June 2007 Capital Adequacy Extension © Copyright 2007, CCRO. All rights reserved. Page 58 of 92 Table 5.4 Transition Matrix27 Initial Rating Rating at Year End AAA AA A BBB BB B CCC Default AAA 90.81 8.33 0.68 0.06 0.12 0 0 0 AA 0.70 90.65 7.79 0.64 0.06 0.14 0.02 0 A 0.09 2.27 91.05 5.52 0.74 0.26 0.01 0.06 BBB 0.02 0.33 5.95 86.93 5.30 1.17 1.12 0.18 BB 0.03 0.14 0.67 7.73 80.53 8.84 1.00 1.06 B 0 0.11 0.24 0.43 6.48 83.46 4.07 5.20 CCC 0.22 0 0.22 1.30 2.38 11.24 64.86 19.79 To demonstrate the migration probability for one particular credit rating, Figure 5.3 graphically displays the potential migration for a BB rated company over a one year period, based on the historical data from Table 5.4. Figure 5.3 5.9. Econometric Factors Certain models incorporate econometric factors into the modeling process such as: • Unemployment rate • Rate of growth in the GDP • The level of long term interest rates 27 Standard & Poor’s CreditWeek (April 15, 1996) 0 0.01 0.02 0.03 0.04 0.05 0.06 0.07 0.08 0.09 BB= 80.53% B= 8.84% CCC= 1.0% DF= 1.06% BBB= 7.73% AA= 0.14% A= 0.67% AAA= 0.03% 0 0.01 0.02 0.03 0.04 0.05 0.06 0.07 0.08 0.09 BB= 80.53% B= 8.84% CCC = 1.0% DF= 1.06% BBB= 7.73% AA= 0.14% A= 0.67% AAA= 0.03% Credit Migration for BB Firm