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Default Study: 2010 Annual Australia & New Zealand Corporate Default

Study And Rating Transitions

Publication date: 03-May-2011 11:17:11 AEST

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2010 Summary

The Australia and New Zealand rated issuer pool for calendar year 2010 returned a record seven defaults. All had been rated

noninvestment grade prior to default. The default rate, inclusive of short-lived ones, was 3.11%, nearly triple the 1.14% rate of

the global issuer pool.

Six of the seven defaults came from New Zealand's finance company sector, which is still suffering from the long-tailed aftermath

of that country's 2008-2009 economic recession.

Not surprisingly, the negative ratings momentum of the Australia and New Zealand issuer pool continued for the third year in

2010. The downgrade-to-upgrade ratio (excluding defaults) was 1.57x, which is double that of the global pool's 0.73x.

The premise that lower ratings correspond to shorter time to default continues to hold for the Australia and New Zealand issuerpool.

The average cumulative default pattern is similar to the global pool's, with differences explained by the consequences of a small

pool size.

Ratings correlation with default risk level, across different time horizons, continues to be supported by our Gini methodology

findings.

2010 Default Rate Triple Of Global AverageStandard & Poor's Australia and New Zealand rated issuer pool ("ANZ pool") for calendar year 2010 returned a record seven defaults--a

sharp contrast with the trend of one default per year over the preceding four years, 2006-2009 (see chart 1). The troubled New Zealand

finance company sector, affected by the country's economic downturn, was the primary contributor to the higher default ratio. The ANZ

pool's default rate, short-lived defaults excluded (see sidebar for definition), for 2010 was 2.09% (2009: 0.58%) which is double the

1.14% default rate for the global issuer pool (see table 1). Inclusive of short-lived defaults, the ANZ pool's default rate would have been

higher at 3.11%, nearly triple the global default rate.

Short-lived defaults. An issuer that received an initial rating after Jan. 1 of agiven calendar year and then subsequently defaulted

within that same calendar year is categorized as a short-lived default. Because the static-pool methodology used in our annual

calculation of default rates references Jan. 1 of each year as its starting point (for more detail on the methodology, please refer to

Appendix I). Such defaulters are omitted from the static pools. As footnoted later in table 2 and chart 3, there were two such short-lived

defaults in the ANZ pool in 2010. The ANZ pool's default rate, inclusive of short-lived defaults, of 3.11% for 2010 was computed by

adding two issuers initially rated and defaulting in 2010 to both the numerator and denominator of the pool's default rate, short-lived

defaults excluded, of 2.09%.

Chart 1

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Table 1

Summary of Default Rates, 1981-2010

Year Australia and New Zealand defaults (%) Global defaults (%)

1981 0 0.14

1982 0 1.19

1983 0 0.76

1984 0 0.91

1985 0 1.11

1986 0 1.72

1987 0 0.95

1988 0 1.39

1989 17.65 1.741990 9.52 2.74

1991 3.13 3.26

1992 0 1.49

1993 0 0.6

1994 0 0.62

1995 0 1.04

1996 0 0.51

1997 0.7 0.63

1998 0 1.29

1999 0 2.11

2000 0 2.43

2001 2.3 3.74

2002 0.6 3.53

2003 0.66 1.89

2004 0 0.79

2005 0 0.58

2006 0.63 0.45

2007 0.64 0.37

2008 0.59 1.74

2009 0.58 4.04

2010 2.09 1.14

Weighted Average 0.78 1.61

Median 0 1.16

Standard deviation 3.59 1.06

Minimum 0 0.14

Maximum 17.65 4.04

This table compares the net change in rating notch from the first to the last day of each year. All intermediate ratings are disregarded. Source:Standard & Poor's "2010 Annual Global Corporate Default Study and Rating Transitions", published March 30, 2011, and CreditPro.

The ANZ pool's return of a worse-than-global-average default rate in 2010 has to be seen in the context of expected more volatile

performance in default rates and ratings transitions typically associated with small pool sizes. For example, the standard deviation of

default rates for the ANZ pool was 3.59% compared to the global pool's 1.06% (see table 1). The ANZ pool size of 475 issuers

contributes only 3% of the global pool's 14,654 issuers. During the 20 years to 2009 inclusive, the ANZ pool had returned lower annual

default rates than the global pool in three out of every four years on average. The record of lower annual default rates reflects the

higher proportion of investment-grade issuers in the ANZ pool compared to the global pool (see chart 2).

Chart 2


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Table 2

Australia and New Zealand Corporate Default Summary, 1981-2010

Year

Investment-grade*

defaults

Speculative-grade*

defaults

Total

defaults

Investment-grade default

rate (%)

Speculative-grade default

rate (%)

Default rate

(%)

