“Unlike previous months, where the change was due to the withdrawal of ratings, the deterioration in January was largely the result of weakening liquidity profiles, particularly of Chinese corporates and more specifically of Chinese property developers,” says Laura Acres, a Moody’s Vice President and Senior Credit Officer. “Furthermore, the increase to 12.5% is the largest month-on-month deterioration since Oct-Dec 2008.”

“Nevertheless, the index remains generally far below the 37% high recorded in Oct-Dec 2008 and is broadly in line with Jan-Mar 2011,” adds Acres. “Overall, the number of issuers in the SGL-4 category rose to 12 in January from nine in December.”

The Asian LSI measures the percentage of companies with the lowest speculative-grade liquidity rating (SGL-4), and increases when corporate liquidity appears to deteriorate.

“In addition, the ratio of downgrades to upgrades shows the peak of the credit cycle has passed. In the second half of 2011, there were more downgrades than upgrades. We are also seeing a very clear negative bias:

in January, eight companies had outlook changes, and of these, six were negative, and one was put on review for downgrade,” says Acres.

Looking ahead, markets in Asia will remain choppy and deals are still being delayed and pulled as the result of concerns over European sovereigns, while a more general economic slowdown in recent months is making investors nervous.

At the same time, January also saw the launch of a US$ bond by an Indonesian utility, Cikarang Listrindo, reinforcing our assertion that the markets could only be reopened by a higher-rated, existing issuer.

But, it remains to be seen whether this will be sufficient to break the deadlock and reopen the floodgates to new issuers coming to the markets.

The amount of high-yield debt rated by Moody’s in Asia fell in January to

$40.1 billion from $47.8 billion in December, reflecting the move by two Indonesian Government Related Issuers (GRIs) to investment-grade after the upgrade of the sovereign to Baa3 from Ba1. The two accounted for $5.5 billion and $1.5 billion of this decline, respectively.

The net number of issuers fell in January to 96 from 97 at the end of December.

The monthly index looks at looks at liquidity trends throughout the Asia-Pacific region (excluding Japan and Australia) for the speculative-grade companies Moody’s rates, and quantifies the proportion of companies with inadequate liquidity.

The report is entitled Moody’s Asia Liquidity Stress Index. It can be found at www.moodys.com

“Looming sovereign-credit and financial crises have subdued business sentiment and consumer confidence, while expected austerity measures in developed economies further constrain prospects for economic growth in Asian countries that depend on exports,” says Simon Wong, a Moody’s Vice President and Senior Analyst.

“Similarly, reduced investor appetite for high-yield names, arising partly from concerns over corporate governance and tighter lending conditions, will restrain the prospects for Asian corporate issuers.”

Wong was speaking on the release of Moody’s special report on corporate issuers in Asia, which he co-authored.

The report also notes that certain sectors and firms are at greater risk.

These include, Chinese property developers, and the regional steel, oil & gas refining & marketing, as well as technology and semiconductor sectors.

These are sectors most vulnerable to adverse policy tightening, cyclicality, and excess capacity.

Moody’s also expects bonds to replace some bank lending, and overall capital costs to rise.

The availability of credit will tighten due to deleveraging by banks in developed markets, and risk aversion among investors and lenders.

As loans become more expensive or harder to come by, domestic bond markets and an emerging, offshore Renminbi or “dim-sum” market will fund an increasing share of Asian companies’ financial needs.

Finally, default rates are likely to rise again after a two-year low, in-line with the moderate increase predicted for global speculative-grade defaults.

The report is titled “Review of 2011 and Outlook in 2012 for Corporate Issuers in Asia (ex Japan): Risks will Test Corporate Fundamentals”. It can be accessed on www.moodys.com.

“Caution and uncertainty look to be the by-words for at least the early part of 2012, and while Asian corporates may make preparations for the reopening of the high yield bond markets, it will likely take a higher speculative-grade rated, existing issuer to break the deadlock and open the floodgates for smaller and first-time names to the market,” says Laura Acres, a Moody’s Vice President and Senior Credit Officer.

“And, of course, such a scenario can only come after fears about further deterioration in Europe and the US lessen, and after investors look once again to move out of cash/investment grade names and into high-yield, fixed-income corporate assets,” says Acres. “Moreover, given the downturn in the debt capital markets and a seeming pull-back on bank lines provided by certain European banks, corporate liquidity is now expected to start to display obvious signs of deterioration.”

Acres was speaking on the release of a Moody’s review of the Asian high-yield corporate bond market during 2011 and its outlook for 2012, and which she authored.

