Global Structured Finance Default And Transition Study–1978-2008: Credit Quality Of Global Structured Securities Fell Sharply In 2008 Amid Capital Market Turmoil
Publication Date: Feb 25, 2009 21:41 Europe/London
Global Structured Finance Default And Transition Study—1978-2008: Credit Quality Of Global Structured Securities Fell Sharply In 2008 Amid Capital Market Turmoil
Turbulence in the capital markets caused a sharp drop in the overall credit quality of global structured securities in 2008, spurring an average 3.2-notch rating decline for the sector over the course of the year. The decrease came on the heels of a 0.52-notch global rating decline in 2007 and reflected unusually severe deterioration in the credit quality of underlying collateral, particularly mortgage assets, as well as high leverage and scant liquidity. These factors—along with volatile debt and equity markets, the difficulties facing some key financial institutions, including monoline insurers, and the resulting government bailouts—led to unprecedented rating volatility for structured finance securities. Overall, we downgraded approximately $1.9 trillion (19.4%) of the roughly $9.8 trillion original issuance amount of outstanding global structured securities in 2008.
The enormous impact of the chain of events last year also resulted in the highest relative annual defaults among both investment-grade and speculative-grade global structured securities that we've seen in the roughly 30-year history of the structured market (notwithstanding a peak in 1988 among speculative-grade securities, resulting primarily from the small sample size at the time). The amount of defaulted securities in 2008 reached approximately $112 billion, 1.1% of the total outstanding issuance amount of global structured securities. Still, although the absolute level of defaults increased significantly during 2008, the relative default behavior of ratings remained in line with historical patterns: that is, higher ratings continued to experience lower average default rates, and vice versa.
The market dislocation has moved far beyond the initial troubles in the U.S. subprime mortgage area to affect virtually every part of the global financial system, and key leading economic indicators—including weaker home sales, falling housing values, rising unemployment, and a shrinking global economy—are pointing to difficult times ahead. The combined effect of these factors, along with rising foreclosures and liquidity constraints, might prolong the economic decline and, as a result, could increase ratings volatility in 2009. As we see it now, credit performance and default rates for the rest of the year will depend, in large part, on the success of government stimulus packages across the globe and the health of the global economy—specifically, the unemployment picture and any stabilization in various housing markets.
Overview Of Our Study Methodology
When conducting this year's global structured finance default and transition study, we placed special emphasis on the volatility of historical default and transition rates. Specifically, we provided standard deviations of default and transition rates for each rating category, when appropriate, to highlight their historical variability, rather than just concentrating on long-term averages.
Although it can be tempting to focus only on averages, looking at variability (as measured by the standard deviation) gives us additional insight into the distribution characteristics around those averages and helps put the recent significant rating volatility in perspective. While the economic environment, particularly the market dislocation of recent years, is a significant cause of the variations, other factors—such as the availability of data, the length of the performance period, and small sample sizes in certain years—may explain additional variability in historical default and transition rates.
For this study, we focused on the rating transition trends for long-term issue ratings on global structured securities, including asset-backed securities (ABS), collateralized debt obligations (CDOs), commercial mortgage-backed securities (CMBS), and residential mortgage-backed securities (RMBS). We did not look at short-term ratings, such as those on asset-backed commercial paper conduits, or issuer credit ratings.
We tracked both default and transition rates, which measure the relative performance of our ratings over time. "Default rate" refers to the percentage of ratings lowered to 'D' over a certain period of time; "near-default rate" refers to the percentage of securities downgraded to the 'CC' or 'C' rating categories. "Transition" refers to how much a Standard & Poor's Ratings Services rating has changed, either up or down, over a certain time frame. We may raise or lower a rating by one or more notches on our ratings scale (for example, a one-notch downgrade would be to 'AA-' from 'AA').
These default and transition rates can be useful to investors and credit professionals because they show the degree to which credits are stable and indicate the relative default rates among credits at different rating levels. Some investors may be able to hold only highly rated securities and may want to assess how likely it is that securities in their portfolios will remain stable or change.
How Global Structured Finance Ratings Performed In 2008
The troubles in the U.S. housing market continued to be the cause of significant rating volatility last year. U.S. subprime, Alternative-A (Alt-A), and closed-end second-lien RMBS are experiencing high levels of defaults and delinquencies, and CDOs backed by mortgage securities saw unprecedented numbers of downgrades.