1981 0 0 0 0 0 0

1982 0 0 0 0 0 0

1983 0 0 0 0 0 0

1984 0 0 0 0 0 0

1985 0 0 0 0 0 0

1986 0 0 0 0 0 0

1987 0 0 0 0 0 0

1988 0 0 0 0 0 0

1989 0 3 3 0 50 17.65

1990 0 2 2 0 40 9.52

1991 0 1 1 0 16.67 3.13

1992 0 0 0 0 0 0

1993 0 0 0 0 0 0

1994 0 0 0 0 0 0

1995 0 0 0 0 0 0

1996 0 0 0 0 0 0

1997 0 1 1 0 14.29 0.7

1998 0 0 0 0 0 0

1999 0 0 0 0 0 0

2000 0 0 0 0 0 0

2001 1 3 4 0.63 20 2.3

2002 0 1 1 0 6.67 0.6

2003 1 0 1 0.7 0 0.66

2004 0 0 0 0 0 0

2005 0 0 0 0 0 0

2006 0 1 1 0 6.67 0.63

2007 0 1 1 0 7.14 0.64

2008 1 0 1 0.65 0 0.59

2009 0 1 1 0 5.26 0.58

2010 0 4 5 0 12.9 2.09

*Rating grade is based on the rating on the issuer at the start of the calendar year in which the issuer defaults. Issuers which default within thesame calendar year as they were initially rated (being one each in 1989 and 1995, and two in 2010) not reflected in the table. Includes an issuerno longer rated (NR) at the point of default. Source: Standard & Poor's CreditPro.

A listing of Australia and New Zealand issuers which defaulted in 2010 is given in Table 3.

Table 3

2010 Australia and New Zealand Corporate Defaults

Company name

Reason for

default* Country Industry

Debt

amount

(mil. $)

Default

date

Next-to-

last rating

Date of next-

to-last rating

First

rating

Date of

first rating

Griffin Coal MiningCompany Pty Ltd. (The)

Admin Australia Energy andnaturalresources

475 Jan. 3,2010

NR Nov. 5, 2009 BB- Oct. 27,2006

Geneva Finance Ltd. Dist.Ex. NewZealand

Financialinstitutions

30.3 Mar.29,2010

CC Oct. 22, 2010 CCC Apr. 29,2008

Vision Securities Ltd. Rec. NewZealand


0 Mar.31,

2010

B Feb. 21, 2010 B Feb. 21,2010

Confidentially rated Rec. NewZealand


0 May 5,2010

CCC Nov. 29, 2009 CCC Nov. 29,2009

Allied NationwideFinance Ltd.

Missed NewZealand


9.6 Aug.20,2010

CC Aug. 11, 2010 BB- Mar. 1,2010

South CanterburyFinance Ltd.

Rec. NewZealand


302.4 Aug.30,2010

CC Aug. 20, 2010 BBB- Dec. 17,2006

Equitable Mortgages Ltd. Missed NewZealand


0 Nov.30,2010

C Nov. 26, 2010 BB+ Nov. 29,2007

*Admin--Administration. Dist. Ex. --Distressed exchange. Missed--Missed interest or principal payment. Rec.--Receivership. Sources: Standard &Poor's Global Fixed Income Research and Standard & Poor's CreditPro.

Default synopses

Six of the seven defaults of the ANZ pool arose from New Zealand's finance company sector, which is continuing to suffer the long-

tailed aftermath of that country's 2008-2009 economic recession. The recession, measured on a real GDP basis, lasted for six

consecutive quarters to second calendar quarter 2009 inclusive.

Descriptions of the defaults of non-confidentially rated issuers of the ANZ pool, extracted from our "2010 Default Synopses" article,


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published March 30, 2011, are given below:

The Griffin Coal Mining Co. Pty Ltd.

On Jan. 4, 2010, the Griffin Coal Mining group of companies (Griffin) went into administration after having missed debt payments. On

Nov. 6, 2009, Standard & Poor's had withdrawn its corporate credit rating on The Griffin Coal Mining Co. Pty Ltd. and its rating on the

company's 144A notes maturing in December 2016. This followed a written request from the company to withdraw the ratings. We also

withdrew the ratings because of a lack of sufficient publicly available information on the privately owned Griffin and associated

companies and because our access to Griffin's financial information (through a secure Web site) became restricted. Prior to the rating

withdrawal, the 'B-' rating on Griffin reflected our view of the West Australian company's weak liquidity, limited financial disclosure

because of its status as a private company, limited mine and geographic diversity, ongoing capital-expenditure requirements, changing

customer mix, and reliance on the growth plans of key industrial customers.

Geneva Finance Ltd.

On March 29, 2010, we revised our long-term rating on New Zealand-based finance company Geneva Finance Ltd. (Geneva) to 'SD'

from 'CC'. This rating action followed the company's announcement that it reached an agreement with its investors and BOS

International, under which all classes of investment maturities are to be extended by about four years. Under the revised agreement, the

debenture and subordinated note investors opted to defer approximately 30% of their currently scheduled principal repayments.

However, Geneva is expected to continue to pay interest each month at the individual investor contracted interest rate. On March 30,

2010, we raised the long-term rating on Geneva to 'CCC' from 'SD' because we expected the company's marginal liquidity position to

enable it to meet its immediate principal and interest repayment in full and on time under its new arrangement.

Vision Securities Ltd.

On April 1, 2010, we revised our long-term local-currency issuer credit rating on New Zealand-based finance company Vision Securities

Ltd. (VSL) to 'D' from 'B'. This rating action followed the announcement that the company's trustee, Perpetual Trust, had appointed a

receiver at the request of the company's directors. The directors' decision stems from the failed settlement of a mortgaged property onMarch 26, 2010. The settlement was expected to generate proceeds of about NZ$6.75 million for VSL. We believe the failure of this

loan settlement calls into question the company's ability to meet its liquidity needs on an ongoing basis.

