Despite a weaker economy, defaults on European structured finance notes issued before the financial crisis remain well below those of comparable U.S. deals, according to Standard & Poor’s.
European Union gross domestic product fell 0.5% in the fourth quarter of 2012 from the third quarter, and the region’s unemployment rate continued to rise.
These negative economic developments could have had a negative effect on the credit performance of collateral backing securitizations. Yet S&P calculates that only €38.1 billion of notes from an original issuance volume of €2,779.0 billion have defaulted since mid-2007, representing a 1.37% cumulative default rate. By definition, this cumulative default measure can only increase over time, and it rose from 1.11% in mid-2012. However, the European structured finance cumulative default rate remains low in absolute terms, for example, compared with the equivalent measure for U.S. structured finance, at 16.8%.
The 12-month-rolling default rate was back up to 0.46% by end-2012 after falling during the third quarter. S&P said this was primarily due to rating actions on commercial mortgage-backed securities, as some tranches in a large transaction defaulted following its restructuring.
While defaults were relatively low, downgrades of European structured finance remained high at the end of 2012. S&P said the downside risks generated by the weakening economy, the rating agency’s further lowering of the Spanish sovereign rating to 'BBB-', and its downgrades of various banks that act as transaction counterparties all kept the 12-month-rolling European structured finance downgrade rate at 30.9% at year-end.
Downgrade rates are always higher than default rates because deteriorating creditworthiness is more likely than actual failure to pay, in S&P’s view. The cumulative downgrade rate in the 22-quarter observation period between mid-2007 and the end of 2012 was 34.5%. In other words, its ratings on about two-thirds of European structured finance notes have either been stable or have risen since mid-2007.
The 12-month-rolling downgrade rate reached 30.9%. Widespread downgrades among asset-backed securities, residential mortgage-backed securities, and covered bonds were due to the knock-on effect of our lowering Spain's sovereign rating, several bank downgrades, and, in some cases, weaker collateral performance.
Consumer transactions have outperformed corporate transactions by a wide margin—with a cumulative downgrade rate of 29.1% and a cumulative default rate of only 0.04%, compared with 47.0% and 4.47%, respectively, for corporate transactions.