The global structured finance annual default rate has continued to decline, with the headline figure dropping marginally to 0.5% in 2022--a 15-year low--from 0.6% the year prior (see chart 1). This was the fifth year the default rate has held under 2% since the global financial crisis.

S&P Global Ratings had 34,066 ratings outstanding on global structured finance securities at the start of 2022. The sector's global average change in credit quality (see definition in Appendix I) recovered from its 2020 slump in the second half of 2021. It continued this trend in 2022, ending the year at +0.17 notches, recording a positive 12-month trailing average change in credit quality for 18 consecutive months (see chart 1). The upgrade rate (the proportion of upgrades among all ratings outstanding) rose to a five-year high of 9.1% in 2022, from 8.2% the prior year, keeping it well above the one-year average of 4.0%. The downgrade rate (measured as the proportion of downgrades, including defaults, among all ratings outstanding) dropped to a 16-year low of 2.3%, down further from the previous year's low of 2.4% and well below the one-year average of 15.3%.

The European commercial mortgage-backed securities (CMBS) sector had the highest downgrade rate for the third consecutive year. The U.S. CMBS and European structured credit and residential mortgage-backed securities (RMBS) sectors also had higher downgrade rates (among sectors) than the year prior. However, downgrade rates were well below their respective long-term averages across the board. In the U.S., upgrade rates rose in the CMBS, RMBS, and asset-backed securities (ABS) sectors in 2022. Outside the U.S. and Europe, there were no defaults overall. Credit quality has recovered over the last six quarters after declining in the first two quarters of 2021.

Credit Performance: The Default Rate Fell Further To 15-Year Low

The overall credit performance (as measured by the average change in credit quality) of global structured finance securities we rate remained positive through 2022, maintaining this trend after turning positive midway through 2021. During the year, we raised 9.1% of our ratings on global structured finance securities that were active at the beginning of the year, down from the historical high of 13.1% in 2018, but above the 8.2% in 2021. The annual default rate held a post-crisis low of 0.5% in 2022, down from 0.6% in 2022, while downgrades declined to 2.3%, down from 2.4% the previous year.

The average change in credit quality for global structured finance was +0.17 rating notches at the end of 2022, unchanged from the end of 2021. This measure had been negative for several years since mid-2007--indicating that, on average, ratings were drifting lower--up until early 2016, when it turned positive. Once in positive territory, the average change in credit quality moved above the +0.2 notch for the first time in August 2018 (see chart 1).

The 12-month trailing default rate declined to -0.5% from -0.6% in 2021. On a 12-month trailing basis, the default rate has been on a broad downtrend since mid-2016, with a small blip in late 2020 (see chart 2). The default rate reached a low of 0.41% in October 2022, ticking up slightly to 0.47% at the end of the year.

The 12-month trailing default rate for investment-grade ratings ('BBB-' or higher) bottomed out and remained at a flat 0% since February 2022. The speculative-grade ('BB+' or lower) 12-month trailing default rate was 1.5%, down from 1.9% the year prior. The default rates for both investment and speculative-grade structured finance securities have stabilized since their peaks in 2009 and resembled pre-crisis levels in 2022. The default rate reached a post-crisis low of 1.3% in October 2022.

Region and sector comparisons

Structured finance credit performance in 2022 was positive across most sectors and regions, barring global CMBS and single-name synthetics, and overall structured finance for Latin America, where downgrades outpaced upgrades. Interestingly, there were no rating actions on Japanese structured finance issues through 2022, same as the year before. Globally, the European CMBS sector had the highest downgrade rate, at 10.6%, followed by the U.S. CMBS sector at 8.2%, both of which held well below their respective one-year average downgrade rates (see chart 3 and table 1). In fact, downgrade rates across all sectors held below their one-year averages. Upgrades were the most prominent in the European RMBS sector, with an upgrade rate of 20.3% in 2022, well above the one-year average of 8.8%. Upgrade rates in 2022 rose above their respective one-year averages for roughly half of the region-sector combinations.

The U.S. RMBS sector had the highest annual default rate in 2022, at 1.0%, followed by the U.S. CMBS sector which was at 0.3% however, these were still below their one-year averages of 4.7% and 3.1%, respectively (see chart 4). Following U.S. RMBS and CMBS, the next highest annual default rate in 2022 was in the U.S. structured credit sector at 0.1%. The U.S. RMBS sector also accounted for the most defaults by volume (with 137). The only non-U.S. defaults came from European RMBS and structured-credit, while there were no defaults among U.S. single-name synthetics, the only such sector in the U.S. The default rate was below the long-term average for all region-sector groupings (see table 1).

Table 1 shows a summary of 2022 credit performance for global structured finance, segmented in various ways, compared with the 1976-2022 one-year weighted average statistics.

