The financial crises which occurred in the last several decades have demonstrated the significant impact of market structural breaks on firms’ credit behavior. To incorporate the impact of market structural break into the analysis of firms’ credit rating transitions and firms’ asset structure, we develop a continuous-time modulated Markov model for firms’ credit rating transitions with unobserved market structural breaks. The model takes a semi-parametric multiplicative regression form, in which the effects of firms’ observable covariates and macroeconomic variables are represented parametrically and nonparametrically, respectively, and the frailty effects of unobserved firm-specific and market-wide variables are incorporated via the integration form of the model assumption. We further develop a mixtured-estimating-equation approach to make inference on the effect of market variations, baseline intensities of all firms’ credit rating transitions, and rating transition intensities for each individual firm. We then use the developed model and inference procedure to analyze the monthly credit rating of U.S. firms from January 1986 to December 2012, and study the effect of market structural breaks on firms’ credit rating transitions.