“In this more challenging environment, speculative-grade companies could face higher costs, and weaker ones could have limited access to credit if investors decide it is too risky to lend to low-rated companies,” says Acres.

At the same time, the report says that, despite such pressures, liquidity profiles for high-yield issuers in Asia remain historically strong.

For example, high-yield corporate liquidity, as measured by the Asian Liquidity Stress Index, remains strong with just some 9.3% of the high-yield portfolio showing inadequate liquidity at 31 December 2011. In addition, the index is below the 2011 high of 13% — recorded in January

– and is well below the 37% reading posted during Oct-Dec 2008, the height of the global financial crisis.

And in terms of credit trends for the high-yield sector, defaults are likely to increase during 2012, having come off no default scenario in 2011, while rating downgrades are expected to persist as demand slows and access to funds remains tight.

Looking back at 2011, the report says that a bumper level of corporate bond issuance was evident in H1, almost exceeding the total for all of 2010. But in H2, almost no new rated bonds were issued for issuers rated

Ba1 and below as conditions turned.

“Current credit conditions with an obvious lack of investor appetite for high-yield names have caused many issuers to return to the local and regional bank markets to access funds albeit with more stringent limitations frequently imposed by banks through maintenance covenants.

The question is how long this can continue, particularly if European banks seek to rationalize lending books and focus on markets closer to home,” says Acres.

The report is entitled Asia Pacific Corporates: 2011 High-Yield Performance Review and 2012 Outlook. It is available at www.moodys.com.

“The Asian economy has shown moderate growth despite the global financial crisis. However, this growth will slow because of the uncertainty surrounding the global economy,” says Jerome Cheng, a Moody’s Vice President and Senior Credit Officer.

Cheng was speaking on the release of the Asian Structured Finance 2012 Outlook, which he co-authored.

The report looks at Korean securitizations, Singapore CMBS, and Asian

(ex-Japan) collateralized loan obligations (CLOs).

New Korean RMBS’ stable performance is supported by mortgage loans with low loan-to-value ratios (LTVs) and the regulator’s guideline to offer more long-term, fixed-rate amortizing notes. Delinquencies and defaults of loans with low LTVs have traditionally been low.

“Existing Korean mortgage loan transactions, as well as new and existing Korean auto loans, will demonstrate stable performance, with low delinquencies and defaults,” says the co-author, Marie Lam, a Moody’s Vice President and Senior Credit Officer.

While high levels of household debt are credit negative, moderate GDP growth, a stable employment market, stable mortgage loan performance, regulatory guidelines to control the growth of household debt, tightened underwriting properties, and transaction eligibility criteria will help moderate performance deterioration in Korean credit card receivables.

New Singaporean CMBS transactions will feature high quality properties, low LTVs, and strong debt service coverage ratios.

“Although new and existing CMBS transactions share many traits, new transactions will have enhanced features, including a minimum of six months of liquidity protection and two-year tail periods,” says Cheng.

Transactions with strong S-REIT sponsorships will enjoy an additional layer of protection, in the form of sound financial management, asset enhancement initiatives, and expert leasing management.

“Many S-REITs have strong domestic support and are ultimately linked to the Singapore government or related entities. This support helps CMBS sponsors raise equity and debt capital, even under adverse market conditions, such as the global financial crisis,” says Cheng.

Finally, the report provides a stable outlook for Asian (ex-Japan) CLOs because of strong replenishment conditions, a strong alignment of interest with investors, moderate economic growth in Asia, manageable refinancing risk, portfolio diversity, and the stable corporate outlook for key industry sectors.

The report is titled Asian Structured Finance 2012 Outlook can be accessed on www.moodys.com

“The change in the index — which declines when corporate liquidity increases — was due to the withdrawal of four ratings, of which two were in the SGL-4 category, rather than any fundamental improvement in overall liquidity,” says Laura Acres, a Moody’s Vice President and Senior Credit Officer.

SGL-4 is the lowest speculative-grade liquidity score an individual company can receive.

“The peak of the credit cycle has passed, and the overall credit quality of the high-yield portfolio is on the wane as evidenced by the number of downgrades versus upgrades,” says Acres.

“For the Asian LSI, this situation is likely to result in stability and then a gradual deterioration, as companies become pressured to raise money to address upcoming debt maturities.”

“Issuers are looking to domestic and regional banking markets to refinance maturing facilities and raise funds for capital expenditure.”

The total amount of rated debt outstanding in November rose slightly to

USD49.2 billion, versus USD48.8 billion in October, fuelled by PT Perusahaan Listrik Negara’s USD1.0 billion drawing off its MTN program.