By region, Australasia (Australia and New Zealand) had the highest upgrade rate in 2022, at 12.9%, with strong contributions from all sectors in the region, making it well above its one-year average of 5.6% (see table 1). In all regions except Japan (which had no upgrades or downgrades in 2022) and Latin America, upgrades outpaced downgrades in 2022. (Asia, excluding Japan, had no rated securities at the start of 2022. The Asia [excluding Japan] region includes transactions with collateral from Hong Kong, Singapore, Korea, and Taiwan, as well as other countries in the region.) The downgrade rate was the highest in Latin America, at 7.9%, but still below its one-year average of 13.5%. Conditions in Latin America deteriorated during the year, with the downgrade rate in the region nearly tripling from 2.8% the previous year. The elevated downgrade rate can also be explained by the small population of outstanding ratings at the start of 2022 (304). However, the upgrade rate in Latin America also rose, to 6.6% in 2022 from 5.1% in 2021.

The average change in credit quality across regions outside of Japan and Latin America broadly increased. These regions reported an upgrade rate of 9.3%, and a downgrade rate of 2.2%. There were no defaults from outside the U.S. and Europe in 2022, the regions with no defaults accounted for a total of 2,232 rated securities at the start of 2022.

By sector, ABS had the highest upgrade rate globally in 2022, at 13.2%, well above its one-year average of 5.4%, followed closely by RMBS at 12.2% (long-term average of 2.8%). The CMBS upgrade rate was also higher than its one-year average. While upgrades outpaced downgrades in the structured credit sector, its upgrade rate was below its one-year average. Downgrades outpaced upgrades only in the CMBS and single-name synthetics sectors. CMBS had a downgrade rate of 8.3% in 2022, below the one-year average of 12.5%. Meanwhile, single-name synthetics had a downgrade rate of 6.4%, above its 3.0% upgrade rate, though significantly below the one-year average downgrade rate of 13.0%.

Default rates across global structured finance sectors were below their one-year averages in 2022. The highest default rate was recorded by RMBS, at 0.8%, followed by CMBS at 0.3%.

The region-sector combination with the highest upgrade rate in 2022 was European RMBS, where we raised 20.3% of the ratings that were active at the beginning of the year. U.S. and European ABS, U.S. RMBS, and Australasia had double-digit upgrade rates contributing to the aggregate rate. Upgrades outpaced downgrades across most region-sector combinations, but a few of these were lower than their respective one-year averages (U.S. CMBS, U.S. structured credit, U.S. single-name synthetics, Japan, and other emerging market securities.)

The region-sector combination with the highest downgrade rate in 2022 was European CMBS, at 10.6%, still well below its one-year average of 21.7%. Downgrades were also prominent in U.S. CMBS and other emerging markets. All region-sector combinations downgrade rates were below their respective one-year averages.

U.S. RMBS and U.S. CMBS had the highest default rate across the sector-region combinations, at 0.99%, and 0.33% respectively. Following this was the U.S. structured credit default rate of 0.13%, and the European structured credit default rate of 0.09%. All region-sector default rates remained below their one-year averages.

Globally, the 2019 vintage recorded the highest upgrade rate, at 22.5% in 2022. Nearly all the vintages 2009 and earlier reported higher downgrade rates than the post-crisis vintages, while downgrade rates were lower than the pre-2010 vintages.

Across rating categories globally, the 'BBB' and 'BB' categories had particularly strong performance, with 2022 upgrade rates of 17.1% and 17.0% respectively, well above their one-year averages of 8.9% and 9.2%. Additionally, upgrades were prominent in the 'B', 'A', and 'AA' rating categories, with respective upgrade rates of 15.3%, 13.5%, and 10.2%. The 'B' category had the highest downgrade rate in 2022, 5.4%.

The overall investment-grade upgrade rate was 8.5% in 2022, above the one-year average of 3.6%, while the downgrade rate of 1.5% was well below the one-year average of 10.6%. The investment-grade default rate was zero, well below its one-year average of 0.24% in 2022.

Downgrades were higher among the 'B' to 'BB' rating categories. More specifically, the 'B' rating category had a downgrade rate of 5.4% in 2022, followed by the 'BB' rating category at 3.9%. Defaults were the highest in the 'CCC' and 'CC' rating categories, at 3.2% and 2.7%, respectively. The overall speculative-grade upgrade rate was 10.6% in 2022, while the downgrade rate was 4.0% and the default rate was 1.5%--all improved compared with their respective one-year averages.

Global structured finance default rates have been more or less declining over the last several years with slight month-over-month occasional upticks. We would have to go back to July 2020 to find a period where the default rate recorded was higher than that of the 12-month prior period.

Table 1

Vintages

Structured finance credit performance continues to be differentiated by the year of issuance--or vintage--of securities. The fundamental credit characteristics and economic conditions surrounding a transaction's vintage can influence its subsequent credit behavior.

Segmenting global structured finance credit performance by transaction vintage does not reveal any trend in particular with regards to the upgrade rate, as about half the vintages ticked up, while the other half decreased. The highest upgrade rate was that of the 2019 vintage, at 22.5%. Of the vintages with more than 1,000 outstanding ratings at the start of the year, all but one (2018) reflected higher upgrade rates in 2022 than in 2021, while only five (out of nine) had lower downgrade rates.

