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2016 Inaugural Global Financial Services Default Study and Rating Transitions


These ESG Trends will Shape 2019, Sustainability Experts Say

S&P Global Ratings

COP24 Special Edition Shining A Light On Climate Finance

S&P Global Ratings

S&P Global Ratings' Global Outlook 2019

S&P Global Platts

Energy: What to Watch in 2019

2016 Inaugural Global Financial Services Default Study and Rating Transitions

Financial services entities rated by S&P Global Ratings, including the bank, nonbank financial institution (NBFI), and insurance sectors, experienced overall high ratings stability and credit quality in 2016, even amid rising global pressures and uncertainty, from volatile commodity prices to rising geopolitical risks, along with political votes that shifted the global dynamic, including the Brexit referendum. A total of 16 rated global financial services issuers defaulted in 2016, an increase from 12 rated defaults in 2015, marking the highest number of defaults from rated financial entities since 2009. These defaults included several NBFIs from the U.S. in advance of pending regulatory actions, along with several banks from Russia and Central and Eastern Europe that defaulted through a regulatory directive. Meanwhile, the largest default of the year was a U.S. bank, the Government Development Bank for Puerto Rico, and the highest-rated defaulter was Panamanian reinsurer Istmo Compania de Reaseguros Inc., which was rated 'BBB' as of the beginning of 2016. This marked the first time in five years that a financial services company defaulted in a year in which it was rated investment grade ('BBB-' or higher) as of the beginning of the year.

Despite rising uncertainty and defaults, ratings remained stable for the majority of financial services entities during the year, and measures of credit quality and ratings stability remained generally in line with historical averages. Default rates were above average only for the lowest rating categories of 'B' and 'CCC'. The default rate for speculative-grade (rated 'BB+' or lower) financial entities globally rose to 2.71% in 2016, and while this was the highest rate since 2010, it remained below the default rate for speculative-grade nonfinancial companies. While the default rate for financial services companies has been rising in recent years, the pace of defaults slowed through the first half of 2017.


  • The number of rated financial entities that defaulted rose to 16 in 2016 from 12 in 2015. The highest rated among the year's defaults was Istmo Compania de Reaseguros, which was rated 'BBB' as of the beginning of 2016, marking the first investment-grade default from a financial services company since the default of MF Global in 2011.
  • The trailing-12-month default rate for speculative-grade financial entities rose to 2.71% in 2016 from 2.33% in 2015, considerably lower than the 4.19% speculative-grade default rate for corporate entities globally.
  • The ratings on financial entities were largely stable in 2016, with 77.1% of ratings remaining unchanged during the year.
  • The Gini coefficient, which we use to measure ratings performance, had a long-term (since 1981) weighted average of 79.56% for financial services companies. The one-year Gini coefficient rose to 91.77% in 2016 from 91.5% in 2015.

This is the inaugural global financial services study, where we review the defaults, transitions, and ratings performance of the broad financial services sector, including the bank, NBFI, and insurance sectors. Our findings in this study show that ratings continue to serve as effective indicators of relative credit risk for financial services companies. We identified a clear negative correspondence between ratings and defaults: The higher the issuer credit rating, the lower the observed default frequency. Historically, financial services issuers tend to have lower default rates than in the nonfinancial corporate sectors, though they also tend to be more sensitive to changes in investor confidence. For those companies that do default, the decline in credit quality can be swift once lenders and counterparties lose confidence in the entity.

Defaults of financial services companies have often involved some type of asset/liability mismatch, wherein a combination of illiquid assets and accelerating liabilities is ignited by a collapse in confidence (such as in the institution or in the value of the assets), sparking a "run on the bank" scenario, where depositors, policyholders, or lenders make demands that cannot be met, either due to illiquidity or insolvency. In many cases, this leads to a regulatory intervention, such as when a bank or insurer is taken under regulatory supervision by its regulator or, as we saw during the 2008-2009 period, when a government steps in to provide extraordinary support to a systemically important financial institution.

Defaults of banks and NBFIs are often cyclical, with defaults rising during periods of recession or other times of financial stress. Some of the notable periods of financial stress that contributed to elevated default rates for banks and NBFIs included the housing crash and Great Recession of 2008-2009, as well as the savings and loan crisis in 1989. Additionally, global financial services default rates have risen in years with a sovereign default, such as following that of the Russian Federation in 1999 and of Argentina in 2001 and 2002. Meanwhile, though the insurance sector also experiences periods of rising defaults, these cycles tend to follow industry trends of aggressive pricing or reserving and do not necessarily follow the broader business cycle.

