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2017 Annual Global Structured Finance Default Study and Rating Transitions

Multiple Operators Suffer Damage to Fiber Networks from Hurricane Michael

Factbox Energy demand impacts to linger in wake of Hurricane Michael

Factbox: Hurricane Michael Impact Turns from Production Loss to Demand Destruction

Fast-moving Michael destroys gas demand across US Southeast

2017 Annual Global Structured Finance Default Study and Rating Transitions

In 2017, the global structured finance default rate declined to a 10-year low, while the downgrade rate fell to its lowest level since 2006. Overall credit quality increased for the second successive year, and the upgrade rate remained close to recent highs.

S&P Global Ratings had more than 38,500 ratings outstanding on global structured finance securities at the beginning of 2017. Of these securities, 2.1% defaulted during the year—the lowest annual figure since 2007. The downgrade rate fell to 5.0% in 2017 from 6.7% in 2016, reaching an 11-year low. Meanwhile, the upgrade rate decreased to 9.1% in 2017, from 10.9% in 2016. Combining upgrades and downgrades with their severity, we raised our ratings on global structured finance securities by an average of 0.10 notches on aggregate, compared with a 0.15-notch increase in average credit quality during 2016.

By far the most downgrades continued to be in the U.S. residential mortgage-backed securities (RMBS) sector, but the European commercial mortgage-backed securities (CMBS) and U.S. single-name synthetics sectors saw higher downgrade rates, which express the number of downgrades as a proportion of the number of ratings outstanding. By contrast, a variety of sectors exhibited strong credit performance, with the highest upgrade rate of 33.2% in the European RMBS sector, mainly due to corresponding upgrades for related transaction counterparties or sovereigns. Overall, there were double-digit upgrade rates in each of the asset-backed securities (ABS), CMBS, and structured credit sectors globally.

Key Takeaways

Defaults: Annual default rate declines to a 10-year low

  • We lowered 817 global structured finance ratings to 'D' in 2017, for an overall default rate of 2.1%—down from 3.0% in 2016.
  • This put the 2017 default rate well below the one-year average default rate of 3.9%.

Rating transitions: Upgrade and downgrade rates both declined in 2017

  • Of the 38,539 global structured finance ratings outstanding at the start of 2017, we left unchanged or raised 95.0% and lowered 5.0%. This compares with 93.3% and 6.7%, respectively, in 2016.
  • We raised 9.1% of ratings in 2017, down from 10.9% in 2016.
  • The 2017 downgrade rate of 5.0% was much lower than the long-term one-year average downgrade rate of 16.6%.
  • The average change in credit quality was +0.10 notches in 2017—down from +0.15 notches in 2016 but still in positive territory at year-end for only the second time since 2006.

Sector and region breakdown: Most downgrades in U.S. RMBS; upgrades spread across many sectors

  • In the U.S., the RMBS sector accounted for by far the majority of downgrades and defaults, with a downgrade rate of 6.8% and a default rate of 3.2%.
  • In Europe, CMBS was the weakest sector, with a downgrade rate of 21.9%.
  • By contrast, ABS ratings saw a high upgrade rate of 12.0% globally, and only eight defaults.

Credit Performance—Default Rate Reaches 10-Year Low

By most metrics, the overall credit performance of global structured finance securities that we rate was positive in 2017. During the year, we raised 9.1% of our ratings on global structured finance securities that were outstanding at the beginning of the year (see chart 1). Although this was down from 10.9% in 2016, it still strongly exceeded the downgrade rate for only the second time since 2006. The downgrade rate of 5.0% constituted an 11-year low.

The 12-month trailing average change in credit quality (see definition in Appendix I) for global structured finance was +0.10 rating notches at the end of 2017. This measure had been negative for several years since mid-2007, indicating that, on average, ratings were drifting lower, but turned positive in early 2016 (see chart 1).

The default rate of 2.1% in 2017 was lower than in the previous year and well below the one-year weighted-average default rate of 3.9%. Viewing the default rate on a 12-month trailing basis reveals the broader downtrend had reversed, with a significant uptick in the default rate during the second half of 2015, but default rates have declined again more recently (see chart 2). The default rate for investment-grade ratings rose slightly to 14.6 basis points (bps) in 2017, from 12.5 bps in 2016, although this was equivalent to only 33 defaults among 22,678 investment-grade ratings outstanding at the beginning of the year. The speculative-grade default rate was 4.9%. The annual default rates for both investment- and speculative-grade structured finance securities have generally stabilized since their peaks in 2009.

Multiple Operators Suffer Damage to Fiber Networks from Hurricane Michael

Communications providers are working to restore services in areas impacted by Hurricane Michael, but storm debris, power outages and significant fiber damage are hindering progress in those counties most devastated by the storm.

