Japanese Corporate Default Rates and Rating Transition Matrices (FY1978-FY2014)

June 30, 2015

・ One company defaulted in FY2014. Unitika Ltd. defaulted through a petition for or implementation of financial assistance (debt restructuring). The company had been rated more than 30 years ago, and the single year default rate for the companies that had R&I's ratings as of April 1, 2014 was 0%. This marks the fifth consecutive year of 0% single year default rates since FY2010, equaling the previous record of five years from FY1987 to FY1991.

・ As regards the relationship between credit ratings and defaults, the study results continued to show that a high credit rating corresponds to a low default rate, and that the lower the level of the credit rating, the higher the default rate.

・ On the whole, credit ratings moved higher in FY2014 due primarily to a decrease in the number of downgrades. While the number of upgrades in FY2014 was slightly larger than in FY2013 (FY2013: 11 upgrades, FY2014: 13 upgrades), the number of downgrades declined sharply (FY2013: 11 downgrades, FY2014: 2 downgrades), suggesting lower rating volatility for two consecutive years.

・ Although single year default rates for rated entities continued to be 0% both in the FY2010-FY2014 period and the FY1987-FY1991 period, rating transitions indicate substantial differences in the credit environment. In the FY2010-FY2014 period, credit ratings moved lower in FY2011, a year when the historical appreciation of the yen and confused political circumstances were added to the stress of natural disasters from the Great East Japan Earthquake and floods in Thailand. In FY2012 and FY2013, the number of upgrades and the number of downgrades were equal, followed by overall upward transitions in FY2014. In the FY1987-FY1991 period, on the other hand, credit ratings leaped during the bubble economy, and the direction of rating transitions turned downward following the burst of the bubble economy.

Akira Ishiwata, Chief Analyst [email protected] Shohei Tanaka, Senior Analyst [email protected] Credit Rating Planning and Research Division Phone: +81-(0)3-3276-3512

Table of Contents

Page Introduction 3 Default Rates 3 Defaults in Recent Years 3 Relationship between Credit Ratings and Defaults 5 Credit Rating Transitions 6 Trend of Rating Transitions 6 Rating Transition Matrix 8 Rating Transitions during Periods When No Defaults Occurred 9 Study Methodology 12 Data Tables 16

The data provided in the Data Tables are available in an Excel file format. [Contact] Capital Market Marketing Department +81-(0)3-3276-3437

Introduction

This report has been prepared to promote greater understanding of the relationship between R&I credit ratings and defaults and illustrates, as default rates and rating transition matrices, the results of a study of default events and rating transitions pertaining to 1,490 Japanese firms for which R&I has assigned a credit rating. This year's report is the 19th review in the series, which R&I has prepared annually since 1997. The conclusion that can be drawn from the study results is that a high R&I credit rating corresponds to a low default rate, and that the lower the level of the credit rating, the higher the default rate. Each year R&I extends the study period by one year and updates the study results, using April 1, 1978 as the starting point. Default rates and rating transition matrices reflect the results of the follow-up study on ratings and the occurrence of default events each year for the firms to which a credit rating had been assigned at the beginning of each fiscal year, covering 37 years from FY1978 through FY2014. The follow-up study methodology is based on the characteristics of Japan's bond market, which is comprised of issuers that have comparatively high credit ratings. In the past, when the creditworthiness of a firm that had obtained a credit rating from R&I had declined and refinancing of its bonds through new bond issuance had become difficult, the credit rating of the firm was frequently withdrawn when the bonds were redeemed. As a result, compared with Europe and the U.S., remarkably few issuers to whom a credit rating has been assigned experienced a default. Because of this consideration, R&I continues the follow-up study of default events at previous rated issuers even after credit ratings have been withdrawn. The study methodology is explained in detail in the Study Methodology section. R&I has not made any changes to its study methodology since the previous report.

Default Rates

Defaults in Recent Years Table 1 shows the change in the number of defaults since FY1978. When we look at the movement since the financial crisis that erupted from the subprime loan problem in the U.S. in 2007, there were four defaults in FY2008, followed by an increase to seven in FY2009. When the default events in FY2009 are examined, one notable cause was restructuring based on an application for turnaround ADR proceedings. The number of defaults declined in the following year, and in FY2011 the number of defaults fell to zero for the first time in 18 years, since 1993. In FY2012 there were two defaults, and in FY2013 the number of

Table 1 Change in Number of Defaults (By Default Event)

Recession phase Restructuring Failure to pay Legal bankruptcy 14

0 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 Fiscal year

- Recession phase shows that the economy was in "recession" at the beginning of said fiscal year. [Source: Prepared by R&I from R&I Rating Transition Statistics (RTS) and the "Reference Dates of Business Cycle" available on the Cabinet Office website]

defaults once again was zero. With only one default in FY2014, a situation in which almost no defaults occurred has continued. The default in FY2014 was a petition for or implementation of financial assistance for Unitika Ltd. To replenish its equity capital eroded in conjunction with structural reforms including withdrawal from the fibers & textiles business on which it was founded, in May 2014 the company requested financial assistance in the form of (1) an underwriting of preferred stock to its main financial institutions for the purpose of repaying obligations owed to those entities and (2) debt restructuring with the goal of maintaining its outstanding obligations to other financial institutions, and this financial assistance was subsequently implemented. Unitika had been assigned a credit rating of B at the beginning of FY1981 and FY1982, but had not been assigned a credit rating at the beginning of any other fiscal year. As a result of this default, for firms with a credit rating in the BB category or lower, the cumulative default rate for 34 years from the beginning of FY1981 was approximately 24% (47 firms in the initial period sample, of which R&I continued to track 32 firms at the beginning of FY2014), and the cumulative default rate for 33 years from the beginning of FY1982 was about 26% (46 firms in the initial period sample, of which R&I continued to track 30 firms at the beginning of FY2014). For firms with a credit rating in the BBB category or higher, the cumulative default rate for 34 years from the beginning of FY1981 and the cumulative default rate for 34 years from the beginning of FY1982 were both around 7% (Table 2) (the number of firms in the initial period sample and the number of firms R&I continued to track at the beginning of FY2014 were 265 firms and 239 firms for the cumulative default rate for 34 years from the beginning of FY1981 and 281 firms and 254 firms for the cumulative default rate for 33 years from the beginning of FY1982). From these figures we can see that, through a period of more than 30 years from the 1980s, about 90% of the firms rated in the BBB category or higher, and about 70% of the firms rated in the BB category or lower, have survived.

Table 2 Long-term Cumulative Default Rates (Unit: %)

Cumulative default rate for 34 years from the beginning of FY1981 Cumulative default rate for 33 years from the beginning of FY1982 30 26

25 24

10 7 7

0 BBB or higher BB or lower [Source: Prepared by R&I from RTS]

As in the case of Unitika, for all five defaults in the most recent five years, no credit rating had been assigned at the beginning of the fiscal year in which the default occurred, and for rated entities the single year default rate was 0% for five consecutive years (Table 3). This was the longest such period since the five-year period that began from FY1987. Looking just at the events of default, the most recent five-year period has been a time when credit risk was low and stable. However, while events of default are important, to better understand the credit environment they must be viewed together with rating transitions. This is discussed under "Credit Rating Transitions" beginning from page 6.

Table 3 Change in Default Rates of Rated Entities (Unit: %)

Recession phase Single year default rate

1.0

0.8

0.6

0.4

0.2

0.0 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 Fiscal year

- Recession phase shows that the economy was in "recession" at the beginning of said fiscal year. [Source: Prepared by R&I from RTS and the "Reference Dates of Business Cycle" available on the Cabinet Office website]

Relationship between Credit Ratings and Defaults As mentioned above, the frequency of defaults in Japan's bond market is small. Accordingly, to verify the relationship between credit ratings and defaults, the cumulative default rates must be examined beyond the periods when the issuers had credit ratings, by conducting the follow-up study even after the credit ratings have been withdrawn. In addition, because the default rates by rating vary as a result of the economic environment at each point in time, the long-term averages of the cumulative default rates must be calculated as well. Table 4 shows the cumulative default rates by rating, averaged for 37 years from FY1978. A relationship in which a high credit rating corresponds to a low default rate, and the lower the credit rating the higher the default rate, can be verified from this table.

Table 4 Average Cumulative Default Rates (5 Years) (Unit: %)

1.20 1.06 1.00

0.80

0.60 0.54

0.40

0.20 0.00 0.04 0.00 AAA AA A BBB

- The measurement period for calculating the average is FY1978-FY2014. [Source: Prepared by R&I from RTS]

Credit Rating Transitions

Trend of Rating Transitions Table 5 gives the change in the percentage of ratings upgraded and percentage of ratings downgraded to another rating category in each fiscal year from FY1978. As the table illustrates, both upgrades and downgrades have occurred each year and there has never been a year without rating changes. In general, downgrades are concentrated in recessionary phases, and upgrades are more frequent in periods of economic expansion. The overall direction of rating transitions changed from upward to downward in FY2008 along with the global recession and financial contraction that began in FY2008, but afterwards it returned to the same number of upgrades and downgrades in FY2010. Rating changes were overwhelmingly in a downward direction again in FY2011. Thereafter, the number of upgrades and the number of downgrades were equal for two consecutive years in FY2012 and FY2013. On the whole, credit ratings moved higher in FY2014 due primarily to a decrease in the number of downgrades. While the number of upgrades in FY2014 was slightly larger than in FY2013 (FY2013: 11 upgrades, FY2014: 13 upgrades), the number of downgrades declined sharply (FY2013: 11 downgrades, FY2014: 2 downgrades), suggesting lower rating volatility for two consecutive years.