For the 2011 vintage, the downgrade rate improved significantly to 2.4% in 2022 from 9.4% the year before (see chart 5).

In 2022, the 2005 vintage reported the highest default rate, at 2.2%, although this remains well below its one-year average of 5.7%. The 2005-2008 vintages exhibit the highest one-year average default rates, given their performance during the financial crisis, and default rates for these vintages in 2022 were among the top five for the year (see chart 6). The 2000 and 2014 vintages also saw elevated default rates, at 1.8% and 1.4%, respectively, both of which were higher than their long-term averages.

Ratings Performance: Ratings Have Historically Differentiated Default Rates

Our structured finance ratings express our opinions of securities' creditworthiness, which center on an assessment of default likelihood, rather than the likelihood of upgrade or downgrade. However, our ratings also consider credit stability as a secondary factor.

Across global structured finance, upgrade and downgrade rates in 2022 were generally differentiated by the ratings at the beginning of the year. Downgrade rates were generally higher for lower rating categories, ranging from 5.4% for securities rated 'B' to 0.4% for securities rated 'AAA' (see chart 7). Downgrade rates across all structured finance securities were well below their one-year averages at every rating category. Upgrade rates increased across almost all rating categories compared with 2021, with the exceptions of 'BB' and 'B', which fell marginally from the year prior. Securities rated 'BBB' recorded the highest upgrade rate in 2022, at 17.1%.

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 global structured finance, higher-rated securities were clearly associated with lower weighted average one-year default rates between 1976 and 2022 (see chart 8). Default rates in 2022 were generally higher at lower rating categories. There were no defaults from the four investment-grade rating categories in 2022. Securities we rated in the 'BB' category at the beginning of the year had a default rate of 0.03%, contrasting with a default rate of 3.2% for those in the 'CCC' category.

To further explore how well our structured finance ratings have rank-ordered creditworthiness over time, we can calculate cumulative default rates by rating category for various time horizons, as we do for our corporate default and transition studies. This approach constructs average multiyear cumulative default rates by first aggregating across static pools the period-to-period one-year marginal default rates that are conditional on the securities' survival (that is, nondefault) in the prior one-year period (see Appendix I for more details). We note that this approach differs from the calculations we use in constructing the weighted average multiyear default and transition rates elsewhere in this study, where default rates are not conditional on survival.

The cumulative default rates (conditional on survival) based on our full data history--from the beginning of 1976 to the end of 2022--show that lower ratings have generally been associated with higher default rates and vice versa (see table 2). In other words, ratings appear to have successfully rank-ordered creditworthiness over each time horizon.

Table 2

Default rates calculated on a rolling basis for a given horizon (for example, five years) further demonstrate that this ratings-based rank ordering has generally remained in place over time, even as absolute default rates have fluctuated with differing levels of credit stress. For example, the five-year trailing 'AAA' default rate for global structured finance was 0.06% at the end of 2022, marginally higher than its level of 0.04% from a year ago. This is the first time since 2012 that this metric has increased in consecutive years. By contrast, the five-year trailing 'B' default rate was 6.1%, down from 6.3% at the end of 2021 and well off the peak of 81.7% in 2012 (see chart 9).

We also calculate Gini coefficients to quantify the rank-ordering power of our ratings in relation to securities' observed default propensity. The Gini coefficient is a summary metric that can range from zero to 100%--the closer to 100%, the higher the rank-ordering power of the ratings under observation (see Appendix I for more details).

In 2022, the one-year Gini coefficient for defaults of rated global structured finance securities was 84.3%, up from 79.2% the previous year. The three-year Gini coefficient also increased, coming in at 75.9% for 2022, compared with 75.0% in 2021. The five-year Gini coefficient at the end of 2022 was 77.6%, after having fallen slightly to 77.1% in 2021 (see chart 10).

This follows the pronounced dip in Gini coefficients several years ago, amid the 2008-2009 financial crisis. During this period, a relatively large number of defaults in certain sectors--like U.S. RMBS and U.S. structured credit--coincided with fewer defaults among lower-rated securities from other sectors, lowering the Gini coefficients.

Finally, we also calculated sector-specific historical one-year Gini coefficients. For most sectors, the Gini coefficients have returned to 80%-100% since the end of 2011, following a drop in 2007 (see chart 11). The Gini coefficient for global RMBS crossed the 70% mark for the first time since 2019 last year, at about 72%, up from 68% the previous year. Although about 96% of the global RMBS defaults in 2022 were from the 'CCC' and 'CC' rating categories, the default from the 'BB' category lowered the Gini coefficient for this sector significantly given that it is one of the smaller rating categories (by volume) within the sector. The ABS and structured credit sectors reported lower Gini coefficients than 2021, with the figure for ABS falling from 94.4 to 88.9%, while structured credit fell slightly from 98.7% to 98.6% in 2022.

