By Edward I. Altman
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Additional resources for Corporate Bond Rating Drift: An Examination of Credit Quality Rating Changes over Time
For the 10-year transition horizon, the estimation ability of the MS model was significantly dampened by the large estimate errors in the BBB rating category. The MS model, in contrast to other models, had a preponderance of positive estimate errors. The estimate errors from the MS model are positive for all five rating categories for the 10-year period. This indicates that the "stayers" over the long term were actually fewer than those estimated by the MS model. The only consistently negative MS estimated error was for the AAA category, at least through seven years.
A comparison of industrial firms and the entire sample leads to the following findings: Empirical Analysis of Bond Rating Drift --- -- -- TABLE 7. Sample Distribution by Issuance Year and Economic Sector Issuance Year IND IND FIN OTH FIN UTL N-NK - UTL NUK OTH UTL - ALL OTH Total . --- Total Key: IND = All industrial companies IND FIN = Financial subsidiaries of industrial companies OTH FIN = Financial institutions other than IND FIN UTL N-NK = Electric public utilities not associated with nuclear power UTL NUK = Electric public utilities with nuclear power OTH UTL = Other utilities, primarily telephone and gas companies ALL OTH = All other, primarily REITs Investment-grade industrial firms appear to be more stable in retaining their original ratings than all other nonindustrial firm issues.
4 Because most public utility new issues receive an investment-grade rating, the two meaningful classes for comparison are AA- and A-rated issues. Indeed, the majority of the nonnuclear, nuclear, and other utility issues-82 percent, 68 percent, and 68 percent, respectively-were in these two rating classes. The nuclear and nonnuclear electric utility issues are analyzed separately because the former came under intense pressure, particularly in the 1980s, to cancel, postpone, or phase out the use of this power source.