Allied Nationwide Finance Ltd.

On Aug. 20, 2010, Standard & Poor's revised its local-currency issuer credit rating on New Zealand finance company Allied Nationwide

Finance Ltd. (ANF) to 'D' from 'CC'. The rating action followed ANF's announcement that it had not met the debenture payments that

were due on Aug. 19, 2010. Further, the company announced that its directors had requested the appointment of receivers. Standard &

Poor's believed that the capital and funding initiatives the company was negotiating were not executed in sufficient time for ANF to meet

its liquidity needs, including the remedy of its trust deed breach. Standard & Poor's also believed that ANF would complete an initial

transaction on Aug. 20, 2010, that could have resulted in the payment of debenture maturities. We further expected that the company

would request that New Zealand Guardian Trust (ANF's trustee company) consent to this transaction and provide a short extension to

the original deadline. However, on Aug. 11, 2010, Standard & Poor's lowered its issuer credit ratings on ANF to 'CC/C' from 'B/B',

reflecting a material weakening of ANF's liquidity and cash position beyond what we anticipated when we had lowered the long-term

issuer credit rating to 'B' and placed it on CreditWatch negative on June 4, 2010. On Oct. 21, 2010, Allied Farmers Ltd. announced the

repayment of its term loan facility with Westpac New Zealand and reorganization of its lending arrangements with its failed subsidiary,

Allied Nationwide Finance.

South Canterbury Finance Ltd.

On Aug. 31, 2010, Standard & Poor's revised its local-currency issuer credit ratings on New Zealand finance company South Canterbury

Finance Ltd. (SCF) to 'D/D' from 'CC/C'. At the same time, we revised the 'CC' rating on SCF's bond issues to 'D'. The rating action

followed the announcement by SCF's trustee, Trustees Executors Ltd., that a receiver had been appointed at the request of SCF's

directors. This was due to SCF's inability to complete a recapitalization and restructuring that would have enabled it to certify with its

trustee that it met various financial covenant requirements under its debenture trust deed for the financial year ended June 30, 2010.

The trustees had granted SCF a trust deed breach waiver, which expired on Aug. 31, 2010. A few weeks prior to the default, on Aug.

20, 2010, Standard & Poor's lowered the long-term issuer credit rating on SCF to 'CC' from 'B-', reflecting a material weakening of the

company's liquidity and cash position. On Sept. 1, 2010, the government granted a bailout of $NZ1.8 billion to cover over 35,000 SCF

depositors. There were talks in early September that SBS BANK, Kiwibank, and CBS Canterbury could pick up a substantial portion ofSouth Canterbury Finance bailout money. On Nov. 19, 2010, Standard & Poor's announced the withdrawal of the 'D/D' counterparty

credit and issue credit ratings on South Canterbury Finance Ltd. (SCF) at the request of the company.

Equitable Mortgages Ltd.

On Dec. 1, 2010, Standard & Poor's revised its issuer credit ratings on New Zealand-based financial institution Equitable Mortgages Ltd.

(Equitable) to 'D' from 'C'. The rating action reflects Equitable's poor asset quality and its failure to resolve arrears as promptly as

Standard & Poor's anticipated. This undermined earnings performance and put some pressure on liquidity. However, the ratings

continue to recognize support received and expected from the Spencer family as sole owners. On Nov. 26, 2010, Standard & Poor's

lowered its issuer credit ratings on Equitable to 'C' from 'BB', placing it on CreditWatch with negative implications. The lowered ratings

and the CreditWatch action came after the company's announcement that it decided to appoint a receiver. This decision stems from the

view of Equitable's board that the company is no longer a viable business. Although the company has indicated its preference to

execute an orderly wind-down of the group's activities without the appointment of a receiver, such an appointment could not be avoided

because of requirements under the extended Crown Guarantee Scheme, to which the company is a party.

Downgrade Trend Continues In 2010, Higher Than Global Pool'sThe negative ratings momentum of Standard & Poor's Australia and New Zealand issuer pool continued, albeit slightly more moderated,

in 2010. The downgrade-to-upgrade ratio was 1.57x (2009: 1.75x) (see chart 3 and table 4) which is double the global pool's 0.73x.

(Note: upgrade and downgrade ratios in chart 3 and table 4 are based on rating notches rather than on rating categories as in the 2009


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report).

Chart 3

Table 4

Australia and New Zealand Summary of Annual Rating Changes, 1981-2010

Year

Issuers as of

Jan. 1

Upgrades

(%)

Downgrades

(%)

Defaults

(%)

Withdrawn

ratings (%)

Changed

ratings (%)

Unchanged

ratings (%)

Downgrade/

upgrade ratio

1981 1 0 0 0 0 0 100.00 N.M.

1982 1 0 100 0 0 100 0.00 N.M.

1983 1 0 0 0 0 0 100.00 N.M.

1984 1 0 0 0 0 0 100.00 N.M.

1985 3 0 33.33 0 0 33.33 66.67 N.M.

1986 5 0 40 0 0 40 60.00 N.M.

1987 5 0 0 0 0 0 100.00 N.M.

1988 9 0 22.22 0 11.11 33.33 66.67 N.M.