The downgrades and defaults were, again, more pronounced among CDOs, especially those backed by residential mortgage securities, and RMBS transactions; RMBS and CDOs alone constituted $1.6 trillion (84%) of the downgraded securities. Globally, RMBS and CDOs accounted for roughly $7 trillion of the $9.8 trillion in total securities outstanding in 2008.
In comparison, ratings on U.S. CMBS were relatively stable last year, although transitions were more negative than in the past. Ratings on ABS transactions and collateralized loan obligations (CLOs) backed by corporate loans were also relatively more stable, although delinquencies and losses are increasing among consumer ABS, particularly transactions backed by auto loans and credit card collateral. Many of the downgrades affecting ABS last year arose from rating actions on the transactions' monoline insurers and counterparty financial institutions.
Ratings on structured investment vehicles (SIVs) were highly volatile in 2008 as the segment struggled with falling net asset prices and a frozen commercial paper market. SIVs overall have been deleveraging through asset liquidations since the beginning of 2007, primarily because they have been unable to roll their debt and obtain access to new funding sources.
We observed the following key global credit trends during 2008:
The credit performance of global structured securities was extremely negative overall last year, following poor performance in 2007 and in contrast with the overall positive credit performance between 2004 and 2006.
The overall credit quality of global structured securities declined roughly 3.2 rating notches.
We downgraded approximately $1.9 trillion (19.4%) of the roughly $9.8 trillion original issuance amount of outstanding global structured securities in 2008, and the amount of defaulted securities had reached $112 billion (1.1%) by the end of the year.
The Gini coefficient for global structured finance ratings, which provides a measure of the ratings' ability to rank-order default risk, was 76% in 2008, compared with 73% in 2007 and 93% in 2006. (For more information on Gini coefficients, see the section titled "Gini Coefficients Can Indicate How Well Ratings Rank-Order Default Risk" below).
The upgrade-to-downgrade ratio was approximately 0.03x, down from 0.35x in 2007 and 3.1x in 2006.
The upgrade rate fell to 1.3% of the number of ratings, from 3.84% in 2007.
The downgrade rate was 37.9% of the number of ratings, up from 10.8% during 2007.
Rating volatility increased in 2008; roughly 39.2% of global structured securities experienced rating transitions, compared with 14.6% in 2007.
Roughly 91% of defaults and near-defaults affected securities that were rated 'A' or lower at the beginning of 2008.
New-issue credit spreads for structured finance securities showed signs of weakness throughout 2008, likely reflecting the market's concerns about the performance of underlying collateral.
We also noted the following trends at the sector and subsector levels during 2008:
The credit quality of U.S. CMBS and ABS declined overall, but these sectors still performed relatively better than the U.S. RMBS and CDO markets. The upgrade rate was 3.4% of the number of ratings for U.S. CMBS and 0.98% for U.S. ABS.
Declines in credit quality for consumer ABS, particularly credit card and auto loan transactions, were mainly due to rating links to monoline insurers. However, delinquencies and losses in the underlying auto and credit card collateral started to increase during the year.
U.S. RMBS ratings declined significantly last year, especially among subprime, closed-end second-lien, net interest margin securities (NIMS), and Alt-A transactions.
Globally, CDOs backed by mortgage securities experienced significant downgrades, and credit performance was also weak for global synthetic CDOs backed by underlying corporate securities.
The ratings on a significant number of subprime and Alt-A RMBS transactions, synthetic corporate CDOs, hybrid CDOs of ABS, and cash flow CDOs of ABS are currently on CreditWatch with negative implications. The CreditWatch placements suggest that the negative trends we've been observing in these subsectors may continue.
Gini Coefficients Can Indicate How Well Ratings Rank-Order Default Risk
During 2008, as in the past, higher ratings were generally associated with lower default rates, while lower ratings saw higher defaults overall. However, as shown in charts 1 and 2 and table 1, defaults for both investment- and speculative-grade securities were much higher in 2008 than in any year in the history of the structured market (except for the spike in 1988 due to a low sample size). Defaults and near-defaults for 'AAA' securities were also the highest ever: The historical weighted average one-year 'AAA' default rate is 8 basis points (bps, with a standard deviation of 11 bps), compared with a default rate of approximately 50 bps in 2008.