Table 5 Change in Percentages of Ratings Upgraded and Downgraded (Single Year) Recession phase Percentage of ratings upgraded Percentage of ratings downgraded Percentage of ratings upgraded – Percentage of ratings downgraded 15%

-5%

-15%

-25% 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 Fiscal year

Table 6 Contributions by Industry to Percentages of Ratings Upgraded and Downgraded (Single Year) FY2012 FY2013 FY2014 2.0%

1.5%

1.0%

0.5% telecommunica- & Electricity Services Unclassified 0.0% products & Construction Manufacturing Wholesale Retail Finance & Real estate insurance Transportation Marine mining gas tions &

0.0%

-0.5%

-1.0%

-1.5%

-2.0% 1 2 3 4 5 6 7 8 9 10 11

- In the above table, the upper graph shows the contribution to ratings upgraded and the bottom graph shows the contribution to ratings downgraded. - Upgrades and downgrades to another rating category are counted. - Downgrades include defaults. [Source: Prepared by R&I from RTS]

Table 6 shows the contribution to the percentage of ratings upgraded and the percentage of ratings downgraded when viewed by industry for the most recent three years. In manufacturing, the rapid erosion of global competitiveness in the household electrical appliance and semiconductor sectors contributed to the percentage of ratings downgraded, as the trend seen in FY2011 continued and many ratings were lowered in FY2012. However, the number of downgrades fell significantly in FY2013, and in FY2014 the ratings shifted toward upgrades. In the finance and insurance industry, viewed as a whole, ratings continued to move upward over this three-year period, as exemplified by the upgrades for the three megabank groups Mitsubishi UFJ, Sumitomo Mitsui and Mizuho. When we examine the movements during these three years, in the finance and insurance industry the number of upgrades has declined, but the number of downgrades continued to fall as well, and in FY2014 there were no downgrades in this sector. The transportation and telecommunications industry saw upgrades in FY2012 and FY2013, but in FY2014 one rating was lowered. This was Mitsui O.S.K. Lines, Ltd. In the electricity and gas industry, the ratings for electric power companies were downgraded for three consecutive years from FY2011 to FY2013; in addition to heightened nuclear power generation risks, power companies saw the framework ensuring their profitability dismantled by amendment of the Electricity Business Act. No ratings in this sector were changed in FY2014. Table 7 shows the contribution to the percentage of ratings upgraded and the percentage of ratings downgraded when examined by rating (category). In the AA category, ratings were downgraded for two consecutive years in FY2012 and FY2013, but there were no rating downgrades in FY2014. That was the first time for such a result since FY1989. In the A category, rating upgrades and downgrades both contributed substantially to the rating changes in FY2012. In FY2013, ratings moved upward with a sharp fall in the number of downgrades. During FY2014, four ratings were upgraded and one rating was downgraded. Because a breakdown of the upgrades shows these were all companies under the umbrella of the Mizuho FG, substantively there was only a single upgrade and single downgrade. In the BBB category, the rating changes during these three years were overwhelmingly upgrades. These upgrades were not biased toward specific industries, and in many instances, R&I evaluated issuers positively for items such as a track record of steady corporate efforts, improved revenue and expenditure through restructuring, and reduction of risk. In the BB category, R&I evaluated positively factors such as the restoration of the financial base as a result of cost structure reforms and capital increases, and since FY2013 has upgraded several of the ratings.

Table 7 Contributions by Rating to Percentages of Ratings Upgraded and Downgraded (Single Year)

FY2012 FY2013 FY2014 2.0%

1.5%

1.0%

0.5%

0.0% AAA AA A BBB BB B CCC-C 0.0%

-0.5%

-1.0%

-1.5%

-2.0%

-2.5% 1234567 - In the above table, the upper graph shows the contribution to ratings upgraded and the bottom graph shows the contribution to ratings downgraded. - Upgrades and downgrades to another rating category are counted. - Downgrades include defaults. [Source: Prepared by R&I from RTS]

Rating Transition Matrix Table 8 shows rating transitions in FY2014 as a rating transition matrix. The percentage of ratings maintained was basically higher than the long-term average. Furthermore, for all of the rating categories, the rating changes were within one category. As a whole, rating volatility was low. There was one rating downgrade in FY2014 from the BBB category or higher to the BB category or lower: Meiko Electronics Co., Ltd. R&I downgraded the rating when Meiko Electronics' ability to generate cash flow declined, hampered by the deterioration of yields at the company's production facilities in China and Vietnam and higher fixed costs including labor costs. There were three rating upgrades from the BB category or lower to the BBB category or higher: Oki Electric Industry Co., Ltd., Daio Paper Corp., and Nippon Piston Ring Co., Ltd. R&I upgraded Oki Electric Industry after judging the company had improved its profits thanks partly to structural reforms in its printer business and achieved progress in rebuilding its financial base through the conversion of preferred shares into common shares. Daio Paper earned an upgrade when, in addition to restoration of the company's financial base through a capital increase, R&I was able to confirm its improved earning capacity, prudent financial management policies and steady corporate governance. R&I upgraded Nippon Piston Ring after determining the results of cost structure reforms were supporting profits and judging the company also had made progress in restoring its financial base, which had been weakened following the bankruptcy of Lehman Brothers. Oki Electric Industry, Daio Paper and Nippon Piston Ring returned to the BBB category for the first time since being downgraded from BBB to BB+ in FY2002, from BBB to BB in FY2011, and from BBB to (BB+) in FY2008, respectively. Table 9 shows the long-term average of the rating transition matrix. The rating transition matrix in a specific fiscal year as in Table 8 is helpful to understand the changes in the credit environment that occurred in that specific fiscal year. On the other hand, the survey results for a specific fiscal year exhibit substantial changes at each point in time when the number of samples is small. Therefore, when evaluating rating stability, it is appropriate to perform the evaluation based on the long-term average of the survey results of different fiscal years. When we look at Table 9, the percentage of ratings maintained is high, and the rating transitions during a year generally remain within a single rating category. Furthermore, rating changes over two categories occur with extremely small frequency. Ratings that were lowered from the AA category to the BBB category and ratings that were downgraded from the A category to the BB category, for example, were 0.1%, respectively, while ratings upgraded to the A category from the BB category were 0.2%. From this we can confirm the stability of the ratings.

Table 8 Rating Transition Matrix (Single Year, 2014 Cohort) (Unit: %) Rating at end of fiscal year

AAA AA A BBB BB B CCC-C Default Sample

Rating at beginning of at beginning Rating AAA 0 AA 100.0 136 fiscal year fiscal year A 1.2 98.4 0.3 322 BBB 4.8 94.4 0.8 125 BB 33.3 66.7 9 B 100.0 1 CCC-C 100.0 1 - Samples are the number of issuers after excluding from the number of samples at the beginning of the measurement period the issuers whose ratings had been withdrawn by fiscal year-end. [Source: Prepared by R&I from RTS]

Table 9 Average Rating Transition Matrix (Single Year, 1978 Cohort - 2014 Cohort) (Unit: %) Rating at end of fiscal year

AAA AA A BBB BB B CCC-C Default Sample

Rating at beginning of at beginning Rating AAA 91.0 9.0 764 AA

fiscal year fiscal year 0.8 94.2 5.0 0.1 3364 A 0.0 1.8 94.5 3.5 0.1 0.1 7825 BBB 0.0 3.8 93.4 2.6 0.0 0.1 7399 BB 0.2 8.2 86.4 2.6 0.1 2.5 807 B 0.8 9.8 77.3 0.8 11.4 132 CCC-C 4.4 88.9 6.7 45 - Samples are the number of issuers after excluding from the number of samples at the beginning of the measurement period the issuers whose ratings had been withdrawn by fiscal year-end. [Source: Prepared by R&I from RTS]

Rating Transitions during Periods When No Defaults Occurred We compare the changes in the ratings for FY2010-FY2014 and FY1987-FY1991, two periods when the single year default rates for rated entities were 0% for five consecutive years. To see the difference between these two five-year periods, the time series of the rating changes in each year during FY2010-FY2014 and FY1987-FY1991 are provided in Table 10. During FY2010-FY2014, the rating transitions exhibited a marked shift in the downward direction in FY2011. In FY2011, the stress of natural disasters from the Great East Japan Earthquake and floods in Thailand was compounded by the historical appreciation of the yen and confused political circumstances, and large rating downgrades were seen across a broad range of industries. Thereafter, the number of upgrades and the number of downgrades were equal in FY2012 and FY2013, changing in the direction of rating upgrades in FY2014. On the other hand, during FY1987-FY1991, the ratings moved higher for three years during the so-called bubble period in FY1987, FY1988 and FY1989. The number of ratings that moved lower rose in FY1990 as a result of the bubble's collapse, and in FY1991, the rating transitions shifted to a downward direction.

Table 10 Comparison of Changes in Percentages of Ratings Upgraded and Downgraded (Single Year) (FY2010-FY2014 vs FY1987-FY1991) Recession phase Percentage of ratings upgraded Percentage of ratings downgraded Percentage of ratings upgraded – Percentage of ratings downgraded 15% 15%

10% 10%

5% 5%

0% 0%

-5% -5%

-10% -10%

-15% -15% 10 11 12 13 14 87 88 89 90 91 Fiscal year Fiscal year

- Recession phase shows that the economy was in "recession" at the beginning of said fiscal year. - Upgrades and downgrades to another rating category are counted. - Downgrades include defaults. [Source: Prepared by R&I from RTS and the "Reference Dates of Business Cycle" available on the Cabinet Office website] A rating transition matrix showing the rating transitions for five years from the beginning of FY2010 to the end of FY2014 (FY2010-FY2014 Rating Transition Matrix) is provided in Table 11, and a rating transition matrix showing the rating transitions from the beginning of FY1987 to the end of FY1991 (FY1987-FY1991 Rating Transition Matrix) is provided in Table 12. From these tables we can perceive, for example, that 294 firms had a rating in the A category at the beginning of FY2010, and of these, 89.8% remained in the A category five years later at the end of FY2014, while 5.1% was in the AA category and a further 5.1% was in the BBB category. When we look at the FY2010-FY2014 Rating Transition Matrix, we can discern the movements of the higher category ratings and lower category ratings were in opposite directions, with the ratings in the AA category or higher moving in the direction of downgrades, the ratings in the A category moving higher and lower in equal number, and the ratings in the BBB category or lower moving in the direction of upgrades. On the other hand, when we look at the FY1987-FY1991 Rating Transition Matrix, almost all of the rating categories saw upward rating transitions with the exception of the highest AAA ratings.