1989 17 0 29.41 17.65 0 47.06 52.94 N.M.

1990 21 4.76 4.76 9.52 0 19.04 80.96 1.00

1991 32 6.25 18.75 3.13 0 28.13 71.87 3.00

1992 61 13.11 8.2 0 1.64 22.95 77.05 0.63

1993 63 4.76 1.59 0 19.05 25.4 74.60 0.33

1994 54 7.41 7.41 0 1.85 16.67 83.33 1.00

1995 67 2.99 11.94 0 8.96 23.89 76.11 3.99

1996 120 10 7.5 0 6.67 24.17 75.83 0.75

1997 143 3.5 8.39 0.7 5.59 18.18 81.82 2.40

1998 154 1.3 16.23 0 11.04 28.57 71.43 12.48

1999 170 2.94 11.76 0 12.35 27.05 72.95 4.00

2000 167 11.38 11.38 0 6.59 29.35 70.65 1.00

2001 174 5.17 9.77 2.3 11.49 28.73 71.27 1.89

2002 168 2.98 11.9 0.6 16.07 31.55 68.45 3.99

2003 152 5.92 10.53 0.66 10.53 27.64 72.36 1.78

2004 152 5.92 3.29 0 10.53 19.74 80.26 0.56

2005 154 6.49 9.74 0 7.79 24.02 75.98 1.50

2006 158 6.33 4.43 0.63 13.29 24.68 75.32 0.70

2007 157 12.1 4.46 0.64 7.01 24.21 75.79 0.37

2008 169 4.14 11.24 0.59 4.14 20.11 79.89 2.71

2009 173 4.62 8.09 0.58 4.62 17.91 82.09 1.75

2010 191 3.66 5.76 2.09 4.71 16.22 83.78 1.57

Weightedaverage

5.69 9.19 0.77 8.49 24.13 75.87 2.26

Median 3.9 9.07 0 5.15 24.19 75.81 1.57

Standarddeviation

3.86 18.96 3.59 5.58 18.03 18.03 2.63

Minimum 0 0 0 0 0 0.00 0.33

Maximum 13.11 100 17.65 19.05 100 100.00 12.48

*This table compares the net change in ratings from the first to the last day of each year. All intermediate ratings are disregarded. Excludesrevisions to 'D', shown separately in the default column. ? Excludes an issuer no longer rated (NR) at the point of default. N.M.Not meaningful.Source: Standard & Poor's CreditPro.

Average Rating Transitions More Volatile Than Global


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Analysis of the average of one-year rating transitions for the period 1981-2010 indicates that volatility in the ANZ pool is higher for most

rating categories than for the global, U.S. or Europe pools (see table 5) (for transitions methodology, see Appendix I).

Table 5

Corporate Average One-Year Transition Rates, 1981-2010 (%)

From/To AAA AA A BBB BB B CCC/C D N.R.

Australia and New Zealand

AAA 78.38 12.16 1.35 0 0 0 0 0 8.11

AA 1.17 86.6 5.36 0.17 0 0 0 0 6.7

A 0 2.57 85.27 4.24 0 0 0 0.11 7.81

BBB 0 0.22 2.06 86.57 2.38 0.33 0.11 0.22 8.13

BB 0 0 0 6.72 67.16 5.97 1.49 2.24 16.42B 0 0 0 0 5.56 67.78 5.55 4.44 16.67

CCC/C 0 0 0 0 0 3.45 41.38 37.93 17.24

Global

AAA 87.91 8.08 0.54 0.05 0.08 0.03 0.05 0 3.25

AA 0.57 86.48 8.17 0.53 0.06 0.08 0.02 0.02 4.06

A 0.04 1.9 87.29 5.37 0.38 0.17 0.02 0.08 4.75

BBB 0.01 0.13 3.7 84.55 3.98 0.66 0.15 0.25 6.56

BB 0.02 0.04 0.17 5.22 75.75 7.3 0.76 0.95 9.79

B 0 0.04 0.14 0.23 5.48 73.23 4.47 4.7 11.71

CCC/C 0 0 0.19 0.28 0.83 13 43.82 27.39 14.48

U.S.

AAA 88.39 7.51 0.57 0.04 0.12 0.04 0.04 0 3.28

AA 0.59 86.31 7.99 0.64 0.09 0.13 0.04 0.04 4.16A 0.05 1.82 87.14 5.67 0.48 0.2 0.03 0.09 4.52

BBB 0.01 0.14 3.65 84.65 4.34 0.76 0.13 0.27 6.04

BB 0.03 0.06 0.22 5.21 75.62 8.2 0.71 1 8.96

B 0 0.05 0.16 0.24 4.98 74.37 4.69 4.77 10.74

CCC/C 0 0 0.25 0.37 0.92 11.57 44.92 28.31 13.66

Europe

AAA 85.03 9.11 0.65 0.22 0 0 0.22 0 4.77

AA 0.28 84.87 10.4 0.44 0 0 0 0 4.01

A 0.02 2.3 86.97 5.25 0.18 0.02 0 0.06 5.21

BBB 0 0.13 4.75 83.01 3.54 0.46 0.16 0.13 7.82

BB 0 0 0.18 4.82 70.61 8.16 0.44 0.7 15.09

B 0 0 0.12 0.35 6.81 64.78 4.97 4.04 18.94

CCC/C 0 0 0 0 0 13.79 25.29 37.93 22.99Source: Standard & Poor's "2010 Annual Global Corporate Default Study and Rating Transitions", published March 30, 2011, and CreditPro.

