Corporate credit rating changes are primarily driven by changes in underlying fundamentals, according to new study by Fitch Ratings.

The report examines the most important proximate cause for some 1,100 rating changes taken in the agency’s ratings portfolio outside North America between 2002 and 2005.

“With the increase in event risk affecting ratings, we wanted to put current trends in some kind of historical perspective,” said Richard Hunter, regional credit officer for Europe. During the 2003-2005 period event risks actually had a net positive impact on ratings, with 0.8 downgrades for each upgrade as recently as 2005. In 2006 thus far, however, the situation has reversed with event risk prompting 1.5 downgrades for every upgrade.

Event risks accounted for only 11% of rating changes. Within the sub-categories of this sector, 9% of all changes were linked to merger & acquisition activity, while only 2% referred to other types of event risk (were unrelated to either a sovereign rating change or M&A.)

The study also found that changes in financial and business profiles (“fundamentals-driven” changes), while the largest single cause behind rating changes in the observation period, accounted for only 41% of upgrades and downgrades. Ratings changes linked to ratings of affiliated entities accounted for 24%, while the remainder of rating changes, a further 24%, were related to sovereign rating actions.

The influence of sovereign actions was much stronger within emerging markets. Almost 60% of non-sovereign rating changes in emerging markets were linked to changes in the rating of the respective sovereign, compared to less than 5% in developed markets, it noted. “Country risks are sometimes seen as exogenous event risks,” noted Hunter. “This study underlines the degree to which country risk elements relevant to Fitch’s sovereign ratings are also actively factored into its non-sovereign rating analysis.”

The study also warns that this strong correlation in emerging markets indicates exposure to a deceleration in the strong upward momentum of sovereign ratings in recent years, as well as a degree of ‘clustering’ in likely future rating actions.

The study also looks at the reasons for rating changes so far in 2006. Upgrades and downgrades for the first nine months almost equalled the respective totals for the whole of 2005, although a slightly different mix was observed.

An increase in fundamentals-driven upgrades was notable within emerging market coverage of the corporate sector, but was matched by an increase in downgrades for developed market corporates driven by merger & acquisition activity, Fitch found. Although the breakdown of changes by cause for banks and insurance companies remained broadly consistent with the findings for 2005, the statistics for the year thus far have been distinguished by a deceleration of upgrades generally within insurance, and by a spike in the number of affiliate downgrades for financial institutions, related to affiliates of the major automakers.