Impacts of Sovereign Rating on Sub-Sovereign Bond Ratings in Emerging and Developing Economies

This paper explores bond-level, issuer-level, and macro-level conditions that affect the distance between sovereign credit rating and sub-sovereign debt ratings. Over three-quarters of rated foreign-currency sub-sovereign bonds issued during 1990–2...

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Bibliographic Details
Main Authors:	Mohapatra, Sanket, Nose, Manabu, Ratha, Dilip
Format:	Working Paper
Language:	English en_US
Published:	World Bank, Washington, DC 2016
Subjects:	MONETARY POLICY HOLDING SOVEREIGN YIELD MARKET COUNTRIES BORROWER DURABLE GOODS CORPORATE DEFAULT FOREIGN CAPITAL ACCOUNTING CHECKS FOREIGN DEBT FIXED INCOME INTERNATIONAL CAPITAL DEFAULTS CAPITAL-RAISING ACTIVITIES INTEREST POST-CRISIS PERIOD GLOBAL DEBT DOMESTIC FINANCIAL MARKETS PRIVATE CREDIT BOND SPREADS DEVELOPING COUNTRIES YIELD SPREADS REVENUES POSITIVE COEFFICIENT EXTERNAL DEFICIT SOVEREIGN ENTITIES LOAN CREDITWORTHINESS GOVERNMENT SUPPORT TREASURY BILL ASSET RATIO EXTERNAL FINANCE CONVERSION DEBT ISSUER DEBT ISSUES CORPORATE BOND ISSUERS BOND RATINGS CURRENCY FINANCIAL INSTITUTION MARKET DEVELOPMENT FOREIGN CURRENCY DEBT RESERVE BANK INTERNATIONAL RATING AGENCIES GOVERNMENT BOND YIELD DEBTS FOREIGN CURRENCIES BOND ISSUANCE INTERNATIONAL BOND CURRENCY DEPRECIATIONS GLOBALIZATION MONETARY FUND EMERGING MARKET DEBT MARKETS FINANCIAL CRISES LOCAL GOVERNMENT BOND ISSUE FINANCIAL FLOWS INFLATION RATE DEBT FLOWS CREDIT-RATING AGENCIES TRANSFER RISKS TRANSFER RISK INTERNATIONAL DEBT INTERNATIONAL BONDS BORROWING COSTS BANK CREDIT BANK POLICY MARKET ECONOMIES BROKERS EMERGING MARKETS DEBT FINANCING MACROECONOMIC INSTABILITY FEDERAL RESERVE BOND MARKETS BOND RATING GOOD DOMESTIC MARKETS INTERNATIONAL TRADE OWNERSHIP STRUCTURE COUNTRY RISK SOVEREIGN RISK FUTURE INCOME SECURITIES ISSUANCE OFFSHORE FINANCIAL CENTERS SHARES LOCAL CURRENCY MARKET RISK MONETARY POLICIES RISK OF DEFAULT SECURITIES FIXED INCOME SECURITIES TREASURY PRIVATE DEBT CREDIT RISK INSURANCE MACROECONOMIC VARIABLES CURRENCIES CALLABLE BOND POSITIVE COEFFICIENTS DOMESTIC CREDIT FINANCIAL INSTABILITY CORPORATE BOND INVESTOR PROTECTION TREASURY BONDS RETURN ON ASSET CALLABLE BONDS DEVELOPMENT FINANCE INTERNATIONAL DEBT MARKETS FINANCIAL SUPPORT CONSUMER PRICE INDEX INTERNATIONAL SECURITIES PUBLIC SECTOR DEBT STOCK RETURNS FINANCIAL SYSTEMS OPEN ECONOMIES CAPITAL ACCOUNT INTERNATIONAL MARKETS FINANCIAL OPENNESS DEBT MATURITY INVESTING DEFICIT CAPITAL MARKETS STOCK SOVEREIGN DEFAULTS GUARANTEES FINANCIAL DISTRESS EMERGING ECONOMIES INTEREST RATE EXCHANGE STOCK MARKET LOCAL GOVERNMENTS INTERNATIONAL FINANCIAL MARKETS LIQUIDITY INTERNATIONAL CAPITAL MARKETS POLITICAL ECONOMY MORTGAGE DEFAULT RISK BONDS FINANCIAL STRESS MACROECONOMIC CONDITIONS TAX DEBT ISSUANCE GOVERNMENT BOND SOVEREIGN DEFAULT