February 13, 2012 / 11:21 AM / 7 years ago

TEXT-S&P says European structured finance default rate remains low

(The following statement was released by the rating agency)

Feb 13 -

— Only 1.0% of European structured finance securities outstanding since mid-2007 have defaulted, and ratings have been stable or have risen on more than 70%.

— Consumer-related securitizations have outperformed those backed by loans to corporates, with cumulative default rates of 0.04% versus 3.02% in the period.

— Higher-rated tranches outperformed those lower in the capital structure; ratings on almost three-quarters of ‘AAA’ issuance have remained stable for 18 quarters.

— Ratings have been withdrawn on close to 54% by original issuance volume, usually due to redemption in full.

— Several tranches are currently on CreditWatch negative, so we could lower more ratings in the coming months.

Despite a weakening European economy and renewed concerns about sovereign indebtedness in fourth-quarter 2011, the overall default rate for European structured finance securities has remained low, Standard & Poor’s Ratings Services said in a transition study published today.

By year-end 2011, only 1.0% of the securities outstanding in mid-2007 had defaulted and the 12-month rolling default rate stabilized at 0.5%, said Standard & Poor’s in the report published today, “European Structured Finance Cumulative Default Rate Since Mid-2007 Edges Higher To 1%.” In addition, we estimate that about 54% of the securities have now redeemed in full.

“Based on our calculations, only EUR26.0 billion of notes outstanding in mid-2007 had defaulted as of year-end 2011,” said Standard & Poor’s credit analyst Arnaud Checconi. “Based on the overall sample’s notional value at issuance of EUR2,596.1 billion, this gives a cumulative default rate of 1.00%.”

“By definition, this cumulative measure of default can only increase over time, and is up slightly from 0.87% based on data through the third quarter of 2011,” Mr. Checconi said.

The European structured finance cumulative default rate remains low in absolute terms, for example, compared with the equivalent measure for U.S. structured finance.

However, many of the ratings transition and default trends vary substantially by asset class and by a note’s position in the capital structure.

We could lower some ratings further in the coming months as we factor in revisions to our bank criteria, and due to the ongoing effects of the sovereign debt crisis and a likely economic contraction in several European countries.

This report is the latest update to our original study, “European Structured Finance Cumulative Default Rate Since Mid-2007 Remains Below 0.5%,” published on May 17, 2010. As before, we quantify credit performance by analyzing tranches’ rating transitions and defaults, aggregating them by notional value at issuance, rather than by the number of tranches. This approach gives greater weight to larger tranches, where the most investor funds are actually deployed—notably those more senior in the capital structure and those in asset classes where transactions are typically larger.

RELATED CRITERIA AND RESEARCH

— The European Structured Finance Default Rate Remains Low, Nov. 29, 2011

— Request For Comment: Counterparty And Supporting Obligations Methodology And Assumptions—Expanded Framework, Nov. 21, 2011

— Banks: Rating Methodology And Assumptions, Nov. 9, 2011

— Global Structured Finance Scenario And Sensitivity Analysis: The Effects Of The Top Five Macroeconomic Factors, Nov. 4, 2011

— Four Years On-The European Structured Finance Default Rate Since Mid-2007 Is Only 1.2%, Sept. 22, 2011

— 2010 Counterparty Criteria-What Happened Next For Global Structured Finance Ratings? July 22, 2011

— Counterparty And Supporting Obligations Methodology And Assumptions, Dec. 6, 2010

— European Structured Finance Cumulative Default Rate Since Mid-2007 Remains Below 0.5%, May 17, 2010

— Methodology: Credit Stability Criteria, May 3, 2010

— Understanding Standard & Poor’s Rating Definitions, June 3, 2009

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