As of Oct. 14, a number of counties along the Florida Panhandle had more than half of their cell sites down, including Bay County — home of Panama City and Mexico Beach, described as "ground zero" of the storm by U.S. Federal Emergency Management Agency administrator Brock Long — where 66.1% of cell sites were down. Similarly, neighboring Gulf County had 69.6% of cell sites down, according to data from the U.S. Federal Communications Commission.

Based on the amount of damage in the area and ongoing power outages, it could be weeks before services are restored. Long said Oct. 12 that after search and rescue, restoring communications in impacted counties is among FEMA's top priorities.

"You have to be able to communicate to appropriately respond and we are trying to do everything we can to get the private sector vendors, the Verizon [Communications Inc.]'s of the world, to get in to try to get their systems back up and running," he said.

Long added, however, that the process is not easy. "There was a tremendous amount of debris. When you look at the damage in Mexico Beach, that is where the ocean rose potentially 14 feet … and shoved buildings out of the way. When you have that type of damage, it takes time to get in and go through," he said.

Hurricane Michael made landfall Oct. 10 near Mexico Beach as a Category 4 hurricane with 155-mile-per-hour winds.

For its part, Verizon said the "vast majority" of Florida and Georgia service has been restored, with 99% of the company's network in Georgia in service and 97% of its network in Florida. But the company noted there are pockets, particularly near Panama City, where the damage is severe.

"The storm caused unprecedented damage to our fiber, which is essential for our network — including many of our temporary portable assets — to work. Our fiber crews are working around the clock to make repairs, and while they are making good progress, we still have work to do to get the fiber completely repaired," the company said Oct. 14.

Fiber is the connecting component of a network that carries data from point to point. It is necessary for Verizon's permanent and temporary cell sites to be operational. The company noted that while it has multiple fiber paths to carry data, "The severity and intensity of the storm caused damage to all duplicate routes in the Panama City and Panama City Beach area."

In terms of wireline services, the FCC said 291,300 subscribers remain out of service as of Oct. 14, including 205,643 subscribers in Florida. The figures were down from a day earlier, when a total of 337,223 subscribers were without service, including 233,843 in Florida.

The top residential video and broadband provider in Bay County is Comcast Corp., according to MediaCensus data from Kagan, a research group within S&P Global Market Intelligence. Comcast, the largest cable operator in the U.S., said in an Oct. 12 statement that it is working to get Xfinity services back online.

"As power returns … and it becomes safe for our technicians and restoration crews, we will work to repair any damages affecting our network," the company said.

As of Oct. 15, more than 162,000 customers in Florida remained without power, including all 27,275 customers served by Gulf Coast Electric Cooperative. The cooperative said in an Oct. 12 Facebook Inc. post that its distribution system "suffered catastrophic damage"

In Gulf County, the top residential video provider is AT&T Inc.'s satellite video service DIRECTV, according to MediaCensus data, while the top residential broadband provider is Mediacom Communications Corp., the fifth-largest cable operator in the U.S.

Mediacom said Oct. 14 that its recovery efforts are underway but its network in Florida has 14 miles of severely damaged fiber near Walton County, as well as 25 miles of damaged fiber east of Panama City that is obstructing video transmission from Gulf County to Walton County.

"Our current priority remains focusing on repairing damage to our high-speed data transport network and main transmission facilities and repairing downed lines where we have access to the area. We have outages from widespread loss of commercial power along with downed lines, and structural damage throughout our systems," the cable operator said.

Factbox: Hurricane Michael Impact Turns from Production Loss to Demand Destruction

Houston, Oct. 11 2018 — Hurricane Michael made landfall at the Florida panhandle as a Category 4 hurricane Wednesday with 155 mph winds, quickly destroying demand for power, natural gas and refined oil products. Shut-in oil production rose modestly from Tuesday to over 700,000 b/d, but the storm has stayed east of much of the region's production, which means supply should be back online quickly.

Meanwhile, the severity of the storm has surprised to the upside, which could a mean longer lasting and more severe impact on demand for power, natural gas, refined products and ultimately crude oil.

"We expect the impact on refined products demand to be below that of previous hurricanes in the Gulf Coast such as Harvey in 2017, as the region impacted by Michael has lower population density than Houston ... Nevertheless, the impacts are favoring the high side of our estimates given the sheer severity of the storm," said Claudio Giamberti, Head of Demand and Refining at S&P Global Platts Analytics.

As of 7 pm EDT, the eye of Michael was moving over southwestern Georgia with maximum sustained winds still at 100 mph, according to the National Hurricane Center. The storm is expected to move northeast across the Carolinas before heading back out to sea Friday morning.