Chart 1
Chart 2
Table 1
Global SF Annual Default Rates (%)—1978-2008*
(Default rates were zero between 1978 and 1988)
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
Default rate
AAA
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
Investment-grade
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.02
0.02
0.00
0.15
0.02
Speculative-grade
44.44
0.00
0.00
0.00
0.00
2.56
0.76
8.66
3.01
1.14
2.43
1.22
All
0.42
0.00
0.00
0.00
0.00
0.02
0.02
0.37
0.17
0.08
0.32
0.12
Defaults and near-defaults
AAA
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
Investment-grade
0.00
0.00
0.00
0.00
0.00
0.00
0.02
0.02
0.02
0.00
0.15
0.02
Speculative-grade
44.44
0.00
0.00
0.00
0.00
2.56
5.30
10.24
6.28
3.03
2.73
1.88
All
0.42
0.00
0.00
0.00
0.00
0.02
0.15
0.44
0.35
0.20
0.34
0.18
2000
2001
2002
2003
2004
2005
2006
2007
2008
Wt. Avg.
Std. Dev.
Default rate
AAA
0.00
0.05
0.00
0.00
0.00
0.00
0.00
0.04
0.53
0.08
0.11
Investment-grade
0.01
0.10
0.12
0.12
0.03
0.02
0.02
0.22
1.03
0.26
0.22
Speculative-grade
1.18
2.75
5.64
4.17
2.22
1.78
1.28
3.07
16.05
6.51
9.54
All
0.12
0.38
0.78
0.68
0.36
0.28
0.21
0.65
4.13
1.13
0.86
Defaults and near-defaults
AAA
0.00
0.05
0.00
0.00
0.00
0.00
0.00
0.04
2.02
0.28
0.43
Investment-grade
0.01
0.12
0.15
0.15
0.04
0.02
0.02
0.27
6.31
1.24
1.34
Speculative-grade
1.63
2.89
8.14
5.48
3.03
2.12
1.49
3.40
36.20
12.89
11.29
All
0.16
0.41
1.10
0.89
0.49
0.33
0.25
0.74
12.48
2.87
2.61
*'AAA' ratings from the same transaction are treated as a single rating in the calculation for this table. We used full rating categories when determining rating transitions and defaults. SF-Structured finance.
Standard & Poor's recognizes the importance of assessing how well our ratings have served as indicators of default risk over time. To this end, we've calculated historical Gini coefficients—measures of statistical dispersion—to assess the relative rank-ordering performance of our ratings in various categories (see chart 3).
To derive the Gini coefficients, we plotted the cumulative percent of structured finance ratings (sorted from low to high ratings) against the cumulative proportion of defaults in a Lorenz curve (a graphical representation of the proportionality of a distribution) to help demonstrate how our ratings rank-order default risk. In the chart, the "random" line—for which the cumulative proportions of ratings and defaults are the same, indicating no ability to rank risk—provides a benchmark for measuring the ranking power of our ratings. The "ideal" curve represents the best possible results at rank-ordering default risk.
Generally speaking, the higher the Gini coefficient (which represents the area between the random line and the Lorenz curve), the greater the correlation between our ratings and the securities' default behavior. We calculate the Gini coefficient using a scale from 0 to 1. In 2008, the Gini coefficient for defaults of rated global structured securities was 76%, which indicates a notable level of correlation. This value is up slightly from 73% in 2007, but down significantly from about 93% in 2006.
It's also valuable to calculate sector-specific historical Gini coefficients, as well as coefficients over longer periods of time. As shown in chart 4, Gini coefficients were in the 90% area for each sector before 2006, whereas performance varied significantly among sectors in 2008. For example, the one-year Gini coefficient for CDOs declined significantly in recent months, to 28%. The drop in the Gini coefficient for CDOs was the primary cause of the overall decline in the Gini coefficient for global structured securities.
Gini coefficients are showing some signs of deterioration over a longer horizon as well (see chart 5), but they still indicate that structured finance ratings remained correlated with default rates in 2008. The historical variation in Gini coefficients again highlights the cyclical behavior of defaults over time while also illustrating the relative weakness of certain recent ratings, especially those on CDOs, in the extent to which they have rank-ordered default risk.
Chart 4
Chart 5
Upheaval In The Capital Markets Caused Unprecedented Rating Volatility
Although the market dislocation has affected virtually all of structured finance, as well as many other financial products, the impact has been most pronounced among CDOs backed by mortgage securities and, to a somewhat lesser degree, among certain types of RMBS. The high frequency, severity, and correlation among downgrades, along with the downgrades of both relatively recent vintages and higher-rated securities, together demonstrate much greater rating volatility in 2008 than in the past. In addition, global structured issuance declined significantly in 2008, credit spreads reached all-time highs, and mortgage loan performance deteriorated significantly.
