA 100% AAA 75% 25%
AA 76% 10% 5% 10% AA 69% 15% 12% 4%
A 10% 67% 18% 4% A 2% 44% 30% 8% 5% 3% 8%
BBB 4% 71% 22% 2% 2% BBB 38% 31% 7% 8% 11% 5%
BB 13% 63% 13% 6% 6% BB 20% 25% 15% 35% 5%
B 100% B 100%
C C 50% 50%
Inv-grade 3% 16% 29% 38% 9% 1% 4% Inv-grade 2% 13% 21% 29% 16% 5% 3% 6% 6%
NI-grade 11% 56% 22% 6% 6% NI-grade 17% 29% 13% 33% 8%
AAA 75% 25% AAA 75% 25%
AA 62% 14% 10% 14% AA 65% 19% 12% 4%
A 2% 39% 33% 10% 6% 4% 6% A 33% 29% 8% 3% 6% 21%
BBB 2% 33% 33% 5% 7% 13% 7% BBB 2% 21% 18% 3% 3% 15% 38%
BB 25% 31% 31% 13% BB 15% 30% 10% 35% 10%
B 100% B 100%
C C 50% 50%
Inv-grade 2% 12% 18% 28% 18% 5% 3% 7% 8% Inv-grade 2% 12% 18% 22% 10% 3% 1% 8% 24%
NI-grade 22% 39% 28% 11% NI-grade 13% 33% 8% 33% 13%


AAA 75% 25% AAA 100%
AA 70% 22% 7% AA 90% 10%
A 53% 33% 4% 2% 4% 5% A 74% 14% 3% 3% 6%
BBB 45% 27% 10% 3% 6% 8% BBB 6% 58% 4% 31%
BB 38% 10% 17% 31% 3% BB 7% 60% 7% 27%
B 80% 20% B 7% 71% 7% 14%
C 100% C 50% 25% 25%
Inv-grade 2% 14% 24% 32% 13% 5% 1% 4% 5% Inv-grade 3% 18% 27% 33% 2% 1% 1% 16%
NI-grade 31% 20% 17% 29% 3% NI-grade 4% 37% 23% 8% 6% 23%
AAA 75% 25% AAA 100%
AA 63% 22% 15% AA 5% 76% 10% 10%
A 40% 27% 4% 4% 5% 20% A 3% 60% 14% 3% 6% 14%
BBB 2% 27% 23% 5% 2% 10% 32% BBB 15% 38% 4% 2% 42%
BB 3% 17% 14% 7% 34% 24% BB 17% 17% 13% 3% 7% 43%
B 80% 20% B 29% 29% 21% 21%
C 100% C 13% 38% 50%
Inv-grade 2% 12% 20% 24% 11% 3% 1% 6% 21% Inv-grade 4% 16% 26% 23% 3% 1% 2% 25%
NI-grade 3% 14% 23% 9% 31% 20% NI-grade 10% 17% 15% 4% 15% 38%
AAA 75% 25% AAA 100%
AA 4% 52% 22% 15% 7% AA 5% 76% 5% 5% 10%
A 2% 36% 20% 7% 2% 7% 25% A 6% 49% 14% 3% 6% 23%
BBB 3% 23% 6% 5% 16% 47% BBB 13% 25% 4% 4% 54%
BB 3% 14% 7% 7% 38% 31% BB 7% 7% 3% 7% 77%
B 60% 20% 20% B 14% 14% 36% 36%
C 100% C 13% 38% 50%
Inv-grade 3% 11% 19% 20% 5% 2% 1% 9% 30% Inv-grade 4% 17% 22% 17% 3% 4% 34%
NI-grade 3% 11% 14% 6% 34% 31% NI-grade 4% 4% 8% 4% 19% 62%
SFR#049/RAM/06 - 19 - APRIL 2006