Our study of global financial defaults identified a clear negative correlation between ratings and defaults. We show this relationship with a Gini ratio, which is a measure of the rank-ordering power of ratings over a given time horizon (see table 1). This measure shows the ratio of actual rank-ordering performance to theoretically perfect rank ordering. Despite the increasing number of defaults in 2016, including one investment-grade default, the one-year Gini ratio--a key measure of the relative ability of ratings to differentiate risk--remained elevated because most of the year's defaults came from the lowest-rated companies.

The one-year Gini ratio rose to 91.77% in 2016 from 91.5% in 2015 and remains above its long-term average. In recent years, financial services ratings have had one-year Gini coefficients well above the average, holding above 90% over the past five years as multiple central banks have pursued quantitative easing. Over longer time horizons, Gini ratios continue to attest to ratings as effective indicators of relative default risk. The one-year weighted-average Gini coefficient for financial entities is 79.56%, the three-year is 68.44%, the five-year is 60.87%, and the seven-year is 55.91%. These weighted-average Gini ratios are weighted by yearly issuer counts since 1981 (see Appendix II for Gini methodology details).

Gini Coefficients For Financial And Nonfinancial Issuer Ratings (1981-2016)
  --Time Horizon--
  One-year Three-year Five-year Seven-year
Weighted average 79.56 68.44 60.87 55.91
Average 81.67 74.23 65.79 58.76
Standard deviation (20.93) (14.58) (15.87) (14.21)
Weighted average 80.77 73.03 69.92 68.15
Average 84.14 76.87 73.03 70.03
Standard deviation (6.11) (5.34) (5.62) (5.27)

Note: Financials consist of banks, NBFIs, and insurance companies. Nonfinancials consist of all nonfinancial corporates. Numbers in parentheses are standard deviations. Sources: S&P Global Fixed Income Research and S&P Global Market Intelligence's CreditPro®.

Listen: These ESG Trends will Shape 2019, Sustainability Experts Say

Progress on corporate disclosures. A looming talent shortage. Climate change mitigation. These are among the top trends that sustainability experts predict will shape the ESG landscape in 2019. In the inaugural episode of ESG Insider, a new podcast from S&P Global, co-hosts Esther Whieldon and Lindsey White speak to several ESG leaders about the key themes they are watching this year, including Rakhi Kumar, State Street Global Advisors’ head of ESG investments and asset stewardship, Mindy Lubber, CEO and president of Ceres, and Libby Bernick, Trucost managing director and global head of corporate business.

"ESG investing is no longer a sideshow," State Street Global Advisors Inc.'s Rakhi Kumar said in the inaugural episode of ESG Insider, which will focus on environmental, social and governance issues.

Kumar, SSGA's head of ESG investments and asset stewardship, also highlighted the importance of leadership teams setting goals around issues like diversity to achieve progress toward building more sustainable businesses in the long term.

Some other takeaways:

Why companies are starting to pay more attention to the physical risks of climate change

Amid an increase in extreme weather events such as hurricanes, droughts and heat waves, companies are beginning to take a closer look at how climate change could threaten their operations and even their bottom line, said Libby Bernick, Trucost managing director and global head of corporate business.

"It's not just 'what's my company's impact on climate,' it's 'what's climate's impact on my company,'" Bernick said.

Trucost is a research group within S&P Global Market Intelligence that assesses business risks related to climate change and other ESG factors.

Companies are responding to investor pressure to tackle sustainability issues

Investor pressure has already prompted a number of companies to step up their environmental efforts, particularly those tied to climate change and water shortages, according to Ceres President and CEO Mindy Lubber. Ceres is an organization that helps coordinate sustainability discussions between major companies and shareholders.

Lubber expects the momentum will continue in 2019 with companies beginning to tackle climate-related issues in a "more concentrated, focused, systemic way."

To read more of S&P Global's coverage of sustainability issues, you can subscribe here to receive our weekly ESG Insider newsletter.

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.

COP24 Special Edition Shining A Light On Climate Finance


− Green loans are evolving, with the Climate Bond Initiative forecasting nearly $1 trillion in green bond issuance by 2020.

− Despite the uptick in green bond and loan issuance, the market still remains relatively small, especially compared to the universe of assets comprising CLO 2.0 transactions.

− In our view, a green CLO market has large growth potential, boosted by regulatory initiatives and emerging interest from both issuers and investors in 2018.

− We built a hypothetical rating scenario for a green CLO to compare and contrast the underlying portfolio and structure with a typical European CLO 2.0 transaction.

− Our hypothetical green CLO analysis showed that green loans may have different fundamental characteristics to corporate loans, such as lower asset yields, higher credit quality, and higher recovery rates assumptions.