For most rating categories, there is a slightly higher rate of transition for Australian and New Zealand issuers than for those in the other

pools. This is not surprising given the smaller number of issuers and shorter study period of the ANZ pool. Statistically, a smaller

number of observations (475 issuers over period of study) and shorter time period may potentially contribute to a sample mean distinct

from that for the global population (14,654 issuers over period of study).

More particularly, the average transition rates in the 'AAA' and 'BB' ratings categories for the ANZ pool are about nine percentage points

higher compared to the global pool is explained as follows:

In the 'AAA' rating category, the transition rate for Australia and New Zealand issuers was 21.62% (i.e. 100% less the

unchanged 78.38%) compared with the global pool's 12.09% (i.e. 100% less 87.91%). This observation is explained by several

government-related issuers in Australia being privatized in the 1980s and 1990s.

In the 'BB' rating category, the transition rate was 32.84% (i.e. 100% less 67.16%) compared with the global pool's 24.25% (i.e.

100% less 75.75%). This occurrence is explained by the apparent reluctance of domestic corporates to have speculative grade

ratings, which has led, in part, to the higher withdrawal rates (to 'NR', i.e. not rated) of ratings at 16.42% for the 'BB' category of

the ANZ pool compared with the lower ratios for the global, U.S. and Europe pools.

Lower Ratings, Shorter Time To DefaultThe general premise that the lower the original rating on an obligor, the shorter the period it usually takes to default is also valid for the

ANZ pool as it is for the global pool. For example, for the ANZ defaulters, the average period to default for issuers that were originally

rated in the 'BBB' and 'BB' categories were 5.2 years and 2.9 years, respectively, from initial rating (or from Dec. 31, 1980, the starting

date of the study) (see table 6). For the global pool of defaulters, the average period to default for issuers that were originally rated in

the 'BBB' and 'BB' categories were 7.8 years and 6.4 years, respectively, from initial rating (or from Dec. 31, 1980).

Table 6

Time to Default For Corporate Defaulters (1981-2010)

Global Australia and New Zealand

Original rating category Defaults

Average

years

from

original

rating* Defaults Average years from original rating

AAA 7 16.4 N/A N/A


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AA 27 15 N/A N/A

A 85 12.5 1 6.8

BBB 181 7.8 3 5.2

BB 505 6.4 6 2.9

B 1,090 4.7 8 4.8

CCC/C 120 2.7 8 1.3

Total 2,015 5.8 26 3.4

*Or Dec. 31, 1980, whichever is later. N/ANot applicable. Source: Standard & Poor's "2010 Annual Global Corporate Default Study and RatingTransitions", published March 30, 2011, and CreditPro.

The relatively short average number of years for the 'BB' category for the ANZ pool was contributed in large part by the 2010 defaults of

New Zealand finance companies.

There was a single default in the original rating category of 'A' (see table 6) in the ANZ pool, which was HIH Insurance Ltd. group. HIH

was originally rated 'A-' in 1994 and was most recently rated 'B' in March 2001. The company that had under-reported losses and used

reinsurance contracts to inflate profits, which helped present a healthier financial picture of the company than had actually been the

case.

Medium-Term Default Pattern Similar to Global Pool'sThe average cumulative default pattern for the ANZ pool shows similar behavior over the medium term to the global pool (see table 7).

Table 7

Average Cumulative Default Rates, 1981-2010 (%)

Time Horizon (years)

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Australia and New Zealand

AAA 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

AA 0 0 0 0.19 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4

A 0.11 0.23 0.36 0.36 0.36 0.51 0.67 0.67 0.67 0.67 0.67 0.67 0.67 0.67 0.67

BBB 0.22 0.45 0.71 1 1.17 1.35 1.56 1.8 2.07 2.4 2.83 2.83 2.83 2.83 2.83

BB 2.24 3.94 5.77 8.74 9.83 9.83 9.83 9.83 9.83 9.83 9.83 9.83 9.83 9.83 9.83

B 4.44 11.99 16.11 19.06 20.61 20.61 22.42 26.3 30.51 34.85 34.85 34.85 34.85 34.85 34.85

CCC 36 40.27 49.46 49.46 49.46 49.46 49.46 49.46 49.46 49.46 49.46 49.46 49.46 49.46 49.46

CC 50 50 50 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

C 50 100 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

Investment grade 0.12 0.25 0.39 0.54 0.64 0.76 0.88 0.95 1.03 1.11 1.21 1.21 1.21 1.21 1.21

Speculative grade 7.11 11.58 14.96 17.57 18.7 18.7 19.39 20.95 22.68 24.74 24.74 24.74 24.74 24.74 24.74

All rated 0.77 1.27 1.69 2.05 2.25 2.35 2.53 2.72 2.92 3.16 3.25 3.25 3.25 3.25 3.25

