Dominion Bond Rating Service today released a study that says DBRS ratings are a good predictor of corporate defaults.

The report, the first undertaken in Canada, focuses on the historical default performance of DBRS-rated corporate bond issuers from 1977 to 2004. It finds that, “DBRS ratings are an effective measure of default prediction. In particular, as the credit quality of the corporate obligor deteriorates, as indicated by the DBRS rating, the statistical probability of default increases,” says report author, Manroop Jhooty.

The report also illustrates that the effectiveness of DBRS ratings as default predictors is consistent over time. ”Corporate defaults do exhibit cyclical behaviour. This systematic characteristic in the credit cycle results in a number of years with no defaults, followed by a concentration of defaults over a short time frame”, adds Jhooty.