Troubled CDOs and mortgage securities drove downgrades and defaults
Over the course of last year, CDOs and U.S. RMBS—particularly transactions backed by subprime, closed-end second-lien, and Alt-A collateral, and also NIMS—experienced the greatest number of downgrades and defaults. These rating actions generally followed Standard & Poor's revisions of its surveillance assumptions to account for the slowing of the global economy, current trends in the U.S. housing market, and credit market weakness.
Credit spreads reached historical highs
The credit market disruption emanating from troubles in the mortgage market has pushed primary and secondary market spreads on structured securities to record highs. Investors' concerns about continued weak housing market fundamentals kept spreads at these levels during all of 2008 and thus far in 2009. In general, spreads have widened across all global structured sectors and rating categories since July 2007, including more-established asset types, such as credit card and auto loan ABS, markets in which spreads have traditionally been tight. In addition, CMBS spreads have widened to historical highs, likely due to the performance of the housing market along with continued economic weakness.
Rising corporate defaults and high unemployment pose more problems
We expect the slowing economy to cause the default rate for speculative-grade U.S. corporates to increase over the next 12 months from an annual level of roughly 4% in 2008 to roughly 14% in 2009, and corporate defaults could be significantly more pronounced beyond this one-year horizon. Any increase, in our view, has the potential to hurt the credit quality of CDOs backed by corporate securities.
The high unemployment rate is also placing pressure on U.S. ABS transactions backed by consumer assets, such as auto loans, student loans, and credit card receivables. Many market participants believe that rising mortgage delinquencies and defaults and other difficulties in the mortgage credit markets indicate a deteriorating outlook for other consumer assets as well—and these assets have, in fact, started to experience higher delinquencies and losses.
Downgrades rose as upgrades declined
In 2008, the one-year downgrade rate for global structured securities increased to 37.9% of the number of ratings from 10.8% in 2007, while the upgrade rate decreased to 1.3% from 3.8%. Overall credit performance was negative, with an average downgrade of about 3.2 notches when considering both the magnitude and frequency of rating transitions. However, when we weight the transition rates according to the original issuance amount of each security, rather than give equal weighting to each outstanding security, the downgrade rate is much lower, at about 19.8% of the roughly $9.8 trillion in outstanding original issuance.
The rating transitions for 2008 revealed areas of stability, variations in default rates, and correlation with the initial rating levels: That is, securities with higher ratings tended to be more stable (or experience upgrades) than their lower-rated counterparts (see chart 6 and table 2).
Chart 6
Table 2
Global SF 2008 Transition By Rating*
Rating at beginning of year
Beginning No. of ratings
Stable %
Upgrade %
Downgrade %
Near-default %
Default %
AAA
15,598
76.58
0.00
23.42
1.49
0.53
AA
16,777
63.34
1.77
34.89
2.93
0.62
A
14,464
61.03
2.10
36.87
6.22
1.06
BBB
14,516
58.12
1.65
40.23
11.16
2.00
BB
7,859
53.90
1.27
44.83
17.32
4.64
B
5,359
43.53
0.95
55.51
24.33
11.83
CCC or lower
2,746
21.38
0.11
78.51
20.10
56.92
Total
77,319
60.78
1.29
37.94
8.35
4.13
*'AAA' ratings from the same transaction are treated as a single rating in the calculation of this table. "Stable" includes ratings withdrawn due to redemptions during the year. Rating modifiers (+ and -) are used when determining rating transitions such as upgrades and downgrades. The downgrade rate includes near-defaults ('CC' or 'C') and defaults.
Chart 7 shows the upgrade and downgrade rates for each rating category in each sector during 2008. The results show higher downgrade rates for RMBS and CDOs and lower downgrade rates for CMBS and ABS across the rating categories.
Chart 7
Chart 8, which compares rating stability rates with default and near-default rates for the various rating categories during 2008, illustrates that less-stable rating categories also tend to experience higher default rates. In other words, there are clear correlations between the rating level, the stability of the rating, and the prevalence of defaults and near-defaults.
Chart 8
Table 3 shows the number of ratings outstanding at the beginning of 2008 for each sector and region and provides rating transition rates for the year.