Global

AAA 0 0.03 0.14 0.26 0.38 0.5 0.56 0.66 0.72 0.79 0.83 0.87 0.91 1 1.09

AA 0.02 0.07 0.15 0.26 0.37 0.49 0.58 0.67 0.74 0.82 0.9 0.97 1.04 1.1 1.15

A 0.08 0.19 0.33 0.5 0.68 0.89 1.15 1.37 1.6 1.84 2.05 2.23 2.4 2.55 2.77

BBB 0.25 0.7 1.19 1.8 2.43 3.05 3.59 4.14 4.68 5.22 5.78 6.24 6.72 7.21 7.71

BB 0.95 2.83 5.03 7.14 9.04 10.87 12.48 13.97 15.35 16.54 17.52 18.39 19.14 19.78 20.52

B 4.7 10.4 15.22 18.98 21.76 23.99 25.82 27.32 28.64 29.94 31.09 32.02 32.89 33.7 34.54

CCC/CC 27.39 36.79 42.12 45.21 47.64 48.72 49.72 50.61 51.88 52.88 53.71 54.64 55.67 56.55 56.55

Investment grade 0.13 0.34 0.59 0.89 1.21 1.53 1.83 2.12 2.39 2.68 2.94 3.16 3.37 3.59 3.83

Speculative grade 4.36 8.53 12.17 15.13 17.48 19.45 21.13 22.59 23.93 25.16 26.21 27.1 27.93 28.66 29.4

All rated 1.61 3.19 4.6 5.8 6.79 7.64 8.38 9.02 9.62 10.18 10.67 11.08 11.47 11.82 12.2

N/ANot applicable. Source: Standard & Poor's "2010 Annual Global Corporate Default Study and Rating Transitions", published March 30, 2011,and CreditPro.

The small pool size for the ANZ pool has meant that the low number of issuers in each of the rating categories in the ANZ pool hasmeant the absence or occurrence of a few defaults in each category can lead to their average cumulative default rates being

significantly different than those of the global pool. That said, the longer-term average cumulative default rates of total speculative-

grade for the ANZ pool remains below those of the global pool.

Correlation with Default Risk Continues To HoldA quantitative analysis of the performance of Standard & Poor's ratings shows that Australia and New Zealand corporate ratings

continue to correlate with the level of default risk across several time horizons. To measure ratings performance, we plot the cumulative

share of issuers by rating against the cumulative share of defaulters in a Lorenz curve to visually render the accuracy of rank ordering

(see charts 4 to 6) (for definition and methodology, refer to Appendix II).

Chart 4


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Chart 5

Chart 6

The Australia and New Zealand average one-year transition to default has a one-year Gini coefficient of 87.81%; three-year, 85.26%

and five-year, 79.13% (see table 8). The observation that these numbers are higher than the global equivalents of 82.06%; 74.98%; and

71.95% respectively is partly explained by the fact that investment-grade issuers form a lower proportion of the global pool than of the

ANZ pool (see chart 2).

As expected, the Gini coefficients decline over time because longer time horizons allow greater opportunity for credit degradation

among higher-rated entities.

For example, in the one-year Australia and New Zealand Lorenz curve, 86.4% (global: 94.9%) of defaults occurred in the

speculative-grade category ('BB+' or lower), while ratings of 'BB+' or lower constituted only 9.6% (global: 34.9%) of all corporate


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ratings (see chart 4).

Looking at the five-year Lorenz curve, speculative-grade issuers contributed to 72.7% (global: 87.9%) of defaulters while

constituting only 8.5% (global: 33.2%) of the entire sample (see chart 6).

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.

Appendix I: Default Methodology And DefinitionsThis long-term corporate default and rating transition study uses the CreditPro database of long-term local currency issuer credit

ratings. Most exhibits contained in this study are the direct output of the CreditPro interface, while others are based off of manual

manipulation of the underlying database. The portions of tables that present summary descriptive statistics, including the standard

deviations in the various transition and cumulative default rate tables, were the result of end-user calculations.

An issuer credit rating reflects Standard & Poor's forward-looking opinion of a company's overall capacity to pay its obligations (that is,

its fundamental creditworthiness). This opinion focuses on the obligor's ability and willingness to meet its financial commitments on a

timely basis, and it generally indicates the likelihood of default regarding all financial obligations of the firm. It is not necessary for a

company to have rated debt to be assigned an issuer credit rating.

Although the rating on a company's very senior forms of secured debt, particularly ones with strong covenants, could occasionally be

higher than the issuer credit rating on the company, specific issues are typically rated as high as or lower than these ratings, depending

on their relative priority within the company's debt structure. If they are speculative grade, issuer credit ratings are generally two notches

higher than subordinated debt ratings. Otherwise, they are generally one notch higher. Therefore, although a 'BB+' issuer credit rating is

generally paired with a 'BB-' subordinated debt rating, a 'AA' issuer credit rating usually corresponds to a 'AA-' subordinated rating.

Standard & Poor's ongoing enhancement of the CreditPro database used to generate this study could lead to outcomes that differ to

some degree from those reported in previous studies. However, this poses no continuity problem because each study reports statistics

back to Dec. 31, 1980. Therefore, each annual default study is self-contained and effectively supersedes all previous versions.

Issuers included in this study

The study analyzes the rating histories of 475 companies that were rated by Standard & Poor's as of Dec. 31, 1980, or that were first

rated between that date and Dec. 31, 2010. These companies include industrials, utilities, financial institutions, and insurance

companies around the world with long-term local currency ratings. The analysis excludes public information ("pi") ratings and ratings

based on the guarantee of another company. Structured finance vehicles, public-sector issuers, and sovereign issuers are the subject of

separate default and transition studies and are also excluded from this study.

