Movement of an issuer from one rating class to another over a period, described by a transition matrix and a source of loss distinct from default itself.
A bond portfolio loses money well before any issuer defaults. A rating downgrade cuts the security's price, raises the regulatory capital charge, and sometimes triggers a forced sale where the mandate imposes a minimum rating. Migration is described by a transition matrix giving the probability, over a one-year horizon, of moving from one class to each of the others, default included. Three properties of these matrices govern their use. They are strongly diagonal, most issuers keeping their rating, but the small probabilities of multi-notch jumps carry most of the loss. They are not stable over time, deforming markedly in recession, which forbids using a long-term average matrix for a crisis scenario. And migrations correlate across issuers, so a portfolio simulation assuming independence badly understates the tail. In the regulatory spread risk module the shock applied depends directly on rating, so a cascade of downgrades costs capital before any default occurs.
Corporate bond portfolio of a European insurer, 3.2 billion euros, as of December 31, 2025. A one-notch downgrade scenario across all BBB issuers, 780M EUR of holdings, pushes part of those securities into speculative grade and raises spread SCR by 42M EUR without a single euro of coupon being lost.
rating migration, matrice de transition, transition matrix, déclassement, downgrade