Table 11 Rating Transition Matrix (5 Years, 2010 Cohort) (Unit: %) Rating at end of FY2014

AAA AA A BBB BB B CCC-C Default Sample

Rating at beginning of at beginning Rating AAA 100.0 11 AA 79.6 17.5 1.5 0.7 0.7 137 FY2010 A 5.1 89.8 5.1 294 BBB 22.6 73.4 3.2 0.8 124 BB 25.01 50.0 25.0 8 B 0 CCC-C 100.0 1 - Samples are the number of issuers after excluding from the number of samples at the beginning of the measurement period the issuers whose ratings had been withdrawn by fiscal year-end. [Source: Prepared by R&I from RTS]

1 The rating upgrades from the BB category to the A category were for two J-REITs that ceased to exist as a result of mergers. For this survey R&I conducts follow-up study, and when an issuer performs a merger, R&I will study the surviving company that is the post-merger issuer. For details, please refer to "Cohort-based Study" in the Study Methodology section beginning on page 12.

Table 12 Rating Transition Matrix (5 Years, 1987 Cohort) (Unit: %) Rating at end of FY1991

AAA AA A BBB BB B CCC-C Default Sample

Rating at beginning of at beginning Rating AAA 88.9 11.1 27 AA 14.3 83.7 2.0 49 FY1987 FY1987 A 31.1 66.0 1.9 0.9 106 BBB 41.0 57.4 1.1 0.5 188 BB 10.0 60.0 30.0 10 B 100.0 1 CCC-C 0 - Samples are the number of issuers after excluding from the number of samples at the beginning of the measurement period the issuers whose ratings had been withdrawn by fiscal year-end. [Source: Prepared by R&I from RTS]

When we carefully examine moves in the credit ratings in this way, we can understand from the changes in the ratings that the credit environment differs greatly, even under identical conditions in which no defaults occurred among the rated entities. During FY2010-FY2014, the ratings were in the process of gradually recovering from the downward move in FY2011, and the overall moves in the ratings were relatively small and a variety of factors were at work on the upgrades and downgrades. On the other hand, in FY1987-FY1991 there was a large shift as a whole from upward transitions to downward transitions, as the economic environment underwent a major change from the so-called bubble boom to the collapse of the economic bubble.

Study Methodology

Samples This study covers Issuer Ratings for corporations, government agencies and J-REITs domiciled in Japan to which R&I assigned a credit rating. Corporations include financial institutions and school corporations. Life insurance companies are excluded because ratings assigned to them are mostly Insurance Claims Paying Abilities.

Credit Ratings The credit ratings used for this study are Issuer Ratings. When assigning a credit rating to individual obligations, R&I first evaluates the default risk, i.e., the probability of the issuer defaulting by, for example, going bankrupt, and then, evaluates the recovery risk, i.e., the probability of losses in the event of default, among others, and incorporates the outcome in the rating. The analysis of the issuer's default risk forms the base of the assessment and determines the issuer's general capacity to fulfill all of its financial obligations. This credit rating, called an Issuer Rating2, is used for calculations of default rates and rating transition matrices. For the fiscal years through March 31, 1998, the calculation uses credit ratings issued by the Japan Bond Research Institute (JBRI) and Nippon Investors Services (NIS), the two companies that merged to form R&I. It also includes publicly announced trial ratings assigned prior to these two companies' commencement of business ratings. In instances when there are credit ratings from both JBRI and NIS, the lower of the two credit ratings is used.

Definition of Default In this study, the following events are defined as a default. As a rule, the facts are confirmed from press reports in national newspapers, the brief statement of financial results following the end of a fiscal period or the fiscal year financial statements.

(1) Legal bankruptcy (2) Failure to perform payment on a financial obligation (3) Petition for or implementation of restructuring of a financial obligation substantially disadvantageous to creditors

The definition of default takes into consideration a situation in which the pledge of the obligor to creditors concerning the issuer's financial obligations is not fulfilled. Legal bankruptcy means either the obligor itself or a third party petitions for application of the Bankruptcy Law or other bankruptcy statutes. Abandonment of claims, debt-equity swaps, reductions in interest rates and extensions of the principal or interest payment date, on the other hand, are regarded as restructuring of financial obligation. R&I may consider debt-equity swaps of obligations held by a holding company as a default of its subsidiary on a case-by-case basis. Of the above three events, whether (1) "Legal bankruptcy" or (2) "Failure to perform payment on a financial obligation" has occurred can be judged in a formulaic way based on objective information. With respect to "restructuring of a financial obligation" in (3), on the other hand, a mere formulaic judgment could result in diversion from reality. Therefore the qualifier "substantially disadvantageous to creditors" was added to enable comprehensive judgment. To ensure the objectivity of judgment, R&I considers whether a given restructuring of a financial obligation is "substantially disadvantageous to creditors" from the following points of view:

・ It can be judged that without the given restructuring of a financial obligation, legal bankruptcy or failure to perform payment on a financial obligation is highly likely to occur in the not-so-distant future. (viewpoint of bankruptcy avoidance) ・ It can be judged that creditors unwillingly accept the given restructuring of a financial obligation to support the obligor's rehabilitation or to avoid incurring further losses. (viewpoint of involuntariness) ・ It can be judged that the economic value of the financial obligation after the given restructuring will fall

2 An Issuer Rating is R&I's opinion on an issuer's general capacity to fulfill its financial obligations and is, in principle, assigned to all issuers.

below the value based on the original agreement and creditors will incur economic losses. (viewpoint of economic losses)

Cohort-based Study In the process of preparing default rates and rating transition matrices, R&I adopted the concept of cohorts for both measures. Each cohort is a group composed of issuers for which R&I had issued a credit rating at a certain point in time. Specifically, for each year, all of the issuers that had a credit rating on April 1 were organized into a cohort for that respective year. To calculate default rates and rating transition matrices, R&I studied the changes in Issuer Ratings and occurrences of default within a cohort for each year passed. To understand the study target firms and the occurrence of default events as accurately as possible when changes such as corporate mergers and divisions have taken place, R&I implemented the following changes to address succession and termination of inclusion in the study. To address successions, when an issuer merges or divides R&I will determine which firm to include in its study according to how the financial obligation is assumed. For mergers, the post-merger firm will be studied because the post-merger firm will succeed to the obligations of the pre-merger firms. In cases of corporate division, R&I will decide which corporation to include by focusing on the size of the obligations taken over by the successor entities. When a new enterprise group is formed through business reorganization, however, R&I will make its decision by considering the capital procurement structure of the group. For example, when a certain firm establishes a new holding company and the holding company becomes the main capital procurement entity, R&I will follow the holding company regardless of which firm succeeds to the debt obligation. When the corporate character of Issuer A that had a credit rating in a given year is extinguished through a merger in the following year and the merger counterparty B is the surviving entity, the Issuer A would be treated as "unrated" one year later without the application of the succession methodology. By applying the succession methodology, R&I treats the credit rating of merger counterparty B (if a credit rating has been assigned) as the credit rating of Issuer A after one year. If merger counterparty B defaults after four years, this will be totaled in the statistics as a default by Issuer A after four years. When monitoring the occurrence of a default becomes difficult, R&I will cease including the issuer in the statistics. When a firm that no longer has a credit rating becomes a wholly-owned subsidiary of another operating company and sufficient information can no longer be obtained, or when several corporations succeed to an obligation in the case of a corporate division and it becomes difficult to determine adequately which firm to include in the study as the successor, R&I will no longer track the firm. For the specific methodology used to terminate inclusion in the study, please refer to the Default Rate by Cohort explained below. Note that there is no relationship between a decision to terminate inclusion in the statistics and a decline in the creditworthiness of the firm. Such rating transition statistical data based on the follow-up study are compiled in the "R&I Rating Transition Statistics" (RTS)3.

Default Rate by Cohort The time axis is divided into intervals of one-year periods. The one-year default rate is determined by dividing the number of issuers that defaulted in each period by the number of issuers at the beginning of the period. The one-year non-default rate (one-year survival rate) is then determined for each period by subtracting the one-year default rate from 1. In addition, the cumulative survival rate for multiple years is determined by multiplying the one-year survival rates. The cumulative default rate is determined by subtracting the cumulative survival rate from 1. This is further explained by the mathematical expressions shown below. For the group of issuers with credit rating i belonging to cohort c, the one-year survival rate S(c,i,t), is determined as shown below.

d(c,i,t) S(c,i,t) 1  u(c,i,t 1) 

In this expression, d(c,i,t) is the number of issuers that had credit rating i when the cohort was composed and defaulted during the one-year period after t-1 year(s) since the cohort was composed. u(c,i,t-1) is the number of issuers that had credit rating i when the cohort was composed and who continued to be traced after t-1 year(s) since the cohort was composed (these are the number of issuers that had not

3 For details, please see http://www.r-i.co.jp/jpn/ancil/. (Japanese only)

defaulted and whose inclusion in the study had not been terminated). Therefore S(c,i,t) shows the one-year period survival rate (non-default rate) for credit rating i, between t and t-1 years since the cohort was composed. The n year(s) cumulative default rate D(c,i,n) for cohort c, credit rating i is then stipulated as follows:

n D(c,i, n) 1   S(c,i,t) t1

Average Cumulative Default Rate The average cumulative default rate is calculated from the cohorts from 1978 to the most recent year. It is determined by first calculating the average of the one-year survival rate of all cohorts weighted by the number of issuers which was used to calculate each one-year survival rate. Next, the average cumulative survival rate is obtained by multiplying the average one-year survival rates, and finally, the average cumulative default rate is determined by subtracting this result from 1. For the issuer group of cohort c with credit rating i, the average one-year survival rate S(i,t) is determined as:

u(c,i,t 1) S(c,i,t) S(i,t)  c{1978,1979,...,most _ recent _ yeart} u(c,i,t 1) c{1978,1979,...,most _ recent _ yeart}

The n year(s) average cumulative default rate D(i,n) for credit rating i is determined as follows:

n D(i,n) 1  S(i,t) t1

Users of this statistic must note carefully the fact this cumulative average default rate does not illustrate the default rate at any given time in the past.