AAA 83% 17% AAA 100%
AA 4% 83% 4% 9% AA 97% 3%
A 3% 87% 3% 3% 5% A 2% 84% 2% 2% 10%
BBB 8% 69% 4% 2% 17% BBB 2% 7% 64% 2% 25%
BB 9% 44% 15% 6% 26% BB 4% 50% 4% 8% 35%
B 25% 50% 6% 13% 6% B 69% 8% 23%
C 25% 25% 50% C 25% 50% 25%
Inv-grade 5% 17% 34% 29% 2% 1% 1% 11% Inv-grade 5% 26% 33% 22% 2% 13%
NI-grade 6% 35% 24% 4% 9% 22% NI-grade 2% 2% 30% 23% 7% 5% 30%
AAA 83% 17% AAA 100%
AA 4% 83% 4% 9% AA 6% 85% 9%
A 5% 72% 5% 5% 13% A 10% 69% 6% 2% 12%
BBB 13% 44% 2% 2% 40% BBB 2% 2% 9% 34% 5% 2% 45%
BB 6% 18% 15% 3% 9% 50% BB 4% 31% 8% 4% 8% 46%
B 19% 31% 19% 31% B 38% 8% 54%
C 25% 25% 50% C 25% 25% 50%
Inv-grade 5% 18% 30% 20% 1% 3% 23% Inv-grade 7% 26%29% 14% 2% 2% 22%
NI-grade 4% 17% 19% 4% 13% 44% NI-grade 2% 2% 19% 16% 7% 5% 49%
AAA 83% 17% AAA 100%
AA 13% 65% 4% 17% AA 6% 82% 12%
A 13% 59% 8% 5% 15% A 10% 57% 10% 2% 20%
BBB 2% 15% 21% 4% 2% 2% 54% BBB 2% 2% 14% 20% 5% 5% 52%
BB 9% 6% 12% 6% 9% 59% BB 4% 23% 8% 15% 50%
B 13% 13% 19% 56% B 38% 8% 54%
C 25% 75% C 25% 25% 50%
Inv-grade 8% 17% 27% 11% 2% 1% 3% 32% Inv-grade 7% 25% 26% 11% 2% 2% 28%
NI-grade 6% 7% 11% 4% 13% 59% NI-grade 2% 2% 14% 16% 5% 9% 51%


AAA 100% AAA 100%
AA 5% 89% 5% AA 98% 2%
A 8% 83% 4% 4% A 2% 83% 6% 9%
BBB 3% 6% 58% 9% 24% BBB 16% 72% 4% 8%
BB 7% 60% 7% 7% 20% BB 8% 75% 8% 8%
B 67% 33% B 100%
C 75% 25% C 75% 25%
Inv-grade 7% 30% 34% 17% 2% 10% Inv-grade 8% 33% 37% 16% 1% 6%
NI-grade 3% 29% 29% 13% 26% NI-grade 4% 36% 36% 12% 8% 4%
AAA 100% AAA 90% 10%
AA 5% 87% 8% AA 86% 5% 9%
A 10% 67% 8% 15% A 4% 78% 6% 2% 11%
BBB 3% 15% 39% 6% 6% 30% BBB 12% 44% 8% 4% 4% 28%
BB 13% 47% 7% 7% 27% BB 8% 58% 17% 17%
B 67% 33% B 56% 33% 11%
C 75% 25% C 50% 50%
Inv-grade 7% 30% 30% 14% 2% 2% 16% Inv-grade 7% 30%35% 11% 2% 1% 1% 14%
NI-grade 6% 23% 29% 10% 3% 29% NI-grade 4% 28% 20% 20% 16% 12%
AAA 83% 17% AAA 90% 10%
AA 5% 79% 3% 13% AA 5% 84% 2% 9%
A 13% 63% 6% 2% 17% A 6% 61% 4% 2% 28%
BBB 3% 9% 27% 12% 6% 42% BBB 4% 20% 12% 4% 8% 52%
BB 7% 33% 7% 13% 40% BB 8% 33% 17% 42%
B 42% 17% 42% B 56% 11% 22% 11%
C 50% 25% 25% C 100%
Inv-grade 6% 29% 27% 10% 4% 2% 22% Inv-grade 8% 31% 29% 4% 1% 2% 25%
NI-grade 3% 16% 16% 16% 10% 39% NI-grade 4% 16% 20% 4% 32% 24%
SFR#049/RAM/06 - 21 - APRIL 2006


AAA 92% 8% AAA 100%
AA 90% 4% 6% AA 4% 96%
A 2% 93% 2% 3% A 4% 79% 1% 15%
BBB 4% 63% 13% 4% 17% BBB 5% 9% 55% 32%
BB 80% 10% 10% BB 8% 58% 8% 25%
B 56% 33% 11% B 100%
C 67% 33% C 17% 83%
Inv-grade 8% 32% 40% 11% 2% 1% 7% Inv-grade 10% 33% 37% 8% 12%
NI-grade 36% 23% 23% 9% 9% NI-grade 4% 29% 25% 4% 25% 13%
! 2-year transition
2004 AAA AA A BBB BB B C D NR
AAA 92% 8%
AA 4% 88% 2% 6%
A 3% 75% 2% 20%
BBB 4% 8% 29% 4% 8% 46%
BB 10% 50% 10% 30%
B 56% 11% 22% 11%
C 100%
Inv-grade 9% 33% 32% 5% 1% 1% 18%
NI-grade 5% 23% 23% 5% 27% 18%