The Gini coefficient metric is useful but has some significant shortcomings. For example, a value of 100% would be attained only if all defaults occurred among securities rated below some critical rating threshold, with no defaults among securities rated higher than this threshold. However, in a diverse sample of rated securities--like global structured finance securities--sector- and region-specific credit stresses of differing severity and likelihood may cause higher-rated securities in more stressed sectors or regions to default, while at the same time lower-rated securities in less stressed sectors or regions do not default. This effect would lower the reported Gini coefficient, despite reflecting the sample composition rather than a decline in ratings' accuracy.

Regions And Sectors In Detail

U.S. RMBS

In 2022, the overall average change in credit quality for U.S. RMBS continued its recovery, ending 2022 at +0.22 notches, a three-year high for year-end figures (see chart 12). On a 12-month trailing basis, the U.S. RMBS default rate increased slightly, to 0.99%, from 0.95% in 2021 (see chart 13).

Of the 13,812 securities outstanding within the U.S. RMBS sector at the start of 2022, the annual default rate was 1.0%, representing 137 securities (see table 3). The subprime subsector, which accounts for the largest share of U.S. RMBS securities, at 29.3%, had a default rate of 1.0% in the sector during the year. The subprime downgrade rate doubled to 4.3% in 2022, up from 2.1% in 2021. Meanwhile, the upgrade rate in the subsector was nearly three times the downgrade rate, at 11.9%, compared with 9.9% in 2021.

For the prime subsector, which accounts for the second-largest portion of U.S. RMBS, the default rate remained at 1.0% in 2022, unchanged from the year before. Downgrade activity decreased in 2022, with the downgrade rate falling to 2.1% from 6.3%. The upgrade rate increased to 1.7% from 0.3% the year prior.

Among the remaining U.S. RMBS subsectors, overall credit quality improved in 2022. Though the reperforming subsector recorded the highest downgrade rate among U.S. RMBS subsectors at 6.2%, this was still lower than its corresponding upgrade rate of 7.4%, and well below its one-year average downgrade rate of 15.0%.

Despite more U.S. RMBS vintages having either higher upgrade rates or lower downgrade rates than in 2021, credit performance across transaction vintages was mixed. Pre-crisis vintages (2001-2007) accounted for all but two defaults in 2022. The 2000 vintage had the highest default rate in 2022 at 4.2%, and 2003 had the highest downgrade rate at 6.5%. Meanwhile, the 2019 vintage had the highest upgrade rate in 2022, as 65.9% of securities rated that year were upgraded.

The vast majority (96%) of U.S. RMBS defaults in 2022 were from the 'CCC' and 'CC' rating categories, which constituted about 33% of our U.S. RMBS ratings at the beginning of 2022. The 'BBB' rating category was the only category with a decreasing default rate in 2022 (excluding 'AAA', 'AA', and 'A' as there were no defaults in 2022 or 2021, and 'C' as there were no outstanding ratings at the beginning of either year). As a result, the speculative grade default rate increased to 1.9% in 2022 from 1.7% in 2021. All these default rates were well below their respective one-year averages, which are driven up by the extreme peaks of the financial crisis.

Table 3

U.S. structured credit

The overall improvement in credit quality for U.S. structured credit slowed in 2022, but remained positive at +0.02 notches in the final month of 2022, down from +0.10 in 2021. The U.S. structured credit 12-month trailing default rate began to pick up pace in 2022, but ended the year at 0.13%, up slightly from 0.10% the previous year (see table 4 and chart 15).

The downgrade rate decreased slightly to 0.2% in 2022 from 0.3% the year prior, but remained well below the one-year average downgrade rate of 16.7%. The upgrade rate came down from its four-year high of 4.9% in 2021 to 1.5% in 2022.

The U.S. structured credit default rate spiked in 2011 following the defaults of a large number of ratings on collateralized debt obligation (CDO) tranches backed by other structured finance securities, notably U.S. subprime RMBS. At that time, these securities had, in our view, minimal realistic prospects of repayment, and many were unlikely to receive any future principal payments because of the ongoing collateral deterioration of the RMBS and other securities backing the transactions.

The overall U.S. structured credit sector remains polarized between collateralized loan obligations (CLOs), which have historically performed very well, and other transactions that performed poorly after 2007 but now constitute only a small portion of our active ratings. CLOs have grown to 98.5% of the U.S. structured credit sector at the beginning of 2022 (see table 4). The subsector saw lowered deterioration in 2022 as the downgrade rate fell to 0.2%, from 0.3% in 2021. There were four CLO defaults in 2022--compared with five in 2021--yielding an annual default rate of 0.1%, on par with the one-year average for the subsector of 0.1%. The upgrade rate slowed in 2022 to 1.5%, down from 5.0% the previous year.

Other U.S. structured credit make up about 1.3% of overall ratings and had no defaults in 2022. There were also no downgrades in 2022, an improvement from the 1.3% downgrade rate in 2021. Meanwhile, the upgrade rate was at 2.6%.

