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TEXT-S&P:Annual default study of Japan SME ratings published

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(The following statement was released by the rating agency)

Oct 12 - Standard & Poor's Ratings Services today published a Japanese-language defaultstudy of Japan SME ratings for 2010. Standard & Poor's, in collaboration with The Risk Databankof Japan (RDB), has been offering Japan SME Ratings services since December 2005.

The report conveys the results of our analysis of rating performance based on financialresults for fiscal 2009 (ended March 31, 2010). We conducted analysis using actual Japan SMERatings, together with "notional" Japan SME Ratings, to obtain larger data sets. Notional JapanSME Ratings were assigned based on all sample company data held by RDB that meet therequirements applied to candidates requesting Japan SME Ratings. Sample companies have the sameindustry attributions (general industrials except for finance companies, including leasing andrental companies, hospitals and schools) and the same revenue range as the companies rated byJapan SME Ratings. That is, the financial statements for five consecutive years are available,and the latest revenue figures are between JPY500 million and JPY10 billion.

The annual aggregation of default data is based on sample companies' fiscal years, not ondefault observation period. Data sets are referred to by the latest of five consecutive fiscalyears, of which the financial statements are used to derive Japan SME Ratings. For example,fiscal 2009 default data tracks companies with the latest financial end dates ranging from April2009 through March 2010. And for companies with the latest financial year ending "April 2009"and "March 2010," the observation periods are "August 2009 to July 2010" and "July 2010 to June2011," respectively. Some observation periods cover March 11, 2011, the date of the Great EastJapan Earthquake and tsunami, but there was hardly any effect on the default data, in our view.

The analysis of default rate by notional rating category shows that among the companies withfinancial statements up to March 2008, those with notional SME ratings of "a" or belowexperienced a rise in default rates, reflecting deterioration in the economy, but they haverecently recovered to previous levels. Default rates are consistent with rating rank ordering.The average default rate for the "bbb" category is 0.85%, which is slightly lower, but close to,the default rate of the lower half of "normal (seijo-saki)" obligors classified by some majorJapanese banks. Nevertheless, the overall decline in the default rate may be partly attributableto a decline in default rates and a decrease in bankruptcies among small and midsize enterprises(SMEs), due to government measures against the weakened economy, including the so-called DebtMoratorium Law and Emergency Guarantee Program. As such, the overall trend of declining defaultrates will require close attention in future.

((Bangalore Ratings Team, Hotline: +91 80 4135 5898swati.ray@thomsonreuters.com,Group id:BangaloreRatings@thomsonreuters.com,Reuters Messaging:swati.ray.thomsonreuters.com@reuters.net))

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