APPENDIX 4: 14 STATIC POOLS’ ANNUAL RATING TRANSITIONS, NR ADJUSTED

AAA AAA
AA 100% AA 100%
A 100% A 50% 50%
BBB BBB 100%
BB BB
B B
C C
Inv-grade 50% 50% Inv-grade 36% 9% 55%
NI-grade NI-grade
AAA AAA
AA 100% AA 75% 25%
A 100% A 50% 50%
BBB BBB 80% 20%
BB BB
B B
C C
NI-grade NI-grade
AAA AAA
AA 100% AA 75% 25%
A 100% A 50% 50%
BBB BBB 60% 40%
BB BB
B B
C C
NI-grade NI-grade
SFR#049/RAM/06 - 23 - APRIL 2006

2005 Corporate Default & Rating Transition Study
AAA 100% AAA 100%
AA 88% 13% AA 100%
A 100% A 3% 94% 3%
BBB 96% 4% BBB 94% 6%
BB 25% 75% BB 14% 29% 57%
B B 100%
C C
Inv-grade 2% 16% 28% 51% 2% Inv-grade 2% 17%35% 43% 2%
NI-grade 25% 75% NI-grade 13% 25% 50% 13%
AAA 100% AAA 100%
AA 88% 13% AA 100%
A 9% 82% 9% A 3% 84% 10% 3%
BBB 87% 13% BBB 3% 89% 8%
BB 25% 75% BB 20% 20% 40% 20%
B B 100%
C C
Inv-grade 2% 19%23% 49% 7% Inv-grade 2% 17%33% 43% 4% 1%
NI-grade 25% 75% NI-grade 17% 17% 33% 17% 17%
AAA 100% AAA 100%
AA 88% 13% AA 85% 8% 8%
A 73% 18% 9% A 17% 62% 21%
BBB 86% 14% BBB 6% 67% 28%
BB 33% 67% BB 20% 20% 40% 20%
B B 100%
C C
Inv-grade 2% 17% 21% 50% 7% 2% Inv-grade 3% 20% 26% 39% 13%
NI-grade 33% 67% NI-grade 17% 17% 50% 17%


AAA 100% AAA 100%
AA 95% 5% AA 88% 8% 4%
A 2% 94% 4% A 7% 80% 13%
BBB 2% 94% 4% BBB 2% 77% 20% 2%
BB 7% 87% 7% BB 5% 80% 15%
B 100% B 100%
C C 100%
NI-grade 6% 76% 12% 6% NI-grade 4% 70% 22% 4%
AAA 100% AAA 75% 25%
AA 84% 11% 5% AA 72% 16% 12%
A 11% 70% 19% A 2% 48% 33% 9% 5% 3%
BBB 4% 72% 22% 2% BBB 40% 33% 7% 9% 12%
BB 13% 67% 13% 7% BB 21% 26% 16% 37%
B 100% B 100%
C C 100%
Inv-grade 3% 17% 30% 40% 10% 1% Inv-grade 2% 14% 22% 31% 17% 5% 3% 6%
NI-grade 12% 59% 24% 6% NI-grade 18% 32% 14% 36%
AAA 75% 25% AAA 75% 25%
AA 72% 17% 11% AA 68% 20% 12%
A 2% 41% 35% 11% 7% 4% A 42% 36% 10% 4% 8%
BBB 2% 35% 35% 6% 8% 14% BBB 3% 34% 29% 5% 5% 24%
BB 29% 36% 36% BB 17% 33% 11% 39%
B 100% B 100%
C C 100%
Inv-grade 3% 13% 19% 30% 19% 5% 3% 8% Inv-grade 3% 15% 23% 29% 14% 3% 2% 11%
NI-grade 25% 44% 31% NI-grade 14% 38% 10% 38%
SFR#049/RAM/06 - 25 - APRIL 2006