The U.S. structured credit CDO subsector made up the lowest number of outstanding ratings at the beginning of 2022, at just 0.27%. However, there were four defaults in the CDO subsector in 2022 and given the small number of outstanding ratings at the start of the year (16), this yielded a 25% default rate for the year, well above the average one-year default rate of 13.3%. Meanwhile, there were no upgrades, and the downgrade rate was also 25%.

Considering only vintages with more than 30 ratings outstanding at the beginning of 2022, the highest upgrade rate was in the 2017 vintage at 9.7%. This is where CLO transactions are now amortizing, increasing the relative credit enhancement for the rated securities, and therefore raising their creditworthiness, all else being equal. There were no downgrades among these vintages, with all the downgrades coming from the 2014 vintage or earlier.

Of the eight defaults in U.S. structured credit in 2022, all were on securities that we rated in the 'CCC' category or below at the beginning of the year.

Table 4

U.S. ABS

Credit performance for the U.S. ABS sector remained positive in 2022. The annual average change in credit quality for 2022 continued its upward trajectory, peaking at +0.53 notches in September (a historical high) before ending the year at +0.38 notches, down from +0.48 notches in 2021 (see chart 16). The 12-month trailing default rate has historically remained very low, further dropping to 0.04% in 2022, the lowest since August 2019, and down from 0.06% the previous year (see chart 17).

The U.S. ABS sector is the third-largest structured finance sector in the U.S. by number of outstanding ratings--behind RMBS and structured credit--accounting for 17.0% of U.S. securities at the start of 2022. The majority of these securities fall within the student loan and auto subsectors (see table 5). The U.S. ABS upgrade rate was 13.7% in 2022, well above the one-year average of 5.5%. The downgrade rate held steady at 0.9% in 2022, remaining well below its one-year average of 4.9%. The annual default rate for ABS was 0.04% in 2022, down slightly from 0.06% in 2021 and below its one-year average of 0.4%.

The only U.S. ABS defaults in 2022 were in the student loan subsector, from the 'B' rating category (see table 5). The two student loan defaults yielded an annual default rate of 0.13% for the subsector, above its one-year average of 0.07%.

Downgrades were split almost evenly between investment and speculative grade securities, even as investment-grade outnumbers speculative grade by a factor of 10. ABS other and manufactured housing accounted for the highest downgrade rates in the U.S. ABS space, with downgrade rates of 3.9% and 1.3%, respectively. Although, the latter only accounts for 2% of securities in the sector.

In 2022, the downgrade rates of all U.S. ABS subsectors remained below their one-year averages.

The U.S. ABS auto subsector had another wave of upgrades in 2022, yielding the highest upgrade rate of all the U.S. ABS subsectors for the second year running, at 29.9%, well above the one-year average of 14.3%. Several other subsectors had upgrade rates above their one-year averages, except for credit card, timeshare, and nontraditional ABS.

Table 5

U.S. CMBS

In U.S. CMBS, the average change in credit quality remained negative at the end of 2022, at -0.10 notches. However, it has now remained negative for 40 consecutive months, the longest such streak since 2014 when the metric remained negative for 70 months. This figure, however, is an improvement from the previous year at -0.17 notches (see chart 18). The 12-month trailing default rate for U.S. CMBS dropped to a 21-year low of 0.15% in November 2022, and subsequently closed the year at 0.33%, yet remained lower than the equivalent global structured finance default rate of 0.47% (see chart 19).

The annual default rate for U.S. CMBS dropped to 0.3% in 2022, down from 2.2% in 2021 (see table 6). The upgrade rate matched the one-year average at 5.8%, a significant increase from 0.2% in 2021. The downgrade rate increased to 8.2% in 2022, up from 5.0% in 2021, though it remains below the one-year average of 11.9%.

A total of nine defaults occurred within U.S. CMBS in 2022, far fewer than the 55 in 2021 (see table 6). The defaults were almost evenly split between the conduit/fusion, and the single borrower subsectors, yielding default rates of 0.3% and 0.5%. respectively. More than half of the defaults came from the 2014 vintage, and all were speculative grade, rated in the 'B' category or below.

The large loan/floater downgrade rate was the highest, at 29.1%, though down from 32.8% the previous year, while the single borrower downgrade rate swelled to 12.2% in 2022 from 1.7% in 2021. The U.S. CMBS conduit/fusion downgrade rate stood at 3.5%, down from 5.1% the prior year. Downgrade rates across the conduit/fusion and CMBS other subsectors remained below their respective one-year averages, while the downgrade rate for the single borrower subsector rose above the average by a factor of three. Further, downgrades primarily occurred in the 2012-2019 vintages, split nearly evenly between investment- and speculative-grade securities.