Table 3
Global SF 2008 Rating Transition By Region And Sector*
Region/sector
Beginning No. of ratings
Stable %
Upgrade %
Downgrade %
Near-default %
Default %
U.S. ABS
3,886
85.56
0.98
13.46
0.00
0.36
U.S. CDO
9,919
56.33
0.77
42.91
18.15
4.17
U.S. CMBS
7,393
82.46
3.41
14.13
0.00
0.34
U.S. RMBS
42,129
50.15
0.44
49.41
10.96
6.25
U.S. single-name synthetics
877
65.79
5.02
29.19
1.82
0.57
Euro. ABS
1,150
91.30
3.13
5.57
0.17
0.00
Euro. CDO
4,485
68.65
1.03
30.32
0.31
1.18
Euro CMBS
899
90.88
1.56
7.56
0.00
0.67
Euro. RMBS
2,786
91.56
2.33
6.10
0.00
0.04
Euro. single-name synthetics
352
75.57
3.69
20.74
0.28
1.42
Asia (non-Japan)
275
44.36
2.18
53.45
1.82
3.27
Australia/New Zealand
1,098
74.23
2.37
23.41
0.18
0.36
Canada
384
90.63
4.43
4.95
0.00
0.52
Japan
1,510
76.62
10.53
12.85
0.00
1.52
Latin America/emerging markets
176
42.05
10.23
47.73
0.00
0.00
Total
77,319
60.78
1.29
37.94
8.35
4.13
*'AAA' ratings from the same transaction are treated as a single rating in the calculation of this table. "Stable" includes ratings withdrawn due to redemptions during the year. Rating modifiers (+ and -) are used when determining rating transitions such as upgrades and downgrades. Downgrade rate includes near-defaults ('CC' or 'C') and defaults. RMBS includes subprime mortgage transactions, and ABS includes manufactured housing deals. CDO includes cash, synthetic, and market-value CDOs, as well as leveraged funds.
Chart 9 shows the frequency of upgrades and downgrades for our global structured finance ratings during 2008 and illustrates aggregate credit performance for the combined regions and sectors during several previous years. The 1.3% upgrade rate in 2008 was down from 3.8% in 2007, while the downgrade rate reached 37.9% at the end of 2008, up from 10.8% in 2007.
Chart 9
Tables 4 and 5 show the historical performance of each sector and region. In the U.S., the number of ABS upgrades during 2008 was lower than in previous years: we raised just 1.0% of our outstanding U.S. ABS ratings last year, down from 7.2% in 2007. At the same time, downgrades of U.S. ABS increased to 13.5% from 2.4%. A few large ABS subsectors—including credit cards and auto and student loans—accounted for most of the downgrades. In Europe, however, the level of ABS upgrades was relatively flat at 3.1%, but the rate of downgrades increased substantially, to 5.6% in 2008 from 0.5% in 2007.
In both Europe and the U.S., CDOs backed by mortgage securities and synthetic corporate CDOs heavily influenced the performance of the sector as a whole, and default and downgrade rates reached their highest levels ever. Similarly, U.S. RMBS experienced an unprecedented level of downgrades and defaults during 2008 and reported much fewer upgrades than in 2007. U.S. and European CMBS transactions also had more downgrades and fewer upgrades than in 2007.
Ratings volatility has also risen in recent years in markets outside the U.S. and Europe, although in some instances the high upgrade or downgrade rates must be placed in the context of a relatively small data set: a case in point is the high downgrade rate in Asia, excluding Japan. We also provide standard deviations for annual upgrade and downgrade rates; high variability over time indicates cyclical components of rating transitions.
Table 4
Global SF Annual Upgrade Transitions By Region And Sector—1978-2008*
Upgrade %
Region/sector
2000
2001
2002
2003
2004
2005
2006
2007
2008
Avg. of 1978-2008
Std. dev.