AAA 75% 25% AAA 100%
AA 70% 22% 7% AA 90% 10%
A 56% 35% 4% 2% 4% A 79% 15% 3% 3%
BBB 49% 30% 11% 4% 7% BBB 9% 85% 6%
BB 39% 11% 18% 32% BB 9% 82% 9%
B 80% 20% B 8% 83% 8%
C 100% C 67% 33%
NI-grade 32% 21% 18% 29% NI-grade 5% 48% 30% 10% 8%
AAA 75% 25% AAA 100%
AA 63% 22% 15% AA 5% 84% 11%
A 50% 34% 5% 5% 7% A 3% 70% 17% 3% 7%
BBB 2% 40% 33% 7% 2% 14% BBB 25% 64% 7% 4%
BB 5% 23% 18% 9% 45% BB 29% 29% 24% 6% 12%
B 80% 20% B 36% 36% 27%
C 100% C 25% 75%
NI-grade 4% 18% 29% 11% 39% NI-grade 16% 28% 25% 6% 25%
AAA 75% 25% AAA 100%
AA 4% 56% 24% 16% AA 5% 84% 5% 5%
A 2% 49% 27% 10% 2% 10% A 7% 63% 19% 4% 7%
BBB 6% 42% 12% 9% 30% BBB 27% 55% 9% 9%
BB 5% 20% 10% 10% 55% BB 29% 29% 14% 29%
B 75% 25% B 22% 22% 56%
C C 25% 75%
Inv-grade 4% 16% 27% 28% 8% 3% 1% 14% Inv-grade 6% 25% 34% 25% 4% 6%
NI-grade 4% 17% 21% 8% 50% NI-grade 10% 10% 20% 10% 50%


AAA 100% AAA 100%
AA 5% 90% 5% AA 100%
A 3% 92% 3% 3% A 2% 93% 2% 2%
BBB 10% 83% 5% 3% BBB 3% 9% 85% 3%
BB 12% 60% 20% 8% BB 6% 76% 6% 12%
B 27% 53% 7% 13% B 90% 10%
C 50% 50% C 33% 67%
Inv-grade 6% 19% 38% 33% 2% 1% 1% Inv-grade 5% 30% 38% 25% 2%
NI-grade 7% 45% 31% 5% 12% NI-grade 3% 3% 43% 33% 10% 7%
AAA 100% AAA 100%
AA 5% 90% 5% AA 7% 93%
A 6% 82% 6% 6% A 12% 79% 7% 2%
BBB 21% 72% 3% 3% BBB 4% 4% 17% 63% 8% 4%
BB 12% 35% 29% 6% 18% BB 7% 57% 14% 7% 14%
B 27% 45% 27% B 83% 17%
C 50% 50% C 50% 50%
NI-grade 7% 30% 33% 7% 23% NI-grade 5% 5% 36% 32% 14% 9%
AAA 100% AAA 100%
AA 16% 79% 5% AA 7% 93%
A 15% 70% 9% 6% A 13% 72% 13% 3%
BBB 5% 32% 45% 9% 5% 5% BBB 5% 5% 29% 43% 10% 10%
BB 21% 14% 29% 14% 21% BB 8% 46% 15% 31%
B 29% 29% 43% B 83% 17%
C 100% C 50% 50%
Inv-grade 11% 25% 39% 16% 3% 1% 4% Inv-grade 9% 35% 36% 15% 2% 3%
NI-grade 14% 18% 27% 9% 32% NI-grade 5% 5% 29% 33% 10% 19%
SFR#049/RAM/06 - 27 - APRIL 2006

AAA 100% AAA 100%
AA 6% 94% AA 100%
A 9% 87% 4% A 2% 92% 6%
BBB 4% 8% 76% 12% BBB 17% 78% 4%
BB 8% 75% 8% 8% BB 9% 82% 9%
B 100% B 100%
C 100% C 75% 25%
Inv-grade 8% 34% 37% 19% 3% Inv-grade 8% 35% 39% 17% 1%
NI-grade 4% 39% 39% 17% NI-grade 4% 38% 38% 13% 8%
AAA 100% AAA 100%
AA 6% 94% AA 95% 5%
A 12% 78% 10% A 4% 88% 6% 2%
BBB 4% 22% 57% 9% 9% BBB 17% 61% 11% 6% 6%
BB 18% 64% 9% 9% BB 10% 70% 20%
B 100% B 63% 38%
C 100% C 50% 50%
Inv-grade 9% 36% 35% 16% 2% 2% Inv-grade 8% 35%41% 12% 3% 1% 1%
NI-grade 9% 32% 41% 14% 5% NI-grade 5% 32% 23% 23% 18%
AAA 100% AAA 100%
AA 6% 91% 3% AA 5% 93% 3%
A 15% 75% 8% 3% A 8% 85% 5% 3%
BBB 5% 16% 47% 21% 11% BBB 8% 42% 25% 8% 17%
BB 11% 56% 11% 22% BB 14% 57% 29%
B 71% 29% B 63% 13% 25%
C 67% 33% C 100%
NI-grade 5% 26% 26% 26% 16% NI-grade 5% 21% 26% 5% 42%