Liquidity in Asia is generally weaker than in other regions, partly because its debt capital markets aren’t as mature as those in other regions, and because they rely more on local bank markets for funding.

Relationship banking, which rolls over short-term and uncommitted lines of credit rather than providing committed funding, is far more common in Asia than elsewhere.

The liquidity of rated Chinese high-yield companies — a key focus of the financial markets — remained broadly stable at 10.6% at the end of November.

The number of Chinese property companies with weak liquidity shot up to 15.4% as of the end of November, from 11.5% in October, reflecting the addition of one new issuer to the SGL-4 category.

Historically, the percentage of speculative-grade Indonesian companies with inadequate liquidity has been higher than the overall Asian portfolio, but the report notes that for the past four months, it has remained stable and now stands at 7.7%, reflecting support from domestic and regional banks with committed term financing.

The monthly index looks at liquidity trends throughout the Asia-Pacific region (excluding Japan and Australia) for the speculative-grade companies Moody’s rates, and quantifies the proportion of companies with inadequate liquidity.

“In coming to a stable outlook, we weighed the impact of the difficult operating environment — resulting from the recent floods — against the broadly more positive fundamentals in the economy and banking system,”

says Karolyn Seet, a Moody’s Assistant Vice President and Analyst.

“Our maintenance of the stable outlook also takes into consideration the absence of a robust global recovery, and assumes that the combined effect of these difficult conditions will lead to asset quality deteriorations and higher non-performing loans (NPLs) formation in the coming six months, particularly in the agriculture, automobile and electronics sectors,” says Seet.

Seet was speaking on the release of Moody’s outlook for the Thai banking system, and which she authored.

Moody’s rates 10 banks in Thailand, including 8 commercial banks and 2 policy banks. The commercial banks accounted for approximately 87% of Thai commercial banking system assets at end-2010. The other 2 banks are specialized financial institutions and policy banks, with 100% government ownership.

The rated banks’ asset-weighted average long-term bank deposit rating is Baa1. This incorporates our assessment of their stand-alone strength and an average of two notches of systemic support.

“Our outlook testifies to the strengths of the banks — including their strong capitalization and profit-generating capability — that will help the industry weather the current difficult period, and may even open up opportunities to grow earnings and profitability towards the second half of our 12-18-month horizon,” says Seet.

In summary, three broad considerations are strong economic and banking sector fundamentals; the assessment that the direct impact of the floods on bank balance sheets is not major; and the government’s push on spending policies, as well as more emergency assistance measures and flood rehabilitation packages.

“On balance, we thus expect a pickup in loan growth after an initial drop in lending, driven by stronger performances in the construction and infrastructure sectors. Nevertheless, under these circumstances, banks are likely to see some volatility in their asset quality, and which may test their capital positions,” says Seet.

Nevertheless, improved liquidity, manageable refinancing risk, and better covenant headroom for corporate issuers in the region, excluding Japan, indicate ongoing low rates of default in 2012.

Such factors are the primary conclusions contained in three new reports on [1] corporate credit trends in Asia Pacific (released Nov 8); [2] liquidity for Asia’s corporates (Nov 14); and [3] refinancing needs in Asia (ex-Japan and ex-Australia) (Nov 14).

A fourth report was released on Nov 4 on liquidity for high-yield issuers in Asia as illustrated by the monthly Asian Liquidity Stress Index.

“In the first report, we note broadly stable credit trends in the region through to the end of the third quarter with no expectation of material changes to this trend in the near future,” says Clara Lau, a Moody’s Group Credit Officer for Asia Pacific.

“However, the third quarter probably marked a turning point in credit quality with downgrades noticeably outpacing upgrades, although still at very low levels,” she adds. In further discussing her second report on liquidity, Lau says, “The proportions of rated issuers with weak liquidity profiles and those at risk of breaching covenants have fallen.”

“With the third report, we note that bond refinancing needs for rated Asian issuers appear manageable for the period through to the end of 2015,” says Kaven Tsang, a Moody’s analyst and assistant vice president.”Whilst the absolute level outstanding is growing, two thirds of the US$266 billion in bonds maturing from rated issuers through 2015 comes from domestic bonds, and investment-grade companies issued 87% of the total,” says Tsang.

“The lower volatility in domestic bond markets — when compared to cross-border ones — and the presence of well-recognized names, or the quasi-sovereign status of most issuers, makes the roll-over of this debt less problematic,” says Tsang.