Subsidiaries with debt that is fully guaranteed by a parent or with default risk that is considered identical to that of their parents were

excluded. The latter are companies with obligations that are not legally guaranteed by a parent but that have operating or financing

activities that are so inextricably entwined with those of the parent that it would be impossible to imagine the default of one and not the

other. At times, however, some of these subsidiaries might not yet have been covered by a parent's guarantee, or the relationship that

combines the default risk of parent and subsidiary might have come to an end or might not have begun. Such subsidiaries were

included for the period during which they carried a distinct and separate risk of default.

Definition of default

A default is recorded on the first occurrence of a payment default on any financial obligation, rated or unrated, other than a financial

obligation subject to a bona fide commercial dispute; an exception occurs when an interest payment missed on the due date is made

within the grace period. Preferred stock is not considered a financial obligation; thus, a missed preferred stock dividend is not normally

equated with default. Distressed exchanges, on the other hand, are considered defaults whenever the debt holders are coerced into

accepting substitute instruments with lower coupons, longer maturities, or any other diminished financial terms.

Issue ratings are usually revised to 'D' following a company's default on the corresponding obligation. In addition, 'SD' is used whenever

Standard & Poor's believes that an obligor that has selectively defaulted on a specific issue or class of obligations will continue to meet

its payment obligations on other issues or classes of obligations in a timely matter. 'R' indicates that an obligor is under regulatory

supervision owing to its financial condition. This does not necessarily indicate a default event, but the regulator might have the power to

favor one class of obligations over others, or pay some obligations and not others. 'D', 'SD', and 'R' issuer ratings are deemed defaultsfor purposes of this study. A default is assumed to take place on the earliest of: the date Standard & Poor's revised the ratings to 'D',

'SD', or 'R'; the date a debt payment was missed; the date a distressed exchange offer was announced; or the date the debtor filed or

was forced into bankruptcy.

Calculations

Static pool methodology. Standard & Poor's conducts its default studies on the basis of groupings called static pools. Static pools are

formed by grouping issuers by rating category at the beginning of each year covered by the study. Each static pool is followed from that

point forward. All companies included in the study are assigned to one or more static pools. When an issuer defaults, that default is

assigned back to all of the static pools to which the issuer belonged.

Standard & Poor's uses the static pool methodology to avoid certain pitfalls in estimating default rates. This is to ensure that default

rates account for rating migration and to allow for default rates to be calculated across multi-period time horizons. Some methods for

calculating default and rating transition rates might charge defaults against only the initial rating on the issuer, ignoring more recent

rating changes that supply more current information. Other methods may calculate default rates using only the most recent year's

default and rating data; this method may yield comparatively low default rates during periods of high rating activity, as they ignore prior

years' default activity.

The pools are static in the sense that their membership remains constant over time. Each static pool can be interpreted as a buy-and-


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hold portfolio. Because errors, if any, are corrected by every new update and because the criteria for inclusion or exclusion of

companies in the default study are subject to minor revisions as time goes by, it is not possible to compare static pools across different

studies. Therefore, every new update revises results back to the same starting date of Dec. 31, 1980, so as to avoid continuity

problems.

Entities that have had ratings withdrawnthat is, revised to N.R.are surveilled with the aim of capturing a potential default. These

companies, as well as those that have defaulted, are excluded from subsequent static pools.

For instance, the 1981 static pool consists of all companies rated as of 12:01 a.m. Jan. 1, 1981. Adding those companies first rated in

1981 to the surviving members of the 1981 static pool forms the 1982 static pool. All rating changes that took place are reflected in the

newly formed 1982 static pool. This same method was used to form static pools for 1983 through 2010. From Jan. 1, 1981, to Dec. 31,

2010, for the global pool a total of 13,269 first-time rated organizations were added to form new static pools, while 2,015 defaulting

companies and 6,732 companies with a last rating that was classified as N.R. were excluded from them.

Consider the following example: An issuer is originally rated 'BB' in mid-1986 and is downgraded to 'B' in 1988. This is followed by a

rating withdrawal (N.R.) in 1990 and a default ('D') in 1993. This hypothetical company would be included in the 1987 and 1988 pools

with the 'BB' rating, which it was rated at the beginning of those years; likewise, it would be included in the 1989 and 1990 pools with

the 'B' rating. It would not be part of the 1986 pool because it was not rated as of the first day of that year, and it would not be included

in any pool after the last day of 1990 because the rating had been withdrawn by then. Yet each of the four pools in which this company

was included (1987-1990) would record its 1993 default at the appropriate time horizon.

Ratings are withdrawn when an entity's entire debt is paid off or when the program or programs rated are terminated and the relevant

debt extinguished. They may also occur as a result of mergers and acquisitions. Others are withdrawn because of a lack of cooperation,

particularly when a company is experiencing financial difficulties and refuses to provide all the information needed to continue

surveillance on the ratings, or at the entity's request.

Default rate calculation. Annual default rates were calculated for each static pool: first in units and later as percentages with respectto the number of issuers in each rating category. Finally, these percentages were combined to obtain cumulative default rates for the 30

years covered by the study.