Upgrade rates within U.S. CMBS subsectors were mixed, with conduit/fusion and large loan/floaters underperforming with respect to their corresponding one-year averages, while the single borrower and CMBS other subsectors recorded higher upgrade rates than their respective historical averages. The CMBS other sector led with an upgrade rate of 8.8% in 2022, though upgrades were recorded across all CMBS subsectors.

Table 6

Europe

Credit performance across European structured finance sectors has historically been more positive than their U.S. counterparts, and the same held true in 2022. Though the average change in credit quality rose to +0.19 from +0.16 notches the previous year and the highest since 2020, it is still a ways off from the peak of +0.41 in February and March 2020 (see chart 20). The 12-month trailing default rate bottomed out at 0% in September 2022, but subsequently increased to 0.07% at the end of the year, down from 0.19% the year before (see chart 21).

The annual default rate for European structured finance fell to 0.1% in 2022 from 0.2% the year before and remained below the one-year average of 1.0% (see table 7). The overall upgrade rate grew to 9.6%, above its one-year average of 7.9%. The overall downgrade rate for European structured finance was 1.4% in 2022, up slightly from 1.0% in 2021, and well below the one-year average of 13.6%. The European structured finance sector consists of a diverse range of subsectors. In terms of defaults, the structured credit CDO subsector was the worst-performing in 2022 (same as 2021), with a rate of 4.2%, although, this is below the one-year average of 5.1%. There was one default each from European structured credit CDO, other structured credit, and RMBS Prime, yielding default rates of 4.2%, 0.4% and 0.2%, respectively. Meanwhile, there were no defaults within European ABS, CMBS, and single name synthetics. All defaults across European structured finance occurred among speculative-grade ratings. There were two defaults from 'CC' rating category, leading to a 7.7% default rate in 2022, lower than its one-year average rate of 29.9%. The remaining default was from the 'B' rating category, leading to 0.2% default rate in 2022, still well below its one-year average rate of 1.9%.

Downgrades rose across few European sectors in 2022 (RMBS Prime, structured credit other, and single-name synthetics). Downgrades were most prominent in the European structured credit other and CMBS subsectors in 2022, which recorded downgrade rates of 11.8% and 10.6%, respectively. European structured credit CDOs downgrade rate decreased to 8.3% from 9.1% in 2021, while the single-name synthetics recorded a 10.5% downgrade rate, up from 4.8% the previous year. European ABS witnessed no downgrades across the board in 2022. Most downgrades in European structured finance were within the investment-grade segment, even as the 'CC' rated category had the highest downgrade rate of 7.7%. The downgrade rate of 4.7% for the 'BBB' rating category was the highest among the investment-grade rating categories.

Most European subsectors reported upgrade rates higher than their respective one-year averages, with the exceptions of the European structured credit CLOs and structured credit other subsectors, as well as the nontraditional ABS, credit card ABS, and single-name synthetics subsectors (which saw no upgrades in 2022). European RMBS upgrades picked up in comparison to 2021, up to 20.3% from 12.3%, driven largely by the RMBS other subsector having recorded a 26.8% upgrade rate. The European structured credit CLO upgrade rate was well below its one-year average upgrade rate of 13.0%, coming in at 1.7% in 2022. Within European ABS, auto ABS and consumer ABS upgrade rates were also elevated with respect to their one-year averages, recording 15.4% and 13.0%, respectively.

Further, upgrade rates were concentrated among the 2004-2008 vintages, all of which had double-digit upgrade rates in 2022, while several others also contributed. Meanwhile, proportional upgrades for investment- and speculative-grade were similar at 9.7% and 9.4%, respectively.

Table 7

Outside U.S. and Europe

Outside the U.S. and Europe, the average change in credit quality remained positive even as it slowed in 2022, at +0.16 notches, down from +0.23 notches in 2021 (see chart 22). With no defaults in 2022, the 12-month trailing default rates for all regions outside the U.S. and Europe reached 0% by the end of the year.

Structured finance ratings outside the U.S. and Europe accounted for 6.6% of outstanding ratings at the start of 2022. The upgrade rate slowed to 9.9% in 2022 from 13.6% the previous year but was still well above its one-year average of 5.9%. The downgrade rate fell slightly to 1.6% from 1.7% the prior year and is still well below its respective one-year average of 4.9%.

The majority of ratings outstanding at the start of the year were concentrated in Australasia and Japan, specifically within the RMBS sector. Downgrades in 2022 were primarily concentrated in Latin America, with a downgrade rate of 7.9%, well below the one-year average of 13.5% (see table 8). There were no downgrades in Canada or Japan in 2022. Further downgrades occurred only in the emerging markets and Australasia RMBS sectors, with downgrade rates of 2.9% and 0.7%, respectively. Downgrades were largely concentrated among issuers rated in the 'CCC' and 'BBB' categories at the beginning of the year.

The highest upgrade rate outside the U.S. and Europe in 2022 was in Australasia RMBS, at 13.5%, compared with a one-year average of 5.4%. There were also elevated upgrades in the Canada other subsector, with an upgrade rate of 4.7%. Meanwhile, there were no upgrades recorded in Japan.