The global collateralized loan obligation (CLO) market has experienced a rebirth (2010 in the U.S. and 2013 in Europe). New issuance continues to increase due to investor familiarity with the product, as well as low historical default rates. While a market for green assets, such as green loans and bonds has been established for a while, although still of a relative size, a sustainable securitization market is still in its infancy. Considering the challenge in financing the amounts, S&P Global Ratings expects green CLOs to play a role in increasing the private sector presence in the sustainable finance market.

Following the Paris Agreement that came into force in November 2016, 184 parties have ratified the action plan to limit global warming. For this purpose, developed nations have pledged to provide $100 billion (about €87 billion) annually until 2025. As part of this deal the EU has committed to decrease carbon emissions by 40% by 2030. In March 2018 the European Commission (EC) proposed the creation of environmental, social, and corporate governance 'taxonomy', regulating sustainable finance product disclosures, as well as introducing the 'green supporting factor' in the EU prudential rules for banks and insurance companies.

Read the Full Report

S&P Global Ratings' Global Outlook 2019

 A deep dive into S&P Global Ratings’ insights on the credit outlook for 2019 and what are the risks and vulnerabilities to look out for.

Access all the Global Outlook
Read More

Energy: What to Watch in 2019


S&P Global Platts Analytics Issues Two Special Reports

Pricing across the global energy markets will face headwinds in 2019, with a weaker and more uncertain macroeconomic framework deflating price formation in general, according to two special reports just issued by S&P Global Platts Analytics. Such headwinds will require the industry and portfolio managers to take a big-picture approach.

See the Executive Summary of the S&P Global Platts Analytics special report 2018 Review and 2019 here. Access the full S&P Global Platts Analytics Top Factors to Look Out For in 2019 for Energy here.

"One of the key lessons learned in 2018, painfully by some, is that market sentiment can shift violently without much change in fundamentals, requiring a steady, holistic perspective," said Chris Midgley, global head of analytics, S&P Global Platts. "It is clear that this volatility will remain a feature across the energy markets in 2019, particularly as IMO 2020 nears."

Particularly blustery headwinds are in store for markets where prices finished 2018 at elevated levels, and well above costs, such as North American natural gas and global coal. However, if the supply side can adjust to the reality of slowing demand growth, energy prices can find support. For natural gas liquids (NGLs), the ongoing logistical constraints at the US Gulf Coast are likely to manifest on continued price volatility, particularly for ethane and liquid petroleum gas (LPG), over the next year despite strong global demand.

LPG, such as propane and butane and used in transportation fuel, refrigeration, heating and cooking, is rapidly facing US export capacity constraints, especially along the US Gulf Coast. For LPG feedstock propylene, there is clear potential for high volatility globally over the next 12-18 months.

Analysts at S&P Global Platts see weakening prices of Henry Hub natural gas. The slowdown in US demand growth will exceed that of supply. But if winter temperatures prove to be colder than normal, near-term prices will need to move higher to bring on enough supply to replenish depleted storage levels.

For global liquefied natural gas (LNG), it will be end-user-backed LNG demand that faces particular struggle to cope with the speed and force of new supply entering the market in 2019. Non price-responsive demand in Asia will be easily met and JKM spot physical prices (reflecting LNG as delivered into Japan, Korea and China) will sag next year.

Access the full S&P Global Platts Analytics Top Factors to Look Out For in 2019 for Energy here. Among the 22 key take-away themes:

  • NGL supply growth will strain the North American energy system
  • Saudi Arabia will need to be nimble to balance 2019 oil supply
  • US oil supply limited by pipelines
  • Oil demand slowing: trade war, industrial slump
  • 2019 LNG supply additions largest since the Qatari mega-trains
  • US gas supply growth to exceed demand growth even with LNG exports
  • Global solar growth slowing
  • Shipping disruption looming - IMO 2020
  • New Russian gas pipeline advantage over Ukraine
  • US coal demand to decline again in 2019
  • Growth in new refineries and complex capacity likely to weigh on refinery margins especially in Asia

Year 2019 will certainly be one of transition for crude and refined oil products as it will lead into 2020 when roughly three million barrels per day of high-sulfur fuel oil must be “destroyed” (including enhanced usage of HSFO in power generation) due to the International Marine Organization (IMO) mandate of eco-friendly shipping fuels in use at sea. A similar amount of middle distillate/low sulfur fuel must be created (by refinery changes and by running more crude oil. The increase in refinery capacity between now and 2020 is large, but mostly needed to cover normal demand growth. Expect prices of light sweet crudes to be bid up in 4Q19.