- No defaults were recorded among Mexican structured finance national scale ratings in 2019, the second time in the past decade.
- The upgrade rate for Mexican national scale ratings in 2019 was the second-highest on record, with the residential mortgage-backed securities (RMBS) upgrade rate exceeding its one-year average.
- The only downgrades within Mexican national scale ratings occurred in the RMBS and future flows sectors.
Credit Performance: No Defaults In 2019, And Upgrades Rose To Historical High
The overall credit performance of Mexican structured finance securities rated by S&P Global Ratings improved in 2019, and there were no defaults. The upgrade rate (the number of upgrades as a portion of the number of ratings outstanding) rose to the second highest on record. The downgrade rate (the number of downgrades as a portion of the number of ratings outstanding) increased in 2019 but remained well below comparable rates in the past 10 years.
The 12-month-trailing average change in credit quality (see definition in Appendix I) for Mexican structured finance was +0.05 rating notches at the end of 2019. This marks the first time the measure has ended the year positive since 2007. After spending over a decade in negative territory, the measure turned positive in August 2019, at +0.07 notches. On average, ratings have been drifting higher since the start of 2018 (see chart 1).
2019 marks the second time in the past 10 years there were no defaults for Mexico, the other being recorded in 2017 (see chart 2).
Mexican structured finance credit performance in 2019 varied across sectors, although some have very few ratings, so comparisons may not always be meaningful. For example, the further flows sector recorded a downgrade rate of 50% in 2019, but the entire pool of outstanding ratings for the sector is just two credits, indicating there was only a single downgrade. Apart from future flows, the one-year average downgrade rate improved for all other sectors in 2019 compared with the year prior (see chart 3).
Residential mortgage-backed securities (RMBS) accounted for all of the recorded upgrades in 2019, leading to an upgrade rate of 9.8% for the sector. RMBS account for the majority of outstanding securities included in this study. The one-year average upgrade rate improved for both the RMBS and structured credit sectors in 2019.
Once again, asset-backed securities (ABS) had the highest one-year average default rate among all the sectors, at 5.2%. The RMBS and future flows sectors both reported lower one-year average default rates in 2019. Once again, there was no measure for the structured credit sector due to a lack of defaults.
Ratings Performance: Ratings Have Historically Differentiated Default Rates
Our structured finance ratings express an opinion on the securities' creditworthiness, for which the focus is an assessment of default likelihood, rather than the likelihood of upgrade or downgrade. That said, our ratings also consider credit stability as a secondary factor.
Across Mexican structured finance, downgrade rates in 2019 differed somewhat by ratings. However, across the board, downgrades rates improved. The categories with the highest number of ratings outstanding at the start of 2019 were 'mxAAA' and 'mxAA', which experienced no downgrades or any defaults. Downgrades were primarily concentrated in the 'mxBB+' and lower category, with a downgrade rate of 16.7%. Upgrades were exclusively in the 'mxBBB-' and higher category, with an upgrade rate of 6.8% (see table 1).
Upgrade rates in 2019 for all rating categories were at or above their respective one-year averages. Downgrade rates held below respective historical averages throughout 2019.
|Mexican Structured Finance National-Scale Transition And Default Summary|
|2019 versus one-year average|
|Ratings (no.)||Stable (%)||Upgrades (%)||Downgrades (%)*||Defaults (%)||Defaults (no.)||Stable (%)||Upgrades (%)||Downgrades (%)*||Defaults (%)|
|mxBBB-' and higher||148.0||91.2||6.8||2.0||0.0||0.0||89.0||2.8||8.2||0.5|
|mxBB+' and lower||6.0||83.3||0.0||16.7||0.0||0.0||59.6||0.0||40.4||21.6|
|Note: Securities whose ratings migrated to 'NR' over the period are classified based on their rating prior to 'NR'. *Includes downgrades resulting in defaults. Source: S&P Global Ratings Research.|
We typically expect default rates to be lower for higher-rated securities, provided that observations are made over sufficiently long time horizons and large samples. Over shorter time frames or smaller samples, this relationship may not always hold, and default rates can also vary over time.
For Mexican structured finance, higher-rated securities were generally associated with lower one-year weighted-average default rates from 2000 to 2019 (see chart 6). Once again, there were no defaults in any rating category in 2019, so the one-year average default rates fell for every category compared with 2018.
Appendix I: Terminology, Data Selection, And Calculation Approaches
This Mexican structured finance default and rating transition study uses our database of long-term Mexican national scale issue credit ratings.
Our ongoing enhancement of the database used to generate this study occasionally leads to changes in the reported statistics from one edition of the study to the next. However, each study includes statistics for previous years, ensuring that each study is self-contained and effectively supersedes all previous editions.
National scale credit ratings provide a wider range of relative credit quality indicators in jurisdictions where sovereign ratings limit the range of global scale credit ratings assigned to local market issuers or issues. While global scale credit ratings are comparable across all regions, national scale credit ratings are not--they provide a rank ordering of credit risk within that country only. In addition, national scale ratings may change more often, including multinotch rating actions, rendering them more volatile than global scale ratings. For example, a one-notch change in the underlying global scale rating may result in a multiple-notch change on the national scale.
While a sovereign rating change may or may not result in a corresponding change to the relevant mapping table, national scale mapping tables can change over time. In general, a national scale rating change that arises only from a national scale mapping recalibration does not represent a change in our view of the issuer's or issue's intrinsic credit quality. Such rating changes may be purely a result of a change to the configuration of the mapping specifications, with the intention of creating the most appropriate distinction among ratings on the national scale. In turn, this may make certain national scale-based transition rates difficult to compare over time and, as a result, less helpful.