Rating Transition Matrix The rating transition matrix shows how credit ratings assigned to issuers composing a cohort changed after a certain period of time. The table below shows how credit ratings on April 1, year c have changed on April 1 after n years. In the table below, the ratings arrayed in descending order in the left-hand column are the ratings as of April 1, year c, while the rating headings shown from left to right in the uppermost row are the ratings on April 1 after n years. For example, the table indicates that of the issuers rated in the A category as of April 1, year c, a total of 200 firms4 continued to have their credit ratings after n years, and that changes in the credit ratings of these issuers resulted in 2.0% of the issuers being rated in the AA category, 95.0% rated in the A category, 2.0% rated in the BBB category, 0.9% rated in the BB category and 0.1%5 in default. When issuers deemed to be in default have a credit rating assigned, such issuers are counted as an instance of default. For example, when an issuer categorized as an instance of default has a credit rating in the B category, the issuer is counted in the "Default" column and not in the "B" column. The average rating transition matrix is a sample weighted average of the rating transition matrix by cohort.

4 The numbers in the "Sample" column of the rating transition matrix are different from the "number of samples" in the table showing default rates by cohort. The numbers in the "Sample" column of the rating transition matrix are the number of issuers to which a credit rating had been assigned on April 1, year c, excluding those issuers whose credit rating had been withdrawn by n years later. The number of samples in the table showing default rates by cohort, on the other hand, is the number of issuers having a credit rating on April 1, year c. 5 The numbers in the "Default" column of the rating transition matrix are different from the default rate by cohort for the same rating and same years elapsed. The numbers in the "Default" column of the rating transition matrix are numbers calculated by dividing the number of defaults that occurred during the period until after n years by the number of samples in the table. The default rate by cohort, on the other hand, is a number that is calculated based on the interval survival rate.

Table 10 Rating Transition Matrix for Cohort c after n Years (Unit: %) n years AAA AA A BBB BB B CCC-C Default Sample AAA 95.0 5.0 20 AA 1.0 94.0 4.0 1.0 100 A 2.0 95.0 2.0 0.9 0.1 200 BBB 1.0 96.0 2.8 0.2 300 BB 5.0 90.0 2.4 2.6 100 B 4.0 80.0 1.0 15.0 50 CCC-C 5.0 75.0 20.0 20

Items to Note To promote understanding of the relationship between credit ratings and defaults, R&I might sometimes change the data, calculation methodology or computation method used as the basis for default rates and rating transition matrices. As a result of such changes, the past default rates and rating transition matrices using the most recent data might differ from those described in reports published in the past, even when their measurement starting years and elapsed years, among others, are the same. In such cases R&I does not retroactively update the content of the descriptions in the reports published in the past. The most recent report will describe data that reflects the changes mentioned above, spanning the entire measurement period. Therefore please read the most recent report when using the default rates and rating transition matrices.

Data Tables

List of Defaulted Companies Fiscal Year Issuer Event 1978 Nippon Light Metal Co., Ltd. Restructuring 1978 Japan Line Co., Ltd. Restructuring 1979 Koyo Seiko Co., Ltd. Restructuring 1980 Keisei Electric Railway Co., Ltd. Restructuring 1981 Dai Nippon Toryo Co., Ltd. Restructuring 1984 Fuji Kosan Co., Ltd. Restructuring 1984 Japan Line Co., Ltd. Restructuring 1985 Keisei Electric Railway Co., Ltd. Restructuring 1986 Yamashita-Shinnihon Steamship Co., Ltd. Restructuring 1986 Showa Line Co., Ltd. Restructuring 1991 Itoman Corp. Restructuring 1992 Nippon Housing Loan Co., Ltd. Restructuring 1994 Takisawa Machine Tool Co., Ltd. Restructuring 1995 Nippon Housing Loan Co., Ltd. Restructuring 1996 Nippon Housing Loan Co., Ltd. Failure to pay 1996 Towa Real Estate Development Co., Ltd. Restructuring 1996 Yamaichi Securities Co., Ltd. Restructuring 1997 Yaohan Japan Corp. Legal bankruptcy 1997 Sanyo Securities Co., Ltd. Legal bankruptcy 1997 Yamaichi Securities Co., Ltd. Failure to pay 1997 Chinon Industries Inc. Restructuring 1997 Showa Line Co., Ltd. Restructuring 1997 The Nippon Credit Bank, Ltd. Restructuring 1998 JDC Corp. Legal bankruptcy 1998 Okura & Co. Legal bankruptcy 1998 Morisho Co., Ltd. Legal bankruptcy 1998 Sato Kogyo Co., Ltd. Restructuring 1998 Fujita Corp. Restructuring 1998 Haseko Corp. Restructuring 1998 Aoki Corp. Restructuring 1998 The Nippon Credit Bank, Ltd. Restructuring 1999 Nagasakiya Co., Ltd. Legal bankruptcy 1999 L Kakuei Corp. Legal bankruptcy 1999 Tomen Corp. Restructuring 1999 Kanematsu Corp. Restructuring 1999 Dia Kensetsu Co., Ltd. Restructuring 2000 Ikegai Corp. Legal bankruptcy 2000 Kawaden Corp. Legal bankruptcy 2000 Akai Electric Co., Ltd. Legal bankruptcy 2000 Marutomi Group Co., Ltd. Legal bankruptcy 2000 Daisue Construction Co., Ltd. Restructuring

Fiscal Year Issuer Event 2000 Mitsui Construction Co., Ltd. Restructuring 2000 Hazama Corp. Restructuring 2000 Kumagai Gumi Co., Ltd. Restructuring 2000 Tesac Corp. Restructuring 2000 Kotobukiya Co., Ltd. Restructuring 2000 The Royal Hotel, Ltd. Restructuring 2001 Nissan Construction Co., Ltd. Legal bankruptcy 2001 Aoki Corp. Legal bankruptcy 2001 Niigata Engineering Co., Ltd. Legal bankruptcy 2001 Mycal Corp. Legal bankruptcy 2001 Izumi Industries, Ltd. Legal bankruptcy 2001 The Taisei Fire & Marine Insurance Co., Ltd. Legal bankruptcy 2001 Haseko Corp. Restructuring 2001 APLUS Co., Ltd. Restructuring 2002 Nisseki House Industry Co., Ltd. Legal bankruptcy 2002 Nippon Kakoh Seishi Co., Ltd. Legal bankruptcy 2002 Cesar Corp. Legal bankruptcy 2002 Sumitomo Coal Mining Co., Ltd. Restructuring 2002 Snow Brand Milk Products Co., Ltd. Restructuring 2002 Nippon Yakin Kogyo Co., Ltd. Restructuring 2002 Toyo Shutter Co., Ltd. Restructuring 2002 Takisawa Machine Tool Co., Ltd. Restructuring 2002 Isuzu Motors Ltd. Restructuring 2002 Tomen Corp. Restructuring 2002 The Daiei, Inc. Restructuring 2002 Daikyo Inc. Restructuring 2003 Ohki Corp. Legal bankruptcy 2003 Matsuyadenki Co., Ltd. Legal bankruptcy 2003 Toyo Construction Co., Ltd. Restructuring 2003 Kanebo, Ltd. Restructuring 2003 Nissan Diesel Motor Co., Ltd. Restructuring 2004 Sojitz Corp. Restructuring 2004 The Daiei, Inc. Restructuring 2004 Mitsubishi Motors Corp. Restructuring 2004 Nakagawa Musen Co., Ltd. Restructuring 2005 Katsumura Construction Co., Ltd. Legal bankruptcy 2005 Matsumura-Gumi Corp. Legal bankruptcy 2005 Sakurada Co., Ltd. Restructuring 2006 Orient Corp. Restructuring 2007 Credia Co., Ltd. Legal bankruptcy 2008 Oriental Shiraishi Corp. Legal bankruptcy 2008 Azel Corp. Legal bankruptcy 2008 Pacific Holdings, Inc. Legal bankruptcy 2008 New City Residence Investment Corp. Legal bankruptcy

Fiscal Year Issuer Event 2009 Japan Airlines International Co., Ltd. Legal bankruptcy 2009 Japan Airlines Corp. Legal bankruptcy 2009 Willcom, Inc. Legal bankruptcy 2009 Izutsuya Co., Ltd. Restructuring 2009 Life Co., Ltd. Restructuring 2009 Cosmos Initia Co., Ltd. Restructuring 2009 Aiful Corp. Restructuring 2010 Silver Seiko Ltd. Failure to pay 2010 Maruwa Co., Ltd. Restructuring 2012 NIS Group Co., Ltd. Legal bankruptcy 2012 Nakayama Steel Works, Ltd. Restructuring 2014 Unitika Ltd. Restructuring

* When it has observed multiple default events for the same issuer in the same fiscal year, R&I describes the "events" in order of priority of (1) Legal bankruptcy, (2) Failure to pay and (3) Petition for or implementation of restructuring of a financial obligation substantially disadvantageous to creditors (restructuring).