Issuer-weighted default rates. Averages that appear in this study are calculated based on the number of issuers rather than the

dollar amounts affected by defaults or rating changes. Although dollar amounts provide information about the portion of the market that

is affected by defaults or rating changes, issuer-weighted averages are a more useful measure of the performance of ratings. Many

practitioners utilize statistics from this default study and CreditPro to estimate "probability of default" and "probability of rating

transition." It is important to note that Standard & Poor's ratings do not imply a specific probability of default.

Average cumulative default rate calculation. Cumulative default rates that average the experience of all static pools were derived by

calculating marginal default rates, conditional on survival (survivors being nondefaulters) for each possible time horizon and for each

static pool, weight averaging the conditional marginal default rates, and accumulating the average conditional marginal default rates.

Conditional default rates are calculated by dividing the number of issuers in a static pool that default at a specific time horizon by the

number of issuers that survived (did not default) to that point in time. Weights are based on the number of issuers in each static pool.

Cumulative default rates are one minus the product of the proportion of survivors (nondefaulters).

For instance, the weighted average first-year default rate of the global pool for all speculative-grade rated companies for all 30 pools

was 4.37%, meaning that an average of 95.63% survived one year. Similarly, the second- and third-year conditional marginal averages

were 4.35% for the first 29 pools (95.65% of those companies that did not default in the first year survived the second year) and 3.99%

for the first 28 pools (96.01% of those companies that did not default by the second year survived the third year), respectively.

Multiplying 95.63% by 95.65% results in a 91.47% survival rate to the end of the second year, which is a two-year average cumulative

default rate of 8.53%. Multiplying 91.47% by 96.01% results in an 87.83% survival rate to the end of the third year, which is a three-

year average cumulative default rate of 12.17%.

Time sample

This update limits the reporting of default rates to the 15-year time horizon. However, the data was gathered for 30 years and all

calculations are based on the rating experience of that period. The maturities of most obligations are much shorter than 15 years. In

addition, average default statistics become less reliable at longer time horizons as the sample size becomes smaller and the cyclicalnature of default rates increases its effect on averages.

Default patterns share broad similarities across all static pools, suggesting that Standard & Poor's rating standards have been consistent

over time. Adverse business conditions tend to coincide with default upswings for all pools. Speculative-grade issuers have been hit the

hardest by these upswings, but investment-grade default rates also increase in stressful periods.

Transition analysis

Transition rates compare issuer ratings at the beginning of a time period with ratings at the end of the period. To compute one-year

rating transition rates by rating category, the rating on each entity at the end of a particular year was compared with the rating at the

beginning of the same year. An issuer that remained rated for more than one year was counted as many times as the number of years

it was rated. For instance, an issuer continually rated from the middle of 1984 to the middle of 1991 would appear in the six consecutive

one-year transition matrices from 1985 to 1990. All 1981 static pool members still rated on Dec. 31, 2010, had 30 one-year transitions,

while companies first rated between Jan. 1, 2010, and Dec. 31, 2010, had only one.

Multi-year transitions

Multi-year transitions were also calculated for periods of two up to 20 years. In this case, the rating at the beginning of the multi-year

period was compared with the rating at the end. For example, three-year transition matrices were the result of comparing ratings at the


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beginning of the years 1981-2008 with the ratings at the end of the years 1983-2010. Otherwise, the methodology was identical to that

used for single-year transitions.

Average transition matrices were calculated on the basis of the multi-year matrices just described. These average matrices are a true

summary, the ratios of which represent the historical incidence of the ratings listed on the first column, changing to the ones listed on

the top row over the course of the multi-year period.

Comparing transition rates with default rates

Rating transition rates may be compared with the marginal and cumulative default rates described in the previous section. Average

cumulative default rates are the summary of all static pools from 1981-2010, while the number of pools used in the average transition

rate is limited by the transition's time horizon.

Initial-to-last transitions and default rates

These transition rates compare issuer ratings from the time of first rating to the last rating, regardless of the time elapsed in the interim.

They provide a roadmap to all of the historically observed rating 'states' inhabited by corporate ratings during their rated lifetime.

Appendix II: Gini MethodologyTo measure ratings performance or ratings accuracy, the cumulative share of issuers by rating is plotted against the cumulative share

of defaulters in a Lorenz curve to visually render the accuracy of their rank ordering. The Lorenz curve was developed by Max O.

Lorenz as a graphical representation of the proportionality of a distribution. To build the Lorenz curve, the observations are ordered from

the low end of the ratings scale ('CCC'/'C') to the high end ('AAA'). If Standard & Poor's corporate ratings only randomly approximated

default risk, the Lorenz curve would fall along the diagonal. Its Gini coefficientwhich is a summary statistic of the Lorenz curvewould

thus be zero. If corporate ratings were perfectly rank-ordered so that all defaults occurred only among the lowest-rated entities, the

curve would capture all of the area above the diagonal on the graph and its Gini coefficient would be one (see chart 7). The procedure

for calculating the Gini coefficients is illustrated below and is accomplished by dividing area B by the total area A+B. In other words, the

Gini coefficient captures the extent to which actual ratings accuracy diverges from the random scenario and aspires to the ideal

scenario.

Chart 7

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