In the Nov 4 report on Asia’s Liquidity Stress Index, Laura Acres, a Senior Credit Officer, noted that fewer than 10% of the rated high-yield portfolio has inadequate liquidity, and no defaults have occurred in the past 12 months. “Although these low numbers will rise slightly next year, they are unlikely to approach levels reached during the global financial crisis of late 2008 to early 2009 when more than a third of these issuers had inadequate liquidity and nearly 18% of the portfolio had defaulted in the previous 12 month,” says Acres.

The three reports released today are (1) Rating And Outlook Trends For Asia Pacific Non-Financial Corporates Q3 2011; (2) Asian Corporate Issuers Have Manageable Refinancing Needs Through 2015; and (3) Near-Term Liquidity Profiles of Rated Asian Corporates is Manageable, but Risks Are Increasing. The report released on Nov 4 is Asian Liquidity Stress Index Data Points to Likely Cycle Peak.

overall rating trend for non-financial corporates in Asia Pacific –

which includes Asia, Australia/New Zealand and Japan — remained broadly

stable in 3Q 2011 when compared with 2Q 2011.

“At the same time, some negative pressures have emerged for Asian

(ex-Japan) rated corporates, while the rating trend for the rated

Japanese corporates is likely to remain negative,” says Clara Lau, a

Moody’s Group Credit Officer.

“During the quarter, for the rated Asian portfolio (ex Japan), there were

a total of 7 negative rating actions, outnumbering the two positive

actions,” adds Lau.

Lau was speaking on the release of Moody’s review of rating trends in

Asia Pacific during 3Q 2011, and which she authored.

Specifically, for the Asian-rated portfolio, negative pressure was most

notable in the real estate and shipping sectors, according to the report.

In this context, Chinese real estate developers accounted for the bulk of

the negative trend due to tight liquidity and slowing sales, while four

of Moody’s six rated shipping companies had negative outlooks. The

outlook for these issuers reflects the possible deterioration in their

credit fundamentals as a result of weakening economic and operating

conditions.

For Australia and New Zealand, the overall trend is fairly balanced

between negative and positive actions. During Q3 2011, there were three

negative actions,to the same number as in Q2 2011 while there were two

positive actions, up from none in the second quarter.

In Japan, the number of rating actions in the previous 2Q 2011 was skewed

by actions prompted by the review for possible downgrade of the sovereign

rating. As a number of corporate ratings were confirmed after Japan’s

downgrade, the number of negative rating actions on Japanese corporates

declined significantly in 3Q 2011.

Nonetheless, the rating trend for Japanese corporates remains negative,

the Moody’s report says. After disregarding the sovereign-related

actions, the number of negative rating actions only dropped slightly to

six in 3Q 2011 from seven in 2Q 2011, and still outnumbering the two

positive actions.

Looking ahead, Moody’s expects the rating trend to remain broadly stable

for Asian- rated issuers — except under a scenario of severe contagion

from sovereign and banking stresses in Europe — but with negative

pressure increasing in the more cyclical sectors, namely the Chinese

property and shipping sectors.

For Australia/New Zealand, negative rating pressure is likely for

telecommunications operators due to regulatory changes, as well as the

airlines, which face a challenging operating environment.

And for Japan, the negative rating trend is likely to continue, given the

weak domestic economy, global economic uncertainty, and a strong yen,

which weakens export competitiveness.

The report is entitled, Rating and Outlook Trends For Asia Pacific

Non-Financial Corporates 3Q 2011. It can be found at www.moodys.com

Water now covers 4 million acres (1.6 million hectares)—a third of Thailand’s provinces—in the north, northeast and centre of the country, disrupting industry and displacing families. The floods have significantly affected agricultural and manufacturing production, as well as distribution networks and commercial activity in affected areas. Supply chains have been disrupted, notably among automobile manufacturers, while around a quarter of the current crop of rice has been destroyed. Thailand is the world’s largest rice exporter.

The central bank previously estimated the damage to industry and property at more than THB120 billion ($3.9 billion) or roughly 1.2% of GDP. However, the potential for flooding to spread to Bangkok poses upside risk to these projections and we assume the economic costs of this natural disaster will exceed THB200 billion (2% of GDP). Combined with the deterioration in the outlook for external demand, real GDP growth in the second half will slow significantly. The Bank of Thailand has indicated 2011 economic growth may be lower than 3% as compared to the 4.1% pace it previously forecast, while Finance Minister Thirachai Phuvanatnaranubala has indicated growth might barely reach 2% owing to the magnitude of disruption. We expect real fourth-quarter GDP to contract in annual and quarterly terms, and estimate full-year GDP growth at 2.8%.

Last week, the Bank of Thailand chose to hold interest rates steady, effectively completing its tightening cycle in order to support an economy facing a double-whammy from the floods and softening external demand. This crisis does not represent a structural break in terms of the country’s productive capacity, and economic growth should climb back toward its trend rate of over 4% in 2013.

