How Important is Sovereign Risk in Determining Corporate Default Premia? the Case of South Africa

Abstract

This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.The paper analyzes and quantifies the importance of sovereign risk in determining corporate default premia (yield spreads). It also investigates the extent to which the practice by rating agencies and banks of not rating companies higher than their sovereign ("country or sovereign ceiling") is reflected in the yields of South African local-currency-denominated corporate bonds. The main findings are: (i) sovereign risk appears to be the single most important determinant of corporate default premia in South Africa; (ii) the sovereign ceiling (in local-currency terms) does not apply in the spreads of the industrial multinational companies in the sample; and (iii) consistent with rating agency policy, however, the sovereign ceiling appears to apply in the spreads of most financial companies in the sample. JEL Classification Numbers: F21, F34, G12, G13, G15

Property Rights and CDS Spreads: When Is There a Strong Transfer Risk from the Sovereigns to the Corporates?

“…and Grandes (2005), Durbin and Ng (2005), and Dittmar and Yuan (2008). This line of research is limited to emerging market countries, and does not examine the role of institutions in mitigating the transfer risks.…”

The determinants of corporate risk in emerging markets: an option‐adjusted spread analysis

“…Ideally, one would want to match the 139 corporate bonds with the same number of sovereign bonds of identical maturities. While this is manageable for a small number of bonds (see Peter and Grandes, 2005), it becomes impractical for so many bonds across so many jurisdictions. 23.…”

International Pricing of Emerging Market Corporate Debt: Does the Corporate Matter?

“…These include Durbin and Ng (2005) and Peter and Grandes (2005), which focus on the question of a country's sovereign credit-rating ceiling. Such a ceiling implies that corporate spreads cannot be lower than sovereign spreads and are likely to rise with sovereign spreads one-for-one.…”

“…Such a ceiling implies that corporate spreads cannot be lower than sovereign spreads and are likely to rise with sovereign spreads one-for-one. Peter and Grandes (2005) examine a panel of 12 local currency-denominated South African bonds, controlling for the factors suggested by the option-pricing framework, while Durbin and Ng (2005) examine 116 hard-currency bonds and indirectly control for firm-specific and other factors by taking the first differences of spreads. Both studies conclude that the country ceiling does not strictly apply.…”

“…This paper is a first effort to fill that gap. Peter and Grandes (2005) examine spreads on local currency bonds, highlighting the central role of country risk relative to firm-level factors, yet their analysis is limited to bonds issued in South Africa. Durbin and Ng (2005) study the specific question of "sovereign ceiling."…”