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2017 Annual Global Structured Finance 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

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.

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.