Table 8

Appendix I: Terminology, Data Selection, And Calculation Approaches

This appendix details the data selection, calculations, and terminology we use in this report.

This global structured finance default and rating transition study uses our database of long-term global scale issue credit ratings. We do not include national and regional scale ratings, such as those we may assign in Argentina, Brazil, Mexico, Taiwan, and Japan, which are not comparable between countries. The analysis also excludes public information ("pi") ratings, issuer credit ratings, and short-term issue ratings, such as those on asset-backed commercial paper conduits.

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 the study is self-consistent and effectively supersedes all previous editions.

Issues included in this study

This study analyzes the rating histories of 254,937 global structured finance instruments that S&P Global Ratings first rated between 1973 and Dec. 31, 2022. The term "structured finance" in this report refers to ABS, CMBS, RMBS, structured credit, and single-name synthetic transactions. For some analyses, we break down these sectors further into subsectors.

Sector definitions

ABS includes underlying collateral types such as credit card receivables, student loans, and auto loans and leases. The sector also includes manufactured housing, franchise loans, 12b-1 transactions, and corporate securitizations.

RMBS includes transactions backed by subprime mortgage loans, as well as home equity loan transactions and re-REMICS.

Structured credit includes CLOs, both cash and synthetic CDOs backed by exposures to corporate credit or other structured finance securities, and market-value CDOs and other leveraged funds. We also include transactions backed by loans to small and midsize enterprises in the structured credit sector.

CMBS also includes re-REMICS, as well as some CDOs primarily collateralized by commercial real estate loans. Single-name synthetic transactions are also referred to as "repackaged transactions" (or "repacks"), especially in Europe. The definition of a repack in this instance is an issue backed by a single credit, where the rating on the note is directly linked to that on the underlying credit.

In this study, we no longer include structured covered bonds, which we previously treated as a separate sector.

Regional definitions

This study presents rating transitions for global structured finance transactions. In some analyses, we segment default and transition statistics by region. In defining a transaction's region, we primarily use the location where we perform surveillance. We may also consider the transaction's issuer country (unless this is a tax haven such as the Cayman Islands) or its domicile of assets. In some cases, the domicile of assets may fail to provide additional insights into the region, especially when a transaction is backed by assets from more than one country.

In table 1 of the study, the "Asia (excluding Japan)" region includes transactions with collateral from Hong Kong, Singapore, Korea, and Taiwan, as well as other countries in the region. The "other emerging markets" region includes emerging market countries that are not included in other regions, such as Turkey and South Africa.

Vintage definition

In this report, we classify a security's vintage based on the date when we first assigned a rating. Usually this is close to the security's original issuance date. However, in some cases, we may first assign a rating to a security sometime after closing.

Rating transitions

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 2022 transition rates by determining the ratings on each security outstanding at the start of 2022 and determining the ratings on those same securities at the end of 2022. 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. During this process, we count each security only once, even if the security experienced more than one rating change during the transition window being observed. In other words, we use the ratings at the start and end of the transition window to calculate the transition rates, disregarding any interim rating changes.

Rating modifiers

We use rating modifiers ("+" and "-") to calculate the upgrade, downgrade, and stability rates quoted in the text, tables, and charts throughout this study. However, the transition matrices in Appendix II of this report show only the less granular, full rating categories for practical reasons. In other words, we count transitions such as to 'AA+' from 'AA' as an upgrade and to 'BBB-' from 'BBB+' as a downgrade in the transition statistics we cite in this report. However, in the corresponding transition matrices, these transitions would appear in the cells corresponding to a stable rating category classification, such as 'AA' to 'AA' or 'BBB' to 'BBB'.

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 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 'AAA' ratings

In this study, we include the ratings history of all securities with original ratings of 'AAA', which we term the "uncollapsed" approach. This represents a change in methodology from editions of the study published before 2018. In these previous editions, for each structured finance transaction, we generally included only one of the securities that we originally rated 'AAA', terming this the "collapsed" approach. This was because historically, some transactions had a disproportionate number of 'AAA' rated tranches that were likely to exhibit similar or identical credit performance. By including only one such security per transaction, we aimed to avoid overweighting their behavior in aggregate performance statistics.

However, we now include all securities' rating histories, regardless of the original ratings, for completeness and consistency with some of our other reporting on ratings performance--for example, in regulatory submissions. The effects of altering the treatment of 'AAA' ratings on some example summary statistics are shown in Appendix III.

Treatment of 'D' ratings

Default counts and default rate statistics in this report are based on securities with ratings we lowered to 'D'. For the purposes of this report, when a rating has moved to 'D', we consider this a terminal state and do not, for example, 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 ratings history as if it were for a new security, beginning from the date that the rating changed from 'D'. Where we segment statistics by vintage, however, we continue to base the vintage on the date we originally assigned a rating to the security.