AAA 100% AAA 100%
AA 96% 4% AA 4% 96%
A 2% 97% 2% A 5% 93% 2%
BBB 5% 75% 15% 5% BBB 7% 13% 80%
BB 89% 11% BB 11% 78% 11%
B 63% 38% B 100%
C 67% 33% C 17% 83%
Inv-grade 9% 35% 42% 12% 2% 1% Inv-grade 11% 38% 42% 9%
NI-grade 40% 25% 25% 10% NI-grade 5% 33% 29% 5% 29%
! 2-year transition
2004 AAA AA A BBB BB B C D NR
AAA 100%
AA 4% 94% 2%
A 4% 94% 2%
BBB 8% 15% 54% 8% 15%
BB 14% 71% 14%
B 63% 13% 25%
C 100%
Inv-grade 11% 40% 39% 7% 1% 2%
NI-grade 6% 28% 28% 6% 33%
SFR#049/RAM/06 - 29 - APRIL 2006

APPENDIX 5: ISSUERS IN DEFAULT (PUBLISHED RATINGS)
Initial
Issue amount Date first Date next-to-last Next-to-last- Date
Company Instrument description assigned
(RM million) rated rating assigned rating defaulted
ratings
2003
Country Heights Holdings Bhd Redeemable Secured Bonds 200.00 11-Mar-96 A3 30-Apr-02 B2 16-Jan-03
Moccis Trading Sdn Bhd Al-Bai' Bithaman Ajil Islamic Debt Securities 50.00 11-May-01 BBB3 25-Apr-03 C1 03-Jun-03
250.00
2005
Comsa Farms Berhad Redeemable Unsecured Bonds 50.00 04-Sep-00 A3 28-Jan-05 B1 08-Nov-05
Inter-Heritage (M) Sdn Bhd Non-Convertible Redeemable Secured Bonds 252.78 12-Jul-00 C1 03-Mar-05 C3 06-Sep-05
Karambunai Corp Berhad Zero Coupon Redeemable Secured Bonds 420.00 04-Oct-00 BB3(s) 27-Apr-04 C1(s) 12-Apr-05
Pasaraya Hiong Kong Sdn Bhd Commercial Paper/Medium-Term Notes Programme 120.00 25-Jun-02 BBB3/P3 17-Dec-04 C3 03-Feb-05
PPH Resourts (Penang) Sdn Bhd Commercial Paper/Medium-Term Notes Programme 50.00 16-Apr-02 A2(bg)/P1(bg) 28-Oct-04 A2(bg)/P1(bg) 14-Jun-05
Sutera Harbour Resorts Sdn Bhd * Tranche 1 Redeemable Secured Bonds 60.00 28-Feb-02 A2 (s) 08-Aug-03 BBB2 (s) 01-Mar-05
Tranche 2 Redeemable Secured Bonds 90.00 28-Feb-02 A3 (s) 08-Aug-03 BBB3 (s) 01-Mar-05
992.78
* Not included in RAM’s 2005 Corporate Default Study

COUNTRY HEIGHTS HOLDINGS BERHAD (“Country Heights”)

- RM250 Million 3% Redeemable Unsecured Bonds (1996/2001)*
- RM200 Million 6% Redeemable Unsecured Bonds (2001/2005)
* Maturity extended with lower par amount and higher coupon
Analyst: Rafiz Azuan Abdullah – (603) 7628 1792
Incorporated in 1984 and listed in 1994, Country Heights had pioneered the country-style living concept in Malaysia with the launch of its
development in Kajang, which had subsequently become a premier residential property project. The success of this development had
encouraged the Group to take on more developments such as Subang Hi-Tech Industrial Park, College Heights Garden Resort, Mines
bungalow lots and country villas. However, the Group became more aggressive in its acquisition strategy from 1997 onwards. Apart from
acquiring parcels of land for future development, the Group had also invested heavily to expand its ownership of exhibition centres in 1998.
This had been further compounded by £39 million of additional debt to subscribe for a 68%-stake in the London International Centre. Apart
from its increased leverage, the mismatch in funding requirements had also been a key concern as Country Heights had been using short-
term financing to fund long-term investments, i.e. the MINES exhibition. The Group’s inability to secure the necessary funding from its rights
issue had caused it to defer the original maturity date by 6 months, to 31 December 2001. Despite being granted another extension up to 31
December 2005, the Group had been unable to trim its debts due to its weak cashflow. Pursuant to Country Heights’ announcement on 2
January 2003 that it was unable to repay the RM50 million principal due, RAM downgraded the rating on its debt securities, from B2 to D, on
16 January 2003.
MOCCIS TRADING SDN BHD (“MTSB”)

