Credit Risks of Malaysian Firms Improve

Moody's Analytics says that the credit risks faced by Malaysian companies in aggregate improved 10-fold over the last five years, and by more than 50% in the last 12 months.


“Corporates in Malaysia have lowered their market leverage -- liabilities as a percentage of enterprise value -- substantially since the global financial crisis. They have also improved their business risk slightly,” says Vanessa Wu, a Moody’s Analytics Senior Director and Head of Credit and Portfolio Solutions in Asia Pacific.


“The improved credit risks for companies across the different industries in Malaysia are in line with the country’s improving trend,” adds Wu. “The only exceptions to the better credit profiles are in the consumer durables and consumer services sectors.”


Wu points out that the key drivers responsible for the rise in risk in the consumer durables and consumer services industries are different.  For consumer durables, increased leverage is the reason, while for consumer services, both leverage and business risk play a role.


She also says that the electronic equipment industry in particular has shown a better improvement in their credit risks compared to the country’s aggregate credit risk over the last year – with decreasing market leverage and lower business risk.


Wu was speaking at a credit research seminar jointly hosted by Moody’s Analytics and Moody’s Investors Service, assessing the credit risks in the Malaysian sovereign, banking and corporate sectors, held on Tuesday, 3 December in Kuala Lumpur.


Wu’s analysis of Malaysian companies was based on Moody’s Analytics’ Expected Default Frequency (EDF) model from CreditEdge.  EDF measures the probability of default for publicly listed companies.  The model assumes that a company will default if a firm’s future market value will be insufficient to meet its future debt obligations. The EDF model translates forward-looking information from the equity markets to provide early warning signals of credit quality changes.


Part of the EDF analysis measures how far away a firm’s asset value is from its liabilities, using 40 years of data on historical defaults.Wu explains that besides providing early warning signs of credit quality changes, the EDF credit measure can also be used for peer analysis, as a benchmark measure to manage internal ratings, for risk-based pricing, and for the purpose of managing investments.