The floods will affect government finances, increasing expenditure and depressing revenue. On 18 October, the Cabinet approved an additional THB50 billion to the proposed 2012 budget for post-flood reconstruction, bringing the projected deficit to 4% of GDP. Government agencies have also been instructed to set aside 10% of their allocations for investment and operating expenditures to free up funds for recovery efforts, amounting to a total of around THB80 billion. A further THB70 billion has been reallocated from other parts of the budget. The government is also likely to put together a sizeable aid package in a mid-year supplementary budget.

In addition to disaster relief, we anticipate a ramp-up in government spending on flood management and mitigation over the duration of the current administration’s remaining four years in office. However, fiscal rules will mitigate the risk of a significant or permanent deviation from the cautious approach that has led the central government’s fiscal deficits to average around 1.5% of GDP over the past 10 years.

Nor do we expect the floods to undermine the government’s creditworthiness. The robust economic recovery over the past three years and post-crisis stabilization of government finances support Thailand’s creditworthiness. A steady repayment of external debt and accumulation of official foreign exchange reserves have reduced government balance sheet vulnerability to shocks. The government will have ample fiscal space to absorb flood-related costs without prompting a permanent deterioration in its debt ratios.

standalone D- bank financial strength rating (BFSR), which maps to Ba3 on the long-term scale; and Baa3/Prime-3 long-term foreign currency deposit.

All ratings have a stable outlook.

Moody’s affirmation of TMB’s ratings is based on the bank’s audited financial statements for 2010 and 1H 2011, as prepared under local GAAP.

RATINGS RATIONALE

While TMB’s financial condition has stabilized, its ratings remain constrained by (i) low profitability metrics when compared to its global and local peers; (ii) the burden of still high albeit legacy non-performing loans (NPLs); and (iii) very high single-borrower concentrations and weak efficiency ratios, again when compared to its peers.

In recent years, TMB has been through a restructuring process that has led to reductions in its loan book. While this has helped stabilize the bank after a difficult period, its profitability remains weak compared to other similar-sized Thai banks and its “D-” rated peers. Pre-provision profits were only 1% of average risk-weighted assets for 2010.

In addition, the bank’s loan portfolio has a very high degree of single-borrower concentration, relative to core capital and earnings.

This is higher than both its local and global peers. Such concentration exposes earnings to volatility, and may affect asset quality in a downturn. Its top 20 loan exposures is over 700% of pre-provision profits.

On the other hand, Moody’s observes that the ratings are underpinned by

(i) the size of its franchise as the seventh-largest in Thailand, with a 5% share of loans, and 6% of assets and deposits; (ii) the bank’s stable funding and liquidity profile; and (iii) its improving fundamentals after investing three years in risk management, re-organisation, and branch transformation.

On another positive note, TMB’s asset quality has continued to improve over recent years, though it is still weak when compared to global peers. Non-performing loans (NPLs, defined as loans 90+ days overdue) declined to Bt32.6 billion (8.6% of gross loans) at end-June 2011 from Bt

54.1 billion (14.7%) at end-2009, due to active debt management, NPL sales and minimal formation of new NPLs.

Its loan-loss reserve coverage ratio, though still low, increased to 64% of gross loans at 1H 2011 from 54% at end-2010.

TMB’s loan-to-deposit ratio is modest, as evidenced by an 84% loan-to-deposit ratio at the end of 1H2011 (88% at end-2010). Its stable core deposit base accounted for nearly 83% of its funding at end- 2010, with a profile mainly in local currency.

TMB’s Tier I capital ratio stood at 11.6% at the end of 1H 2011. But, in stressed conditions, the bank’s solvency is less resilient than higher rated peers due to its relatively weaker earnings and loan loss reserves cushion.

An upgrade of its stand-alone rating would require that its financial performance in the next 18 months continues to improve, such that (i) its NPL ratio declines below 4%; (ii) its Tier I ratio remains above 10%;

(iii) its single-borrower concentration is significantly diluted; and/or

(iii) its cost-to-income ratio falls below 50%.

On the other hand, the stable outlook on the ratings could change to negative if (i) the difficult operating environment in Thailand worsens, and TMB’s asset quality deteriorates such that its new annual NPL formation rate reaches 1.5% of gross loans and/or its annual credit costs reaches 0.75% of gross loans; (ii) the loan-to-deposit ratio rises above 100%; and/or (iii) the bank’s capital adequacy declines significantly, such that its Tier I ratio falls below 8%.