U.S. ABS
1.01
2.01
1.10
2.44
1.65
4.57
6.70
7.16
0.98
2.69
2.31
U.S. CDO
0.28
0.18
0.57
1.25
2.79
3.79
3.20
3.29
0.77
2.50
1.37
U.S. CMBS
7.02
10.99
5.52
9.49
13.50
20.86
16.54
10.33
3.41
11.17
5.17
U.S. RMBS
10.09
10.22
9.24
12.81
10.73
7.90
3.79
1.66
0.44
5.21
4.13
U.S. single-name synthetics
3.14
0.27
1.14
1.22
3.05
10.41
14.65
10.03
5.02
6.06
4.77
Euro. ABS
0.00
0.00
1.48
4.82
1.70
1.97
1.35
3.11
3.13
2.03
1.46
Euro. CDO
0.00
2.90
0.99
4.59
4.51
3.16
5.03
5.62
1.03
4.64
1.91
Euro CMBS
0.00
2.67
1.64
7.20
7.69
6.48
8.84
5.30
1.56
6.10
3.01
Euro. RMBS
5.33
4.01
5.35
5.85
4.02
6.31
10.21
4.16
2.33
5.42
2.08
Euro. single-name synthetics
2.04
5.37
0.73
6.51
0.44
3.70
4.15
6.39
3.69
2.99
2.12
Asia (non-Japan)
10.53
5.00
6.90
0.00
3.92
9.68
6.76
8.22
2.18
6.56
3.27
Australia/New Zealand
2.79
4.72
0.92
2.16
2.48
3.91
14.29
2.88
2.37
4.55
3.75
Canada
8.16
3.08
5.17
6.94
6.55
15.35
3.72
11.63
4.43
7.21
3.78
Japan
0.00
0.00
2.58
4.68
6.32
8.64
9.13
12.44
10.53
8.25
4.27
Latin America/emerging markets
26.98
4.00
12.75
0.00
7.14
16.53
10.79
10.00
10.23
9.23
7.27
Global
6.13
6.49
5.16
7.86
7.77
8.26
6.10
3.84
1.29
5.28
2.09
*'AAA' ratings from the same transaction are treated as a single rating in the calculation of this table. Rating modifiers (+ and -) are used when determining rating transitions such as upgrades and downgrades. Downgrade rate includes near-defaults ('CC' or 'C') and defaults. RMBS includes subprime mortgage transactions, and ABS includes manufactured housing deals. CDO includes cash, synthetic, and market-value CDOs, as well as leveraged funds. Std. dev.-standard deviation.
Table 5
Global SF Annual Downgrade Transitions By Region And Sector—1978-2008*
Downgrade %
Region/sector
2000
2001
2002
2003
2004
2005
2006
2007
2008
Avg. of 1978-2008
Std. Dev.
U.S. ABS
3.18
2.90
7.52
19.17
8.40
2.13
3.63
2.36
13.46
4.57
5.58
U.S. CDO
4.56
5.00
11.16
10.39
4.08
3.61
2.71
10.92
42.91
6.39
11.86
U.S. CMBS
1.52
3.91
6.03
7.67
4.43
2.29
2.08
1.80
14.13
3.26
3.82
U.S. RMBS
1.93
1.05
0.98
0.84
0.45
0.64
1.04
15.78
49.41
4.73
15.35
U.S. single-name synthetics
4.29
8.56
24.10
12.39
9.78
7.47
6.83
4.33
29.19
8.39
8.33
Euro. ABS
1.43
0.84
3.26
2.94
3.74
0.00
3.44
0.50
5.57
1.82
1.72
Euro. CDO
0.00
7.97
20.79
16.43
3.45
4.12
5.30
4.36
30.32
5.61
9.46
Euro CMBS
0.00
0.00
1.09
4.55
3.42
2.31
0.68
0.52
7.56
1.59
2.40
Euro. RMBS
0.00
0.36
0.73
0.34
0.00
0.34
0.19
0.27
6.10
1.59
1.84
Euro. single-name synthetics
4.76
0.67
20.44
11.83
9.78
5.76
4.15
0.32
20.74
9.34
7.25
Asia (non-Japan)
0.00
0.00
24.14
0.00
1.96
1.08
8.11
17.81
53.45
9.39
16.89
Australia/New Zealand
0.28
1.42
0.46
2.52
2.34
1.30
0.95
2.42
23.41
1.43
6.94
Canada
0.00
0.00
0.00
6.36
0.44
0.00
2.23
2.03
4.95
1.40
2.25
Japan
8.05
5.33
5.15
3.75
2.69
2.21
3.90
6.30
12.85
4.39
3.08
Latin America/emerging markets
4.76
25.33
36.27
20.41
0.00
0.83
0.00
2.00
47.73
10.04
16.94
Global
2.38
2.60
5.51
6.91
3.01
1.74
1.97
10.79
37.94
4.62
10.92
*'AAA' ratings from the same transaction are treated as a single rating in the calculation of this table. Rating modifiers (+ and -) are used when determining rating transitions such as upgrades and downgrades. Downgrade rate includes near-defaults ('CC' or 'C') and defaults. RMBS includes subprime mortgage transactions, and ABS includes manufactured housing deals. CDO includes cash, synthetic, and market-value CDOs, as well as leveraged funds. Std. Dev.-Standard deviation.