Default Rates by Cohort (By Rating Category; Cumulative Years: 1 to 10 Years) (Unit: %)

2014 Cohort 1 yr2 yrs3 yrs4 yrs5 yrs6 yrs7 yrs8 yrs9 yrs10 yrs# of Samples AAA------0 AA0.00------138 A 0.00------326 BBB0.00------128 BB0.00------9 B or below0.00------2 BBB or abov e 0.00------592 BB or below 0.00------11 All0.00------603 2013 Cohort 1 yr2 yrs3 yrs4 yrs5 yrs6 yrs7 yrs8 yrs9 yrs10 yrs# of Samples AAA------0 AA0.000.00------147 A 0.000.00------317 BBB0.000.00------139 BB0.000.00------9 B or below0.000.00------1 BBB or abov e 0.000.00------603 BB or below 0.000.00------10 All0.000.00------613 2012 Cohort 1 yr2 yrs3 yrs4 yrs5 yrs6 yrs7 yrs8 yrs9 yrs10 yrs# of Samples AAA------0 AA0.000.000.00------150 A 0.000.000.00------318 BBB0.000.000.00------154 BB0.000.000.00------8 B or below0.000.000.00------1 BBB or abov e 0.000.000.00------622 BB or below 0.000.000.00------9 All0.000.000.00------631 2011 Cohort 1 yr2 yrs3 yrs4 yrs5 yrs6 yrs7 yrs8 yrs9 yrs10 yrs# of Samples AAA0.000.000.000.00------12 AA0.000.000.000.00------148 A 0.000.000.000.00------318 BBB0.000.000.000.00------159 BB0.000.000.000.00------6 B or below0.000.000.000.00------1 BBB or abov e 0.000.000.000.00------637 BB or below 0.000.000.000.00------7 All0.000.000.000.00------644 2010 Cohort 1 yr2 yrs3 yrs4 yrs5 yrs6 yrs7 yrs8 yrs9 yrs10 yrs# of Samples AAA0.000.000.000.000.00----- 12 AA0.000.000.000.000.00----- 144 A 0.000.000.000.000.00----- 318 BBB0.000.000.640.640.64----- 163 BB0.000.000.000.000.00----- 9 B or below0.000.000.000.000.00----- 1 BBB or abov e 0.000.000.160.160.16----- 637 BB or below 0.000.000.000.000.00----- 10 All0.000.000.160.160.16----- 647

2009 Cohort 1 yr2 yrs3 yrs4 yrs5 yrs6 yrs7 yrs8 yrs9 yrs10 yrs# of Samples AAA0.000.000.000.000.000.00---- 12 AA0.000.000.000.000.000.00---- 143 A 0.000.000.000.000.000.00---- 324 BBB1.731.731.732.352.352.35---- 173 BB16.6716.6716.6716.6716.6716.67---- 12 B or below 0.00 0.00 0.00 100.00 100.00 100.00 ---- 1 BBB or abov e 0.460.460.460.620.620.62---- 652 BB or below 15.3815.3815.3823.0823.0823.08---- 13 All0.750.750.751.071.071.07---- 665 2008 Cohort 1 yr2 yrs3 yrs4 yrs5 yrs6 yrs7 yrs8 yrs9 yrs10 yrs# of Samples AAA 0.00 0.00 0.00 0.00 0.00 0.00 0.00 - - - 14 AA 0.00 0.00 0.00 0.00 0.00 0.00 0.00 - - - 145 A 0.30 0.91 0.91 0.91 0.91 0.91 0.91 - - - 333 BBB 0.58 1.18 1.18 1.18 1.80 1.80 1.80 - - - 171 BB 11.11 33.33 33.33 33.33 44.44 44.44 44.44 - - - 9 B or below 0.00 0.00 0.00 0.00 0.00 0.00 0.00 - - - 1 BBB or abov e 0.30 0.76 0.76 0.76 0.92 0.92 0.92 - - - 663 BB or below 10.00 30.00 30.00 30.00 40.00 40.00 40.00 - - - 10 All 0.45 1.20 1.20 1.20 1.51 1.51 1.51 - - - 673 2007 Cohort 1 yr2 yrs3 yrs4 yrs5 yrs6 yrs7 yrs8 yrs9 yrs10 yrs# of Samples AAA 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 - - 10 AA 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 - - 134 A 0.00 0.33 0.99 0.99 0.99 0.99 0.99 0.99 - - 306 BBB 0.00 0.55 1.10 1.10 1.10 2.28 2.28 2.28 - - 185 BB 7.14 14.29 28.57 28.57 28.57 28.57 28.57 28.57 - - 14 B or below 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 - - 1 BBB or abov e 0.00 0.32 0.80 0.80 0.80 1.13 1.13 1.13 - - 635 BB or below 6.67 13.33 26.67 26.67 26.67 26.67 26.67 26.67 - - 15 All 0.15 0.62 1.40 1.40 1.40 1.72 1.72 1.72 - - 650 2006 Cohort 1 yr2 yrs3 yrs4 yrs5 yrs6 yrs7 yrs8 yrs9 yrs10 yrs# of Samples AAA 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 - 9 AA 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 - 117 A 0.00 0.00 0.00 0.73 0.73 0.73 0.73 0.73 0.73 - 283 BBB 0.51 1.03 1.54 2.06 2.06 2.06 2.62 2.62 2.62 - 195 BB 0.00 0.00 6.25 18.75 18.75 18.75 18.75 18.75 18.75 - 16 B or below 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 - 3 BBB or abov e 0.17 0.33 0.50 1.01 1.01 1.01 1.18 1.18 1.18 - 604 BB or below 0.00 0.00 5.26 15.79 15.79 15.79 15.79 15.79 15.79 - 19 All 0.16 0.32 0.65 1.47 1.47 1.47 1.64 1.64 1.64 - 623 2005 Cohort 1 yr2 yrs3 yrs4 yrs5 yrs6 yrs7 yrs8 yrs9 yrs10 yrs# of Samples AAA 0.000.000.000.000.000.000.000.000.000.00 7 AA 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 111 A 0.000.000.000.000.770.770.770.770.770.77 265 BBB 0.000.000.000.001.001.001.001.521.521.52 206 BB 0.00 0.00 0.00 6.25 6.25 6.25 6.25 6.25 6.25 6.25 16 B or below 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 6 BBB or abov e 0.00 0.00 0.00 0.00 0.70 0.70 0.70 0.88 0.88 0.88 589 BB or below 0.00 0.00 0.00 4.55 4.55 4.55 4.55 4.55 4.55 4.55 22 All 0.000.000.000.170.840.840.841.011.011.01 611

2004 Cohort 1 yr2 yrs3 yrs4 yrs5 yrs6 yrs7 yrs8 yrs9 yrs10 yrs# of Samples AAA 0.000.000.000.000.000.000.000.000.000.00 8 AA 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 107 A 0.000.000.000.000.000.410.410.410.410.41 249 BBB 0.000.000.000.000.001.481.481.481.481.48 211 BB 11.11 11.11 11.11 11.11 14.98 14.98 14.98 14.98 14.98 14.98 27 B or below 16.67 16.67 16.67 16.67 16.67 16.67 16.67 16.67 16.67 16.67 6 BBB or abov e 0.00 0.00 0.00 0.00 0.00 0.72 0.72 0.72 0.72 0.72 575 BB or below 12.12 12.12 12.12 12.12 15.26 15.26 15.26 15.26 15.26 15.26 33 All 0.660.660.660.660.831.511.511.511.511.51 608 2003 Cohort 1 yr2 yrs3 yrs4 yrs5 yrs6 yrs7 yrs8 yrs9 yrs10 yrs# of Samples AAA 0.000.000.000.000.000.000.000.000.000.00 7 AA 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 104 A 0.000.000.000.000.000.000.410.410.410.41 249 BBB 0.000.000.000.000.000.000.930.930.930.93 226 BB 2.50 10.20 10.20 10.20 10.20 12.76 12.76 12.76 12.76 12.76 40 B or below 9.09 18.18 18.18 18.18 18.18 18.18 18.18 18.18 18.18 18.18 11 BBB or abov e 0.00 0.00 0.00 0.00 0.00 0.00 0.53 0.53 0.53 0.53 586 BB or below 3.92 11.93 11.93 11.93 11.93 13.93 13.93 13.93 13.93 13.93 51 All 0.310.950.950.950.951.111.591.591.591.59 637 2002 Cohort 1 yr2 yrs3 yrs4 yrs5 yrs6 yrs7 yrs8 yrs9 yrs10 yrs# of Samples AAA 0.000.000.000.000.000.000.000.000.000.00 18 AA 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 92 A 0.000.000.000.000.000.000.000.390.390.39 261 BBB 0.000.000.000.000.000.000.431.321.321.32 238 BB 1.89 5.73 11.63 13.59 13.59 13.59 15.55 15.55 15.55 15.55 53 B or below 25.00 33.33 33.33 33.33 41.67 41.67 41.67 41.67 41.67 41.67 12 BBB or abov e 0.00 0.00 0.00 0.00 0.00 0.00 0.17 0.68 0.68 0.68 609 BB or below 6.15 10.85 15.62 17.21 18.81 18.81 20.40 20.40 20.40 20.40 65 All 0.591.041.491.641.791.792.102.562.562.56 674 2001 Cohort 1 yr2 yrs3 yrs4 yrs5 yrs6 yrs7 yrs8 yrs9 yrs10 yrs# of Samples AAA 0.000.000.000.000.000.000.000.000.000.00 18 AA 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 88 A 0.390.390.390.390.390.390.390.390.800.80 255 BBB 0.391.171.171.951.951.951.952.352.752.75 258 BB 0.00 1.72 6.99 8.78 10.57 12.35 12.35 14.14 14.14 14.14 60 B or below 25.00 37.50 37.50 37.50 37.50 37.50 37.50 37.50 37.50 37.50 8 BBB or abov e 0.32 0.65 0.65 0.98 0.98 0.98 0.98 1.14 1.48 1.48 619 BB or below 2.94 5.97 10.68 12.27 13.87 15.46 15.46 17.06 17.06 17.06 68 All 0.581.171.612.062.212.362.362.662.962.96 687 2000 Cohort 1 yr2 yrs3 yrs4 yrs5 yrs6 yrs7 yrs8 yrs9 yrs10 yrs# of Samples AAA 0.000.000.000.000.000.000.000.000.000.00 18 AA 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 92 A 0.000.380.760.760.760.760.760.760.761.15 263 BBB 0.000.360.730.731.461.461.461.461.832.21 279 BB 0.00 0.00 1.39 5.62 7.05 8.48 9.91 9.91 11.36 11.36 74 B or below 18.18 36.36 54.55 54.55 54.55 65.91 65.91 65.91 65.91 65.91 11 BBB or abov e 0.00 0.31 0.62 0.62 0.93 0.93 0.93 0.93 1.09 1.41 652 BB or below 2.35 4.71 8.32 12.04 13.30 15.81 17.07 17.07 18.34 18.34 85 All 0.270.821.511.922.342.622.762.763.053.33 737