Issues included in this study
This study analyzes the rating histories of 606 Mexican structured finance instruments that S&P Global Ratings first rated between 1999 and Dec. 31, 2019. The term "structured finance" in this report refers to asset-backed securities, commercial mortgage-backed securities, future flow transactions (including partial-credit guaranteed [PCG] and future tax revenue-backed transactions), RMBS, and structured credit (including issues backed by a single credit, where the rating on the note is directly linked to that on the underlying credit--so-called repackaged transactions or "repacks").
In this report, we consider future flow transactions as a separate sector, given the relatively large number of such transactions historically in the Mexican market. In our global structured finance default and rating transition study, we include these transactions in the structured credit sector. We include PCG transactions (also known as multiple-credit-dependent obligations) in the future flow sector because, like future flow securities, PCGs are linked to the rating on an entity--in this case, the issuer.
National scale ratings
National and regional scale ratings express relative opinions about the creditworthiness of an issuer or the credit quality of an individual debt issue within the universe of credit risk on the national scale. National scale ratings are not directly comparable with our global scale ratings or with national scale ratings for other countries. Our Mexico national scale credit ratings generally include a prefix of 'mx' to distinguish them from global scale ratings and other national scale ratings.
Our rating transition statistics use a "static pool" approach. To calculate the transition statistics over a given period (or "transition window"), we consider the static pool of ratings outstanding at the beginning of that period. The transition statistics for that static pool of ratings are then based on the movements in ratings between the start and end of the transition window.
For instance, we calculate the 2019 transition rates by determining the ratings on each security outstanding at the start of 2019 and determining the ratings on those same securities at the end of 2019. We then calculate statistics such as upgrade, downgrade, and stability rates, equivalent to the proportions of securities in the static pool with ratings that moved up, down, or remained the same, respectively, over the transition window.
We use rating modifiers ('+' and '-') to calculate the upgrade, downgrade, and stability rates given in the text, tables, and charts throughout this study. However, the transition matrices in Appendix II of this report show only the full rating categories for practical reasons.
In other words, the use of a rating category suggests that transitions, for example, to 'mxAA' from 'mxAA-' or to 'mxBBB+' from 'mxBBB-' are not considered rating transitions because the rating remained within the rating category.
Rating discontinuance or withdrawal
We may discontinue ratings when, for example, a rated obligation's payments have been made in full in accordance with its terms or when a rated issue matures. Ratings may also be withdrawn because of a lack of sufficient information of satisfactory quality or at the issuer's request.
In these cases, the rating may change to not rated ("NR"). When we withdraw or discontinue ratings within the transition window under consideration, we may either derive our reported statistics by classifying the rating transition as a move to "NR" (the "NR-included" approach), or, for some other analyses, we may classify the transition as a move to the last "non-NR" rating before withdrawal or discontinuance (the "NR-adjusted" approach).
In the text of this report, when we refer to upgrade and downgrade rates, for example, we use the latter approach. In the tables and charts, we clarify the approach used in the footnotes. We do not include a security with a withdrawn rating at the beginning of a transition window in the transition and default rate calculations for that period.
Treatment of 'D' ratings
Counts of defaults and default rate statistics in this report are based on securities that we downgraded to 'D'. For the purposes of this report, when a rating has moved to 'D', we consider this a terminal state and do not include such a security in any transition windows that start on a subsequent date.
In practice, however, some securities with ratings that have migrated to 'D' may later be assigned a different rating. This can occur, for example, if the defaulted security is subsequently restructured to different terms, such as a lower coupon. In these cases, we treat the security's post-default rating history as if it were for a new security, beginning from the date that the rating changed from 'D'.
Weighted-average transition and default rate calculation
For weighted-average transition rates (including default rates), we calculate the individual transition rates for different static pools. We then calculate a single averaged transition rate, weighted by the number of ratings in each static pool. We use this technique to determine, for example, the five-year weighted-average transition rates, by analyzing static pools over five-year periods and aggregating.
Appendix II: Detailed Default And Transition Statistics
Tables 2 and 3 provide various default and transition rate statistics for Mexican structured finance securities.
|Mexican Structured Finance National-Scale Rating Transitions, 2019 And Multiyear Averages, NR Adjusted (%)|
|One-year weighted average|
|Two-year weighted average|
|Three-year weighted average|
|Four-year weighted average|
|Five-year weighted average|
|N/A--Not applicable. Securities whose ratings migrated to 'NR' over the period are classified based on their rating prior to 'NR'. Source: S&P Global Ratings Research.|
|Mexican Structured Finance National-Scale Rating Transitions, 2019 And Multiyear Averages, NR Included (%)|
|One-year weighted average|
|Two-year weighted average|
|Three-year weighted average|
|Four-year weighted average|
|Five-year weighted average|
|N/A--Not applicable. Source: S&P Global Ratings Research.|
- Methodology For National And Regional Scale Credit Ratings, June 25, 2018
- Methodology: Credit Stability Criteria, May 3, 2010
- Understanding S&P Global Ratings' Rating Definitions, June 3, 2009
This report does not constitute a rating action.
|Ratings Performance Analytics:||Nick W Kraemer, FRM, New York + 1 (212) 438 1698;|
|Kirsten R Mccabe, New York + 1 (212) 438 3196;|
|Research Contributor:||Sundaram Iyer, CRISIL Global Analytical Center, an S&P affiliate, Mumbai|
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