The magnitude of rating changes hit record highs in 2008
Approximately 41% of the downgrades in 2008 were 10 notches or more, the highest annual percentage we've ever observed. At the same time, roughly 52% of upgraded securities and 4% of downgraded securities experienced only a one-notch rating change. About 24% of upgraded securities and 89% of downgraded securities had transitions of three notches or more (see chart 10).
Chart 10
Vintage can affect performance
The fundamental credit characteristics and economic environment of a transaction's vintage year—for example, the recession in the U.S. and globally between 2000 and mid-2003, which brought changes in underwriting standards—may influence its current credit behavior. Table 6 illustrates the impact of the issuance (vintage) year on credit performance of global structured securities in 2008.
The credit performance of outstanding transactions originated between 1995 and 2002 was generally weak in 2008. Transactions issued in 2005 through 2007 experienced significantly higher downgrade and default rates last year, owing to credit deterioration among subprime and Alt-A RMBS and CDOs backed by these mortgage securities. Default rates were also uncharacteristically high for these more recent vintages, particularly securities originated in 2006, which had an 8% default rate and a 16.6% near-default rate.
Table 6
Global SF 2008 Rating Transition By Issuance (Vintage) Year*
Issuance year
Beginning No. of ratings
Stable %
Upgrade %
Downgrade %
Near-default %
Default %
Pre-1990
181
95.03
0.00
4.97
0.00
0.00
1990
27
100.00
0.00
0.00
0.00
0.00
1991
41
95.12
0.00
4.88
0.00
0.00
1992
71
95.77
0.00
4.23
0.00
0.00
1993
122
88.52
0.00
11.48
1.64
0.00
1994
83
89.16
0.00
10.84
0.00
0.00
1995
102
66.67
0.00
33.33
0.00
0.00
1996
144
61.81
1.39
36.81
0.00
1.39
1997
280
86.07
2.14
11.79
0.00
0.00
1998
558
85.30
3.05
11.65
0.36
1.08
1999
696
86.21
1.01
12.79
0.29
0.57
2000
846
85.82
2.01
12.17
0.47
0.59
2001
1,521
81.00
4.93
14.07
0.92
1.71
2002
3,322
80.61
3.88
15.50
1.51
2.11
2003
6,913
83.31
3.49
13.21
1.24
1.40
2004
11,199
78.24
1.10
20.66
2.75
1.37
2005
16,098
65.44
0.82
33.74
6.02
3.93
2006
19,557
38.21
0.93
60.86
16.56
7.97
2007
15,558
50.55
0.42
49.03
11.47
4.11
All
77,319
60.78
1.29
37.94
8.35
4.13
*'AAA' ratings from the same transaction are treated as a single rating in the calculation of this table. "Stable" includes ratings withdrawn due to redemptions during the year. Rating modifiers (+ and -) are used when determining rating transitions such as upgrades and downgrades. Downgrade rate includes near-defaults ('CC' or 'C') and defaults.
Certain Subsectors Saw Higher Percentages Of Downgrades And Defaults
Downgrades affected high percentages of the ratings on many subsectors in 2008. As shown in table 7, among subsectors with large numbers of outstanding ratings, cash flow high-grade CDOs of ABS led downgrades, with 97% of ratings lowered during the year, followed by hybrid mezzanine CDOs of ABS (93%); closed-end second-lien RMBS (82%); subprime RMBS (58%); Alt-A RMBS (57%); synthetic corporate investment-grade CDOs (55%); and trust-preferred CDOs (31%). Upgrades constituted very low percentages of the rating actions overall during 2008.
Table 7 also shows sector-specific default rates. Closed-end second-lien RMBS saw the highest default rate (56%) in 2008, followed by hybrid mezzanine (28%) and hybrid high-grade (24%) CDOs of ABS. While Alt-A (4%) and subprime (7%) RMBS defaults were relatively lower in 2008 (in terms of the number of ratings), the default rates were significant nonetheless because those asset types make up a large portion of the structured market.