1999 Cohort 1 yr2 yrs3 yrs4 yrs5 yrs6 yrs7 yrs8 yrs9 yrs10 yrs# of Samples AAA 0.000.000.000.000.000.000.000.000.000.00 24 AA 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 90 A 0.000.000.370.750.750.750.750.750.751.13 271 BBB 0.000.331.001.342.032.712.712.712.712.71 305 BB 3.45 8.62 8.62 10.34 13.93 15.80 17.67 19.54 19.54 21.46 58 B or below 0.00 12.50 37.50 50.00 50.00 50.00 62.50 62.50 62.50 62.50 8 BBB or abov e 0.00 0.15 0.59 0.89 1.18 1.48 1.48 1.48 1.48 1.64 690 BB or below 3.03 9.09 12.12 15.15 18.29 19.93 23.20 24.83 24.83 26.50 66 All 0.260.931.602.142.693.103.383.523.523.79 756 1998 Cohort 1 yr2 yrs3 yrs4 yrs5 yrs6 yrs7 yrs8 yrs9 yrs10 yrs# of Samples AAA 0.000.000.000.000.000.000.000.000.000.00 29 AA 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 118 A 0.000.330.330.671.341.342.362.362.362.36 302 BBB 0.310.621.261.581.902.882.882.883.223.22 324 BB 14.29 14.29 20.00 20.00 20.00 22.96 22.96 29.13 29.13 29.13 35 B or below 25.00 25.00 50.00 50.00 75.00 75.00 75.00 75.00 75.00 75.00 4 BBB or abov e 0.13 0.39 0.65 0.92 1.32 1.72 2.12 2.12 2.26 2.26 773 BB or below 15.38 15.38 23.08 23.08 25.64 28.30 28.30 33.81 33.81 33.81 39 All 0.861.111.731.992.493.003.393.653.783.78 812 1997 Cohort 1 yr2 yrs3 yrs4 yrs5 yrs6 yrs7 yrs8 yrs9 yrs10 yrs# of Samples AAA 0.000.000.000.000.000.000.000.000.000.00 30 AA 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.86 0.86 0.86 120 A 0.350.350.690.691.051.751.752.462.462.46 288 BBB 0.291.161.452.642.943.244.464.465.395.70 347 BB 2.86 11.43 11.43 14.29 14.29 17.14 17.14 17.14 17.14 17.14 35 B or below 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1 BBB or abov e 0.25 0.64 0.90 1.41 1.68 2.07 2.60 3.00 3.40 3.53 785 BB or below 2.78 11.11 11.11 13.89 13.89 16.67 16.67 16.67 16.67 16.67 36 All 0.371.101.341.962.212.713.223.603.984.11 821 1996 Cohort 1 yr2 yrs3 yrs4 yrs5 yrs6 yrs7 yrs8 yrs9 yrs10 yrs# of Samples AAA 0.000.000.000.000.000.000.000.000.000.00 29 AA 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.93 0.93 110 A 0.350.701.051.751.752.112.822.823.553.55 285 BBB 0.000.291.161.162.652.953.564.474.475.40 345 BB 0.00 0.00 4.76 4.76 4.76 4.76 16.97 16.97 19.49 19.49 43 B or below 25.00 25.00 25.00 25.00 25.00 25.00 50.00 50.00 50.00 50.00 4 BBB or abov e 0.13 0.39 0.91 1.18 1.84 2.10 2.64 3.04 3.45 3.85 769 BB or below 2.13 2.13 6.48 6.48 6.48 6.48 19.84 19.84 22.13 22.13 47 All 0.250.491.231.482.102.353.613.994.504.89 816 1995 Cohort 1 yr2 yrs3 yrs4 yrs5 yrs6 yrs7 yrs8 yrs9 yrs10 yrs# of Samples AAA 0.000.000.000.000.000.000.000.000.000.00 31 AA 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1.02 101 A 0.000.370.370.741.111.481.852.612.613.37 271 BBB 0.000.000.291.461.462.652.653.263.873.87 347 BB 0.00 0.00 2.63 2.63 5.26 5.26 5.26 18.42 21.05 23.68 38 B or below 25.00 25.00 25.00 25.00 25.00 25.00 25.00 50.00 50.00 50.00 4 BBB or abov e 0.00 0.13 0.27 0.94 1.07 1.75 1.89 2.44 2.72 3.14 750 BB or below 2.38 2.38 4.76 4.76 7.14 7.14 7.14 21.43 23.81 26.19 42 All 0.130.250.511.141.402.042.173.473.874.40 792

1994 Cohort 1 yr2 yrs3 yrs4 yrs5 yrs6 yrs7 yrs8 yrs9 yrs10 yrs# of Samples AAA 0.000.000.000.000.000.000.000.000.000.00 29 AA 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 110 A 0.000.000.390.771.161.541.932.323.113.11 259 BBB 0.000.000.000.001.361.362.743.084.134.49 301 BB 0.00 0.00 0.00 3.03 3.03 6.06 6.06 6.06 18.18 21.21 33 B or below 25.00 50.00 50.00 50.00 50.00 50.00 50.00 50.00 50.00 50.00 4 BBB or abov e 0.00 0.00 0.14 0.29 1.01 1.16 1.89 2.18 2.92 3.07 699 BB or below 2.70 5.41 5.41 8.11 8.11 10.81 10.81 10.81 21.62 24.32 37 All 0.140.270.410.681.371.642.342.613.874.16 736 1993 Cohort 1 yr2 yrs3 yrs4 yrs5 yrs6 yrs7 yrs8 yrs9 yrs10 yrs# of Samples AAA 0.000.000.000.000.000.000.000.000.000.00 31 AA 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.90 0.90 112 A 0.000.000.000.400.791.581.982.772.773.58 253 BBB 0.000.000.000.000.411.631.632.052.884.56 249 BB 0.00 0.00 0.00 0.00 0.00 0.00 3.70 3.70 3.70 14.81 27 B or below 0.00 20.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 40.00 5 BBB or abov e 0.00 0.00 0.00 0.16 0.47 1.25 1.41 1.88 2.36 3.31 645 BB or below 0.00 3.13 6.25 6.25 6.25 6.25 9.48 9.48 9.48 19.18 32 All 0.000.150.300.440.741.491.782.242.694.06 677 1992 Cohort 1 yr2 yrs3 yrs4 yrs5 yrs6 yrs7 yrs8 yrs9 yrs10 yrs# of Samples AAA 0.000.000.000.000.000.000.000.000.000.00 35 AA 0.00 0.00 0.00 0.00 0.84 1.68 1.68 1.68 1.68 2.54 119 A 0.000.000.000.000.000.000.811.212.022.02 247 BBB 0.430.430.430.430.430.872.192.642.643.53 232 BB 0.00 0.00 4.17 4.17 4.17 8.33 12.50 12.50 12.50 12.50 24 B or below 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 33.33 33.33 3 BBB or abov e 0.16 0.16 0.16 0.16 0.32 0.64 1.43 1.75 2.07 2.56 633 BB or below 0.00 0.00 3.70 3.70 3.70 7.41 11.11 11.11 14.81 14.81 27 All 0.150.150.300.300.460.911.832.142.603.06 660 1991 Cohort 1 yr2 yrs3 yrs4 yrs5 yrs6 yrs7 yrs8 yrs9 yrs10 yrs# of Samples AAA 0.000.000.000.000.002.382.382.382.382.38 42 AA 0.00 0.00 0.00 0.00 0.00 0.00 0.91 0.91 0.91 0.91 110 A 0.000.440.440.440.440.440.892.222.673.56 225 BBB 0.000.000.000.000.000.000.000.920.920.92 224 BB 0.00 0.00 0.00 4.35 4.35 4.35 8.90 13.46 13.46 13.46 24 B or below 0.00 0.00 0.00 0.00 0.00 0.00 33.33 33.33 33.33 66.67 3 BBB or abov e 0.00 0.17 0.17 0.17 0.17 0.34 0.67 1.51 1.68 2.02 601 BB or below 0.00 0.00 0.00 3.85 3.85 3.85 11.86 15.87 15.87 19.87 27 All 0.000.160.160.320.320.481.132.092.262.74 628 1990 Cohort 1 yr2 yrs3 yrs4 yrs5 yrs6 yrs7 yrs8 yrs9 yrs10 yrs# of Samples AAA 0.000.000.000.000.000.002.222.222.222.22 45 AA 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.93 0.93 0.93 108 A 0.000.000.510.510.510.510.511.012.022.02 198 BBB 0.000.410.410.410.410.410.410.411.681.68 244 BB 0.00 0.00 0.00 0.00 4.76 4.76 4.76 9.77 9.77 9.77 22 B or below 0.00 0.00 0.00 0.00 0.00 0.00 0.00 50.00 50.00 50.00 2 BBB or abov e 0.00 0.17 0.34 0.34 0.34 0.34 0.51 0.85 1.70 1.70 595 BB or below 0.00 0.00 0.00 0.00 4.35 4.35 4.35 13.46 13.46 13.46 24 All 0.000.160.320.320.490.490.651.312.132.13 619