- RM50 million Bai Bithaman Ajil Islamic Debts Securities (“BaIDS”) (1999/2004)
Analyst: Meor Amri Meor Ayob – (603) 7628 1024
MTSB’s primary business is the sale of consumer goods (ranging from jewellery and electrical goods to household goods), on a deferred-
payment basis according to the Murabahah principle, to employees of the public sector, including civil servants as well as corporatised and
privatised Government-owned companies. RAM downgraded MTSB's rating to C1 on 25 April 2003, following the Company's persistent
inability to abide by the terms stipulated in the legal documents (original and supplemental agreements for the BaIDS). At that time, although it
could have been construed as an event of default under the Trust Deed, we had noted that neither the trustee nor ABRAR Discount (the sole
bondholder) had called on the default. The BaIDS had been due for redemption on 30 June 2003 under the supplemental agreement. RAM’s
decision to downgrade the rating to D in June 2003 had been made pursuant to the serving of the notice of default on MTSB, in relation to the
BaIDS.
PASARAYA HIONG KONG SDN BHD (“PHK”)

- RM120 million Commercial Papers/Medium-Term Notes (“CP/MTN”) (2002/2008)
Analyst: Hafiza Abdul Rashid – (603) 7628 1793
PHK is the owner-operator of 5 supermarket and departmental-store outlets in the Klang Valley. The respective long- and short-term ratings of
BBB3 and P3 of PHK’s CP/MTN were downgraded to C3 and NP on 17 December 2004, with a negative outlook. The immediate downgrade
had reflected the sudden and unexpected closure of all PHK’s supermarket and departmental-store outlets in Pudu Plaza, Pearl Point,
Paragon Point, Pandan Kapital and Kompleks Sungai Buloh. The cessation of its operations had effectively left the Company with virtually no
source of operating cashflow to support its financial obligations on the RM120 million CP/MTN. The subsequent rating downgrade to D on 3
February 2005 reflected the failure of PHK to repay the principal amount of RM100 million due on its CP, following the sudden and
unexpected closure of all 5 of its supermarket and departmental-store outlets in December 2004. Among the securities pledged for the
CP/MTN, and which are now enforceable, the noteholders currently have a third-party charge on 2 commercial lots and a 4-storey shopping
complex in Bandar Baru Sungai Buloh, Selangor, belonging to Tat Seng Fatt Holding Sdn Bhd, the holding company of PHK. Meanwhile, the
SFR#049/RAM/06 - 31 - APRIL 2006

Company’s ex-managing director, Mr Yap Kim Seng was sentenced to jail for 2 years on the account of providing false information to the
Securities Commission.
PPH RESORTS (PENANG) SDN BHD (“PPH”)

- RM50 million Bank-Guaranteed Commercial Papers/Medium-Term Notes (“CP/MTN”) (2002/2009)
Analyst: Karin Koh – (603) 7628 1774
PPH is principally involved in the development of Pearl Island Country Resort (“Pearl Island”) in Bayan Lepas, Penang. This development
comprises residential, commercial and leisure properties. PPH’s weak corporate credit rating since the initial rating exercise reflects its fragile
business fundamentals as well as poor financial performance. Operationally, property launches at Pearl Island had been limited after the
completion of Phase 1 in 1996; although the low-cost flats and double-storey terrace houses under Phase 2 have been fully taken up, the
bungalows/bungalow lots had met with poor response. The construction of its bungalows/bungalow lots had also been disrupted by its weak
financials and tight cashflow. Meanwhile, PPH remained under-capitalised, with accumulated losses well above its paid-up capital. The
Company defaulted on its debt issue on 10 May 2005 when it failed to repay the first RM5 million on its CP/MTN that fell due on the same
date. As such, the entire RM50 million CP/MTN had become immediately due and repayable. The obligations on the CP/MTN, being
unconditionally and irrevocably guaranteed by a consortium of financial institutions, had been subsequently settled by the guarantors.
KARAMBUNAI CORP BERHAD (“Karambunai”)

