2017 Annual Global Structured Finance Default Study and Rating Transitions

S&P Global Ratings
Written By: Andrew South and Zev Gurwitz
S&P Global Ratings
Written By: Andrew South and Zev Gurwitz

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.

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