RESERVE CENTRAL BANKS INFLATION INTERNATIONAL BANK BOND ISSUERS EMERGING MARKET ECONOMIES BUDGET CENTRAL BANK MATURITY EMERGING MARKET COUNTRIES SOVEREIGN DEBT PROBLEMS CREDIT RATINGS BOND ISSUER BOND ISSUES TELECOMMUNICATIONS BOND YIELD FINANCIAL STUDIES OPTIONS SOVEREIGN BOND CAPITAL OUTFLOWS SOVEREIGN RATING RETURN DEBT DENOMINATION INTERNATIONAL ECONOMICS RETURN ON ASSETS FINANCE FOREIGN CURRENCY SOVEREIGN ISSUERS EXPENDITURE INVESTORS SOVEREIGN RATINGS DEBT ISSUERS SOVEREIGN DEBT DEBT ISSUE IMPLICIT GUARANTEES FEDERAL RESERVE BANK FINANCIAL CRISIS FINANCIAL SECTOR INDICATOR FOREIGN FINANCING POST-CRISIS PERIODS RETURNS COLLATERALIZATION CONTRACT PROPERTY PROPERTIES CURRENT ACCOUNT DEFICIT BALANCE SHEET DEFAULT MARKET STOCK MARKET DEVELOPMENT SOVEREIGN ENTITY CREDIT RATING FOREIGN EXCHANGE RISK FACTORS DEBT MARKETS SOVEREIGN DEBTS DEBT MARKET GOODS INVESTOR CORPORATE BONDS SECURITY FINANCIAL DEVELOPMENT DURABLE FINANCIAL MARKET INVESTMENT BOND SOVEREIGN BONDS SHARE CIVIL LAW BALANCE SHEETS COLLATERAL CREDIT QUALITY FINANCIAL MARKETS DEBT OBLIGATIONS CORPORATE BOND MARKETS FLOATING RATE CAPITAL INFLOWS SOVEREIGN DEBT MARKET FIXED RATE BONDS EXTERNAL DEBT INVESTMENTS TREASURY BILL RATE CHECK PRIVATE FINANCING INSTRUMENT DEBT SERVICING ASSETS RATIO COMMON LAW INTERNATIONAL INVESTORS INTERNATIONAL SETTLEMENTS
Online Access:	http://hdl.handle.net/10986/24160

Description
Summary:	This paper explores bond-level, issuer-level, and macro-level conditions that affect the distance between sovereign credit rating and sub-sovereign debt ratings. Over three-quarters of rated foreign-currency sub-sovereign bonds issued during 1990–2013 in 47 emerging and developing countries were rated at or below the corresponding sovereign rating, thus confirming the prevalence of a sovereign ceiling. For bonds rated below the sovereign ceiling, a Tobit regression shows strong sovereign-corporate links for financial firms, publicly-owned firms, and local government entities. International bonds tend to be rated closer to the sovereign rating during riskier global financial conditions. Well-developed domestic financial markets also tend to be related to a smaller distance, likely because of stronger macro-financial links for financial issuers. About 11 to 26 percent of the bonds had ratings higher than the sovereign rating, which was achieved mainly through securitization structures. This observation is confirmed using a double-hurdle estimation that accounts for bond and firm characteristics and macroeconomic conditions. The sovereign-corporate rating relationship became significantly stronger at the peak period of the 2008-09 global financial crisis, and appears to have weakened in the subsequent years.

Impacts of Sovereign Rating on Sub-Sovereign Bond Ratings in Emerging and Developing Economies

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