- RM420 million Zero-Coupon Redeemable Secured Bonds (“Bonds”) (2001/2005)
Karambunai (previously known as FACB Resorts Berhad) is principally involved in the management and operations of its 5-star resort, Nexus
Resort Karambunai (“NRK”), in Kota Kinabalu, Sabah, and the development of a mixed township, Bukit Unggul Eco-Media City (“BUEMC”), in
Bangi, Selangor. The initial B2 rating on its Bonds in October 2000 had reflected the poor performance of its property-development division
due to the industry slowdown, which had also led to difficulties in securing financing for its property-development activities. This had impinged
upon the Group’s cashflow-generating ability while its debt burden had remained heavy due to its investment in NRK and its property-
development activities. Its development plans had also been put on hold pending the completion of the proposed restructuring exercise, which
had been persistently delayed for a few years. As a result, this had affected the Group’s financial position and had simultaneously caused
operating losses while tightening its cashflow. On 12 April 2005, the Bonds were downgraded from C1(s), with a negative rating outlook, to D.
The rating action had been premised on the variation to extend the original repayment date of the Bonds, which had fallen due on 11 April
2005. Notwithstanding that, its sole bondholder, Abrar Discounts Berhad (“Abrar”), had also consented to extend the maturity date of the
Bonds to 30 November 2005 in order to implement a mutually agreeable settlement plan. Under the agreed settlement plan between Abrar
and Karambunai, the repayment of the Bonds will be settled via a combination of cash and the issuance of Redeemable Secured Loan Stocks
to Abrar.
INTER HERITAGE (M) SDN BHD (“IHSB”)

- RM252.784 million Non-Convertible Redeemable Secured Bonds (“Bonds”) (2000/2005)
IHSB had been formed to undertake the development of an integrated complex comprising the 5-star Sheraton Imperial Kuala Lumpur
(“SIKL”) as well as office and retail space, under Faber Imperial Court (“FIC”). The integrated complex had been completed in November 1997
and SIKL was officially opened in February 1998. IHSB’s weak C1 rating since the initial rating exercise in July 2000 reflected its poor
operational and financial performance. Having been opened during the financial crisis, SIKL had been plagued by low occupancy rates, which
had in turn affected its top line. Its heavy financing costs, which had stemmed from liabilities incurred to fund the construction of the

development, had further impinged upon its bottom line. Although the repayment of the Bonds hinged upon the successful disposal of SIKL
and FIC, the market values of both establishments had been less than the redemption value of the Bonds. RAM had subsequently
downgraded IHSB’s rating from C1 to C3, while maintaining the negative rating outlook to reflect the very high likelihood that IHSB would
default on the redemption (nominal value plus accreted value) of the Bonds upon maturity, given its limited cash-generating capacity relative
to its debts. On the maturity date of the Bonds (30 August 2005), IHSB reached a settlement agreement with the Bondholders, to redeem the
Bonds at a mutually agreed amount. However, we note that the settlement had been at an amount agreed upon between IHSB and the
bondholders, and had not represented the full redemption value of the Bonds, which should have been approximately RM430 million.
COMSA FARMS BERHAD (“Comsa”)

- RM50 million Redeemable Unsecured Bonds (“Bonds”) (2000/2005)
Analyst: Kevin Lim – (603) 7628 1034
Comsa is involved in poultry farming, feedmilling as well as the importation, wholesale and retail of chilled and frozen poultry products and
foodstuff. In January 2005, Comsa's Bonds were downgraded from BB2 to B1, whilst maintaining its negative rating outlook. The rating had
been placed on a negative outlook in June 2004, to reflect the imminent weakening of the Group's credit fundamentals as it sank deeper into
debt to finance its overdue sinking-fund payment. In November 2004, the bondholders granted indulgence to Comsa to defer its sinking-fund
instalments until the completion of the Group’s proposed issuance of its 7% 5-year redeemable convertible secured loan stocks (“RCSLS”), of
between RM150.1 million and RM285.1 million in May/June 2005. Prior to that, Comsa had utilised the cash in the sinking-fund account to
partially redeem RM10 million of the Bonds in July 2004. Notwithstanding the above, the downgrade had been premised on a potentially
weaker balance sheet from additional net debt even if Comsa repaid RM121.6 million of its existing liabilities (including the Bonds) via the
proceeds from its proposed RCSLS issuance. The downgrade had also reflected the additional strain on Comsa’s liquidity position stemming
from the Bonds imminent maturity in November 2005 and the hefty interest expense of RM10.5 million - RM20.0 million per annum on the
RCSLS in comparison to its weak operating cashflow. RAM’s subsequent decision to downgrade the rating to D had been based on Comsa’s
failure to repay the Bonds on their original maturity date of 4 November 2005, despite the fact that Comsa had sought and obtained the
consent of the Bondholders to extend the maturity date of the Bonds to 26 February 2006.
SFR#049/RAM/06 - 33 - APRIL 2006