1989 Cohort 1 yr2 yrs3 yrs4 yrs5 yrs6 yrs7 yrs8 yrs9 yrs10 yrs# of Samples AAA 0.000.000.000.000.000.000.000.000.000.00 39 AA 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1.14 1.14 1.14 88 A 0.000.000.000.590.590.590.590.591.181.76 170 BBB 0.000.000.360.360.360.360.360.360.361.48 275 BB 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 4.35 4.35 25 B or below 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 50.00 50.00 2 BBB or abov e 0.00 0.00 0.18 0.35 0.35 0.35 0.35 0.53 0.70 1.41 572 BB or below 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 8.00 8.00 27 All 0.000.000.170.340.340.340.340.501.011.69 599 1988 Cohort 1 yr2 yrs3 yrs4 yrs5 yrs6 yrs7 yrs8 yrs9 yrs10 yrs# of Samples AAA 0.000.000.000.000.000.000.000.000.000.00 30 AA 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1.47 1.47 68 A 0.000.000.000.000.650.650.650.650.651.31 153 BBB 0.000.000.000.340.340.340.340.340.340.34 296 BB 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 4.35 24 B or below 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 33.33 3 BBB or abov e 0.00 0.00 0.00 0.18 0.37 0.37 0.37 0.37 0.55 0.74 547 BB or below 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 7.69 27 All 0.000.000.000.170.350.350.350.350.531.06 574 1987 Cohort 1 yr2 yrs3 yrs4 yrs5 yrs6 yrs7 yrs8 yrs9 yrs10 yrs# of Samples AAA 0.000.000.000.000.000.000.000.000.000.00 29 AA 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1.92 52 A 0.000.000.000.000.000.000.000.000.000.00 117 BBB 0.000.000.000.000.370.370.370.370.370.37 271 BB 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 25 B or below 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 3 BBB or abov e 0.00 0.00 0.00 0.00 0.21 0.21 0.21 0.21 0.21 0.43 469 BB or below 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 28 All 0.000.000.000.000.200.200.200.200.200.41 497 1986 Cohort 1 yr2 yrs3 yrs4 yrs5 yrs6 yrs7 yrs8 yrs9 yrs10 yrs# of Samples AAA 0.000.000.000.000.000.000.000.000.000.00 29 AA 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 46 A 0.000.000.000.000.000.000.000.000.000.00 96 BBB 0.000.000.000.000.000.440.440.440.440.44 230 BB 8.70 8.70 8.70 8.70 8.70 8.70 8.70 8.70 8.70 8.70 23 B or below------0 BBB or abov e 0.00 0.00 0.00 0.00 0.00 0.25 0.25 0.25 0.25 0.25 401 BB or below 8.70 8.70 8.70 8.70 8.70 8.70 8.70 8.70 8.70 8.70 23 All 0.470.470.470.470.470.710.710.710.710.71 424 1985 Cohort 1 yr2 yrs3 yrs4 yrs5 yrs6 yrs7 yrs8 yrs9 yrs10 yrs# of Samples AAA 0.000.000.000.000.000.000.000.000.000.00 31 AA 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 37 A 0.000.000.000.000.000.000.000.000.000.00 92 BBB 0.001.021.021.021.021.021.531.531.531.53 197 BB 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 14 B or below------0 BBB or abov e 0.00 0.56 0.56 0.56 0.56 0.56 0.84 0.84 0.84 0.84 357 BB or below 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 14 All 0.000.540.540.540.540.540.810.810.810.81 371

1984 Cohort 1 yr2 yrs3 yrs4 yrs5 yrs6 yrs7 yrs8 yrs9 yrs10 yrs# of Samples AAA 0.000.000.000.000.000.000.000.000.000.00 29 AA 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 28 A 0.000.000.000.000.000.000.000.000.000.00 78 BBB 0.000.001.191.191.191.191.191.191.191.19 168 BB 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 18 B or below 11.11 22.22 22.22 22.22 22.22 22.22 22.22 22.22 22.22 22.22 9 BBB or abov e 0.00 0.00 0.66 0.66 0.66 0.66 0.66 0.66 0.66 0.66 303 BB or below 3.70 7.41 7.41 7.41 7.41 7.41 7.41 7.41 7.41 7.41 27 All 0.300.611.211.211.211.211.211.211.211.21 330 1983 Cohort 1 yr2 yrs3 yrs4 yrs5 yrs6 yrs7 yrs8 yrs9 yrs10 yrs# of Samples AAA 0.000.000.000.000.000.000.000.000.000.00 24 AA 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 31 A 0.000.000.000.000.000.000.000.000.000.00 74 BBB 0.000.000.001.291.291.291.291.291.291.29 155 BB 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 26 B or below 0.00 10.00 20.00 20.00 20.00 20.00 20.00 20.00 20.00 20.00 10 BBB or abov e 0.00 0.00 0.00 0.70 0.70 0.70 0.70 0.70 0.70 0.70 284 BB or below 0.00 2.78 5.56 5.56 5.56 5.56 5.56 5.56 5.56 5.56 36 All 0.000.310.631.251.251.251.251.251.251.25 320 1982 Cohort 1 yr2 yrs3 yrs4 yrs5 yrs6 yrs7 yrs8 yrs9 yrs10 yrs# of Samples AAA 0.000.000.000.000.000.000.000.000.000.00 25 AA 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 32 A 0.000.000.000.000.000.000.000.000.000.00 76 BBB 0.000.000.000.001.351.351.351.351.351.35 148 BB 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 29 B or below 0.00 0.00 5.88 11.76 11.76 11.76 11.76 11.76 11.76 11.76 17 BBB or abov e 0.00 0.00 0.00 0.00 0.71 0.71 0.71 0.71 0.71 0.71 281 BB or below 0.00 0.00 2.17 4.35 4.35 4.35 4.35 4.35 4.35 4.35 46 All 0.000.000.310.611.221.221.221.221.221.22 327 1981 Cohort 1 yr2 yrs3 yrs4 yrs5 yrs6 yrs7 yrs8 yrs9 yrs10 yrs# of Samples AAA 0.000.000.000.000.000.000.000.000.000.00 25 AA 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 31 A 0.000.000.000.000.000.000.000.000.000.00 73 BBB 0.000.000.000.000.001.471.471.471.471.47 136 BB 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 29 B or below 5.56 5.56 5.56 11.11 16.67 16.67 16.67 16.67 16.67 16.67 18 BBB or abov e 0.00 0.00 0.00 0.00 0.00 0.75 0.75 0.75 0.75 0.75 265 BB or below 2.13 2.13 2.13 4.26 6.38 6.38 6.38 6.38 6.38 6.38 47 All 0.320.320.320.640.961.601.601.601.601.60 312 1980 Cohort 1 yr2 yrs3 yrs4 yrs5 yrs6 yrs7 yrs8 yrs9 yrs10 yrs# of Samples AAA 0.000.000.000.000.000.000.000.000.000.00 14 AA 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 22 A 0.000.000.000.000.000.000.000.000.000.00 44 BBB 0.000.000.000.000.000.002.112.112.112.11 95 BB 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 23 B or below 6.25 12.50 12.50 12.50 25.00 25.00 25.00 25.00 25.00 25.00 16 BBB or abov e 0.00 0.00 0.00 0.00 0.00 0.00 1.14 1.14 1.14 1.14 175 BB or below 2.56 5.13 5.13 5.13 10.26 10.26 10.26 10.26 10.26 10.26 39 All 0.470.930.930.931.871.872.802.802.802.80 214

1979 Cohort 1 yr2 yrs3 yrs4 yrs5 yrs6 yrs7 yrs8 yrs9 yrs10 yrs# of Samples AAA 0.000.000.000.000.000.000.000.000.000.00 15 AA 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 19 A 0.000.000.000.000.000.000.000.000.000.00 45 BBB 0.000.000.000.000.000.000.001.041.041.04 96 BB 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 20 B or below 0.00 0.00 6.25 6.25 6.25 18.75 18.75 18.75 18.75 18.75 16 BBB or abov e 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.57 0.57 0.57 175 BB or below 2.78 2.78 5.56 5.56 5.56 11.11 11.11 11.11 11.11 11.11 36 All 0.470.470.950.950.951.901.902.372.372.37 211 1978 Cohort 1 yr2 yrs3 yrs4 yrs5 yrs6 yrs7 yrs8 yrs9 yrs10 yrs# of Samples AAA 0.000.000.000.000.000.000.000.000.000.00 13 AA 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 19 A 0.000.000.000.000.000.000.000.000.000.00 48 BBB 0.001.041.041.041.041.041.041.042.082.08 96 BB 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 20 B or below 12.50 12.50 12.50 18.75 18.75 18.75 25.00 25.00 25.00 25.00 16 BBB or abov e 0.00 0.57 0.57 0.57 0.57 0.57 0.57 0.57 1.14 1.14 176 BB or below 5.56 5.56 5.56 8.33 8.33 8.33 11.11 11.11 11.11 11.11 36 All 0.941.421.421.891.891.892.362.362.832.83 212

Average Cumulative Default Rates (By Rating Category; Cumulative Years: 1 to 10 Years) (Unit: %)

1 yr 2 yrs 3 yrs 4 yrs 5 yrs 6 yrs 7 yrs 8 yrs 9 yrs 10 yrs AAA 0.00 0.00 0.00 0.00 0.00 0.13 0.27 0.27 0.27 0.27 AA 0.00 0.00 0.00 0.00 0.04 0.07 0.11 0.24 0.38 0.52 A 0.05 0.15 0.26 0.41 0.54 0.67 0.87 1.09 1.30 1.50 BBB 0.11 0.32 0.53 0.76 1.06 1.39 1.69 1.91 2.18 2.42 BB 2.05 3.61 5.30 6.58 7.45 8.33 9.57 10.81 11.74 12.57 B or below 8.41 13.60 17.90 20.32 22.74 24.21 26.18 27.17 28.17 29.19 BBB or abov e 0.06 0.19 0.31 0.46 0.65 0.84 1.06 1.26 1.47 1.67 BB or below 3.19 5.41 7.57 9.06 10.21 11.20 12.57 13.78 14.71 15.58 All 0.24 0.48 0.72 0.95 1.20 1.44 1.73 2.00 2.26 2.50

Rating Transition Matrix (By Rating Category) (Unit: %)

2014 Cohort 1 yr AAA AA A BBB BB B CCC-C Default Sample AAA 0 AA 100.0 136 A 1.2 98.4 0.3 322 BBB 4.8 94.4 0.8 125 BB 33.3 66.7 9 B100.01 CCC-C 100.0 1

2012 Cohort 3 yrs AAA AA A BBB BB B CCC-C Default Sample AAA 0 27 AA 88.0 12.0 142 A 5.3 92.1 2.0 0.3 0.3 304 BBB 18.4 79.4 2.2 136 BB 57.1 42.9 7 B 0 CCC-C 100.0 1

2010 Cohort 5 yrs AAA AA A BBB BB B CCC-C Default Sample AAA 100.0 11 AA 79.6 17.5 1.5 0.7 0.7 137 A 5.1 89.8 5.1 294 BBB 22.6 73.4 3.2 0.8 124 BB 25.0 50.0 25.0 8 B 0 CCC-C 100.0 1

Average Rating Transition Matrix (1978 Cohort - 2014 Cohort) 1 yr AAA AA A BBB BB B CCC-C Default Sample AAA 91.0 9.0 764 AA 0.8 94.2 5.0 0.1 3364 A 0.0 1.8 94.5 3.5 0.1 0.1 7825 BBB 0.0 3.8 93.4 2.6 0.0 0.1 7399 BB 0.2 8.2 86.4 2.6 0.1 2.5 807 B 0.8 9.8 77.3 0.8 11.4 132 CCC-C 4.4 88.9 6.7 45