Average change in credit quality calculation

Certain analyses in this study refer to the "average change in credit quality" of a set of structured finance securities over a given transition window. We define the average change in credit quality as the average number of notches by which ratings changed during the stated transition window, where we take the average across all ratings in the set under consideration (for example, a particular region or sector). In this averaging, we count downgrades as a negative number of notches, whereas we count upgrades as a positive number. We consider stable ratings to have undergone a transition of zero notches. We believe this measure acts as a useful summary of the credit performance of, for example, a given sector, since it combines the relative number of ratings undergoing transition with the severity of that transition.

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, for example, to determine the five-year weighted average transition rates, by analyzing the transition rates for different static pools over different five-year periods and then aggregating them.

Average cumulative default rate calculation

In this report, we also calculate and present average cumulative default rates for different time horizons. For example, table 2 shows that the one-year average cumulative default rate for 'A' rated global structured finance has been 0.40% and the three-year average has been 5.80%.

We first consider the static pool of ratings at the beginning of each calendar year. For each static pool, we calculate the marginal default rates for each calendar year after the static pool's formation. These one-year marginal default rates are "conditional on survival." For example, the marginal default rate for the third year is the number of defaults during the third year divided by the number of ratings from the static pool that had "survived" (that is, not moved to 'D') by the beginning of the third year. We then average the marginal default rates for each time horizon across static pools, weighting by the number of surviving ratings at the beginning of each time horizon, to give an average marginal default rate per time horizon, as well as average marginal survival rates (equal to one minus the average marginal default rate). Finally, the average cumulative default rate of each time horizon is calculated as one minus the product of marginal survival rates up to that time horizon.

We note that this approach differs from the calculations we use in constructing the weighted average multiyear default and transition rates included elsewhere in this study (and as described above), where default rates are not conditional on survival.

Gini coefficient calculation

We calculate Gini coefficients as one way to quantify our ratings' power to rank-order creditworthiness, based on observed default rates.

We first construct a Lorenz curve, which plots the cumulative proportion of all structured finance ratings per rating level on the x-axis, against the cumulative proportion of defaults per rating level on the y-axis (see chart 24). For both axes of the Lorenz curve, the observations are ordered from the low end of the ratings scale ('C') to the high end ('AAA').

If our structured finance ratings only randomly approximated default propensity, the Lorenz curve would fall along the diagonal, shown as the random curve in chart 24. On the other hand, if all defaults occurred only among the lowest-rated securities, with no defaults among the higher-rated securities, the Lorenz curve would lie along the ideal curve in chart 24. Typically, the observed Lorenz curve falls between the ideal and random curves, and we use the Gini coefficient as a summary statistic to quantify its proximity to the ideal curve.

The procedure for calculating the Gini coefficient is illustrated in chart 24. Area B is bounded by the random curve and the Lorenz curve, while area A is bounded by the Lorenz curve and the ideal curve. The Gini coefficient is defined as area B divided by the sum of area A and area B. The Gini coefficient can therefore range from zero (if the Lorenz curve follows the random curve) to 100% (if the Lorenz curve follows the ideal curve). In general, therefore, the higher the Gini coefficient, the greater the link between our ratings and the securities' observed default propensity.

Appendix II: Detailed Default And Transition Statistics

Tables 9-52 provide various default and transition rate statistics for global structured finance securities and major structured finance subsectors.

Global structured finance

Table 9

Table 10

Table 11

Table 12

U.S. RMBS

Table 13

Table 14

Table 15

Table 16

U.S. structured credit

Table 17

Table 18

Table 19

Table 20

U.S. ABS

Table 21

Table 22

Table 23

Table 24

U.S. CMBS

Table 25

Table 26

Table 27

Table 28

Europe

Table 29

Table 30

Table 31

Table 32

Other regions

Table 33

Table 34

Table 35

Table 36

Global RMBS

Table 37

Table 38

Table 39

Table 40

Global structured credit

Table 41

Table 42

Table 43

Table 44

Global ABS

Table 45

Table 46

Table 47

Table 48

Global CMBS

Table 49

Table 50

Table 51

Table 52

Appendix III: Comparison Of Alternative Treatments For 'AAA' Ratings

This edition of our global structured finance default and rating transition study adopts a new approach to the treatment of securities with original ratings of 'AAA'. As detailed in Appendix I, this study uses the "uncollapsed" approach to the treatment of securities with original ratings of 'AAA', rather than the "collapsed" approach, which was used in studies published before 2018. Charts 25-28 illustrate the resulting differences in some example summary statistics.

Related Publications

Related Criteria

• U.S. Structured Finance Asset Isolation And Special-Purpose Entity Criteria, May 15, 2019
• Credit Stability Criteria, May 3, 2010
• Understanding S&P Global Ratings' Rating Definitions, June 3, 2009

Related Research

• 2022 Annual Japanese Structured Finance Default And Rating Transition Study, March 27, 2023
• Global Financing Conditions: Bond Issuance Is Set To Expand Modestly In 2023, With Stronger Upside Potential, Jan. 30, 2023