Analysts Phone
Alfred Chan (603) 7628 1787
Siew Suet Ming (603) 7628 1771
2005 Corporate Bond Default

& Rating Transition Study
This report has been prepared solely for informational purposes. The
information contained within is not intended to be an exhaustive or a
complete coverage of the subject. No statement in this report is to be
construed as a recommendation to buy, hold or sell securities, or to
provide investment advice, as it does not comment on the security's
market price or suitability for any particular investor.
Published by Rating Agency Malaysia Berhad. Reproduction or

transmission in any form is prohibited except by permission from RAM.
 Copyright 2006 by RAM.
Tel: (603) 7628 1000 Fax: (603) 7628 1700

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8 STRUCTURED FINANCE RESEARCH

(Company No. 208095-U) APRIL 2006

2005 Corporate Bond Default &

Appendix 1: Cumulative Weighted-Average Rating Transitions, 1992 – 2005..................................................................................................... 14

IST OF TABLES AND FIGURES

Table 1: Published defaults in 2005

SFR#049/RAM/06 -1- APRIL 2006

70% 87% 87%

Table 2: Malaysia’s real GDP growth by expenditure

APRIL 2006 www.ram.com.my

Figure 3: Outstanding issuers by sector at the beginning of each calendar year

RM million 2001 2002 2003 2004 2005

Source: Bank Negara Malaysia (“BNM”)

SFR#049/RAM/06 -3- APRIL 2006

1 RAM Consultancy Services Sdn Bhd

APRIL 2006 www.ram.com.my

Table 3: 1-year rating-migration behaviour

SFR#049/RAM/06 -5- APRIL 2006

Table 4: Annual default summary (1992 - 2005)

APRIL 2006 www.ram.com.my

Figure 5: Cumulative average default rates, 1992 – 2004 vs 1992 – 2005

2-Year Cumulative Weighted Average 3-Year Cumulative Weighted Average

SFR#049/RAM/06 -7- APRIL 2006

Figure 6: Cumulative average default rates, 1992 – 2005

Default rates Default rates, NR adjusted

A 0.9% 2.0% 3.7% 0.9% 2.3% 4.5%

BBB 1.2% 4.3% 8.0% 1.4% 5.7% 12.5%

BB 7.4% 14.3% 19.2% 8.9% 20.6% 33.6%

C 30.6% 33.3% 37.0% 37.9% 50.0% 66.7%

APRIL 2006 www.ram.com.my

Figure 7: RAM’s default curve vs credit-spread curve as at 31 December 2005

Source: RAM and Bondweb Malaysia Sdn Bhd

Figure 8: Yield curve as at end-December 2004 and 2005

Source: Bondweb Malaysia Sdn Bhd

Table 5: Average time to default by rating category

SFR#049/RAM/06 -9- APRIL 2006

Figure 9: Cumulative weighted-average rating stability, 1992 – 2005

APRIL 2006 www.ram.com.my

Table 6: Summary of annual rating changes

n/a = not applicable

Figure 10: Downgrades vs defaults (2000 – 2005)

1.90% 2005: 3.33%

0.0% 2002: 0.00%

SFR#049/RAM/06 - 11 - APRIL 2006

Figure 11: RAM’s rating drift vs economic indicators

GDP growth RAM's net downgrades and defaults IPI growth

Source: RAM and BNM Monthly Statistics

APRIL 2006 www.ram.com.my

80% B 6.8% 35.7%

0% AAA 100.0% 100.0%

0% 20% 40% 60% 80% 100%

SFR#049/RAM/06 - 13 - APRIL 2006

APPENDIX 1: CUMULATIVE WEIGHTED-AVERAGE RATING TRANSITIONS, 1992 – 2005

End-of-Year Rating (1-year transition)

AA 1.39% 90.86% 3.32% 1.39% - - 0.28% - 2.77%

End-of-Year Rating (2-year transition)

AA 2.57% 81.99% 5.79% 3.22% - - - - 6.43%

End-of-Year Rating (3-year transition)

AA 4.25% 73.36% 8.49% 4.25% - - - - 9.65%

APRIL 2006 www.ram.com.my

APPENDIX 2: CUMULATIVE WEIGHTED-AVERAGE RATING TRANSITIONS, NR-ADJUSTED, 1992 – 2005

End-of-Year Rating (1-year transition)

AA 1.42% 93.45% 3.42% 1.42% - - 0.28% - -

End-of-Year Rating (2-year transition)