Average Rating Transition Matrix (1978 Cohort - 2012 Cohort) 3 yrs AAA AA A BBB BB B CCC-C Default Sample AAA 74.0 25.2 0.8 750 AA 2.4 82.6 14.3 0.6 0.1 0.0 2990 28 A 0.0 5.2 84.2 9.6 0.6 0.0 0.3 6845 BBB 0.1 12.1 80.8 6.0 0.2 0.7 6154 BB 2.0 25.4 58.1 5.1 9.4 544 B 2.2 6.7 22.2 31.1 3.3 34.4 90 CCC-C 3.4 13.8 58.6 24.1 29

Average Rating Transition Matrix (1978 Cohort - 2010 Cohort) 5 yrs AAA AA A BBB BB B CCC-C Default Sample AAA 61.6 37.5 1.0 726 AA 3.1 74.1 20.6 1.8 0.2 0.1 0.0 2649 A 0.1 7.7 76.7 13.3 1.4 0.0 0.7 5964 BBB 0.4 20.2 70.7 6.6 0.5 1.6 5037 BB 8.8 36.1 33.9 3.7 17.4 407 B 4.3 17.4 14.5 7.2 2.9 53.6 69 CCC-C 10.0 10.0 5.0 20.0 55.0 20

Rating Transition Matrix (By Rating Notch) (Unit: %)

2014 Cohort 1 yr AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B B- CCC+ CCC CCC- CC C Default Sample AAA 0 AA+ 95.0 5.0 20 AA 97.7 2.3 44 AA- 1.4 98.6 72 A+ 4.0 94.0 2.0 100 A 5.6 88.9 5.6 108 A- 6.1 93.0 0.9 114 BBB+ 9.2 87.7 3.1 65 BBB 17.8 82.2 45 BBB- 13.3 80.0 6.7 15 BB+ 16.7 83.3 6 BB 66.7 33.3 3 BB- 0 B+ 100.0 1 B 0 29 B- 0 CCC+ 100.0 1 CCC 0 CCC- 0 CC 0 C 0

2012 Cohort 3 yrs AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B B- CCC+ CCC CCC- CC C Default Sample AAA 0 AA+ 85.7 14.3 21 AA 71.9 14.0 8.8 5.3 57 AA- 1.684.412.51.6 64 A+ 15.4 75.8 6.6 1.1 1.1 91 A 0.9 15.4 70.9 11.1 0.9 0.9 117 A- 1.0 11.5 82.3 4.2 1.0 96 BBB+ 1.528.862.17.6 66 BBB 9.1 29.1 56.4 3.6 1.8 55 BBB- 13.3 13.3 60.0 13.3 15 BB+ 50.0 50.0 4 BB 66.7 33.3 3 BB- 0 B+ 0 B 0 30 B- 0 CCC+ 100.0 1 CCC 0 CCC- 0 CC 0 C 0

2010 Cohort 5 yrs AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B B- CCC+ CCC CCC- CC C Default Sample AAA 90.9 9.1 11 AA+ 31.8 22.7 22.7 18.2 4.5 22 AA 77.6 18.4 4.1 49 AA- 1.5 74.2 18.2 1.5 1.5 1.5 1.5 66 A+ 16.9 72.7 9.1 1.3 77 A 0.8 20.7 59.5 16.5 1.7 0.8 121 A- 1.0 2.1 16.7 67.7 9.4 3.1 96 BBB+ 3.835.854.73.81.9 53 BBB 9.4 32.1 52.8 1.9 3.8 53 BBB- 11.1 11.1 16.7 44.4 11.1 5.6 18 BB+ 100.0 3 BB 25.0 25.0 25.0 25.0 4 BB- 100.0 1 B+ 0 B 0 31 B- 0 CCC+ 100.0 1 CCC 0 CCC- 0 CC 0 C 0

Average Rating Transition Matrix (1978 Cohort - 2014 Cohort) 1 yr AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B B- CCC+ CCC CCC- CC C Default Sample AAA 91.0 7.5 1.3 0.3 764 AA+ 2.1 84.6 11.6 1.3 0.4 680 AA 0.9 3.2 87.5 6.3 1.5 0.4 0.2 1326 AA- 3.286.57.62.30.20.10.1 1358 A+ 0.1 0.3 4.9 86.7 6.1 1.2 0.3 0.3 0.1 0.1 0.1 1964 A 0.00.10.30.65.685.65.91.10.50.20.00.1 3003 A- 0.1 0.1 0.3 7.1 84.7 4.8 2.1 0.5 0.2 0.0 0.1 2858 BBB+ 0.0 0.1 1.0 8.6 83.1 4.9 1.6 0.3 0.2 0.1 0.1 2208 BBB 0.0 0.1 0.5 1.1 5.6 86.7 4.2 0.9 0.7 0.0 0.1 3620 BBB- 0.3 1.0 7.8 82.9 5.5 1.7 0.8 0.1 0.1 0.1 1571 BB+ 1.0 1.3 6.4 81.8 3.6 3.8 0.5 0.3 1.3 391 BB 0.3 0.3 1.2 4.4 2.9 0.6 80.5 4.7 2.0 0.9 0.3 2.0 343 BB- 1.4 2.7 5.5 6.8 61.6 8.2 2.7 11.0 73 B+ 8.1 10.8 56.8 10.8 2.7 10.8 37 B 1.1 5.6 1.1 1.1 80.0 1.1 1.1 8.9 90 32 B- 40.0 60.0 5 CCC+ 14.3 85.7 7 CCC 2.6 89.5 7.9 38 CCC- 0 CC 0 C 0

Average Rating Transition Matrix (1978 Cohort - 2012 Cohort) 3 yrs AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B B- CCC+ CCC CCC- CC C Default Sample AAA 74.0 19.9 4.5 0.8 0.3 0.5 750 AA+ 4.3 59.6 23.3 7.4 3.9 1.1 0.2 0.3 623 AA 3.7 7.8 67.0 12.8 5.3 2.0 0.9 0.3 0.2 1191 AA- 0.5 8.5 64.4 17.6 6.5 1.3 0.3 0.4 0.2 0.1 0.1 0.1 0.1 1176 A+ 0.1 1.3 11.4 67.2 12.5 4.0 1.6 0.8 0.5 0.1 0.1 0.1 0.2 1704 A 0.1 0.2 1.3 2.7 12.8 62.9 12.9 3.6 2.1 0.9 0.1 0.3 0.0 0.2 2641 A- 0.2 0.8 2.4 16.0 61.6 11.3 4.4 1.7 0.8 0.1 0.2 0.0 0.4 2500 BBB+ 0.1 0.1 1.0 3.9 20.4 56.4 12.0 4.0 1.1 0.3 0.4 0.4 1879 BBB 0.1 0.1 0.2 2.2 5.4 13.6 63.7 9.5 2.5 1.6 0.5 0.0 0.1 0.6 3041 BBB- 0.1 0.2 0.3 1.9 3.8 19.6 55.6 10.2 4.1 1.8 0.4 0.5 0.1 1.4 1234 BB+ 2.0 4.8 6.4 12.9 54.2 3.6 5.6 3.2 0.8 6.4 249 BB 1.2 1.2 5.0 14.1 8.3 1.2 52.7 5.4 3.7 1.2 5.8 241 BB- 5.6 11.1 5.6 1.9 5.6 20.4 7.4 3.7 38.9 54 B+ 3.8 3.8 3.8 3.8 15.4 11.5 3.8 11.5 42.3 26 B 5.1 3.4 20.3 40.7 5.1 25.4 59 33 B- 100.0 5 CCC+ 20.0 20.0 60.0 5 CCC 12.5 58.3 29.2 24 CCC- 0 CC 0 C 0

Average Rating Transition Matrix (1978 Cohort - 2010 Cohort) 5 yrs AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B B- CCC+ CCC CCC- CC C Default Sample AAA 61.6 27.7 7.0 2.8 0.4 0.4 0.1 726 AA+ 4.0 44.5 27.1 10.7 8.8 3.0 1.1 0.2 0.4 0.4 569 AA 5.6 10.0 55.1 15.7 7.2 3.1 1.6 0.8 0.3 0.3 0.1 0.1 0.1 1059 AA- 0.9 10.9 50.7 22.0 9.3 2.7 1.5 0.8 0.6 0.3 0.1 0.1 0.1 1021 A+ 0.1 2.4 14.5 54.9 16.9 5.4 2.6 1.3 0.8 0.3 0.1 0.1 0.1 0.5 1474 A 0.2 0.6 2.3 4.8 17.1 46.7 16.6 5.3 3.5 1.3 0.4 0.4 0.2 0.0 0.5 2283 A- 0.4 1.3 5.0 20.5 47.2 13.6 6.2 2.6 1.7 0.2 0.5 0.9 2207 BBB+ 0.2 0.2 2.2 7.6 26.1 40.3 14.6 5.2 2.2 0.4 0.4 0.7 1572 BBB 0.1 0.2 0.8 4.0 10.9 17.9 47.0 11.9 3.3 1.6 0.7 0.1 0.2 1.3 2519 BBB- 0.1 0.3 0.7 1.4 4.4 8.1 25.3 39.0 8.6 3.9 2.7 1.1 0.5 0.1 3.7 946 BB+ 9.1 8.6 10.3 16.0 32.6 3.4 3.4 4.0 1.1 11.4 175 BB 1.6 2.2 5.5 8.2 20.9 11.5 1.1 32.4 2.2 1.6 12.6 182 BB- 4.0 2.0 14.0 10.0 2.0 4.0 2.0 2.0 4.0 56.0 50 B+ 13.0 13.0 13.0 60.9 23 B 4.9 9.8 7.3 17.1 12.2 4.9 43.9 41 34 B- 100.0 5 CCC+ 66.7 33.3 3 CCC 11.8 5.9 17.6 64.7 17 CCC- 0 CC 0 C 0

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