Table 7
Global SF 2008 Rating Transition: Subsectors With Significant Rating Volatility*
Subsectors
Beginning No. of ratings
Stable %
Upgrade %
Downgrade %
Near-default %
Default %
CDO cash flow high-grade CDO of ABS
733
2.86
0.00
97.14
67.26
4.09
CDO hybrid mezzanine CDO of ABS
917
6.65
0.00
93.35
59.87
27.59
CDO hybrid high-grade CDO of ABS
74
9.46
0.00
90.54
50.00
24.32
CDO hybrid CDO of CDO
114
11.40
0.00
88.60
50.88
23.68
CDO synthetic mezzanine CDO of ABS
383
11.49
0.26
88.25
1.31
5.74
RMBS closed-end second
1,397
17.90
0.00
82.10
10.38
56.05
RMBS home equity line of credit
237
19.41
0.00
80.59
4.64
19.41
ABS rental car
27
22.22
0.00
77.78
0.00
0.00
CDO cash flow mezzanine CDO of ABS
1,203
26.93
1.08
71.99
46.80
2.91
CDO synthetic high-grade CDO of ABS
222
30.18
1.35
68.47
0.00
1.80
ABS 12b-1
23
34.78
0.00
65.22
0.00
8.70
RMBS NIMS
1,537
40.14
0.00
59.86
32.86
0.00
RMBS subprime
16,910
41.50
0.18
58.31
10.17
7.16
CDO CF CDO of CDO
222
40.54
1.80
57.66
31.08
12.61
RMBS Alt-A
12,515
42.86
0.10
57.04
15.82
3.99
CDO syn. corp. inv-grade CDO
3,223
43.50
1.43
55.07
0.03
1.74
ABS future flow
147
38.78
12.24
48.98
0.00
2.04
ABS commercial other
41
51.22
0.00
48.78
0.00
0.00
CDO synthetic CDO of CDO
789
53.49
0.76
45.75
0.00
1.14
CDO equity and hedge fund CFO
41
60.98
0.00
39.02
2.44
0.00
ABS aircraft
77
62.34
0.00
37.66
0.00
0.00
RMBS high LTV
14
64.29
0.00
35.71
0.00
0.00
ABS franchise loans
38
65.79
0.00
34.21
0.00
0.00
CDO hybrid CBO
66
66.67
0.00
33.33
0.00
0.00
CDO CF trust preferred
286
68.53
0.00
31.47
0.70
0.00
CDO other
822
68.00
1.09
30.90
4.62
2.31
CDO synthetic CDO of CMBS
344
70.06
0.00
29.94
0.00
0.00
RMBS first-lien high LTV
189
72.49
0.00
27.51
4.23
7.41
RMBS document-deficient
196
73.47
0.00
26.53
1.53
2.04
Single-name synthetics
1,287
69.15
4.58
26.26
1.32
0.78
CDO operating companies
42
73.81
0.00
26.19
0.00
0.00
ABS other
297
74.75
1.01
24.24
0.67
0.00
RMBS outside guidelines
468
77.14
0.00
22.86
0.43
1.28
ABS RV loans
23
78.26
0.00
21.74
0.00
0.00
CDO synthetic corporate high yield CBO
116
77.59
0.86
21.55
0.00
0.00
ABS student loans
892
78.59
0.22
21.19
0.00
0.00
ABS new assets
257
77.82
2.33
19.84
0.00
0.00
CDO hybrid CDO of CMBS
42
80.95
0.00
19.05
0.00
0.00
RMBS 2nd-lien high combined LTV
237
81.86
0.00
18.14
0.00
0.42
CDO hybrid CLO
69
82.61
0.00
17.39
0.00
0.00
RMBS prime jumbo
9,597
81.13
3.25
15.62
2.43
0.58
ABS manufactured housing
326
85.58
0.00
14.42
0.00
0.92
CMBS
9,129
84.47
3.30
12.24
0.00
0.34
RMBS nonperforming
82
89.02
0.00
10.98
0.00
2.44
*'AAA' ratings from the same transaction are treated as a single rating in the calculation of this table. "Stable" includes ratings withdrawn due to redemptions during the year. Rating modifiers (+ and -) are used when determining rating transitions such as upgrades and downgrades. Downgrade rate includes near-defaults ('CC' or 'C') and defaults.
Time-To-Default And Cumulative Default Rates
The time to default is an additional means for understanding the default behavior of ratings. In general, higher-rated securities, on average, take longer to default, while lower-rated securities default sooner. However, this expectation may not always play out if the sample size is small, especially among securities that were highly rated before defaulting. Table 8 provides the distribution of the times to default—which represent the number of years between the origination date and the default date for each defaulted security—according to the original rating categories.
Table 8
Global SF Percent Of Time-To-Default Since Original Rating Date—1988-2008*
Percent of defaults within No. of years since origination
Original rating
1
2
3
4
5
6
7
8
9
10
11
12
13
14
AAA
8.28
50.34
31.72
6.21
0.00
0.69
1.38
0.69
0.69
0.00
0.00
0.00
0.00
0.00
AA+
3.70
70.37
25.93
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
AA
4.41
46.26
20.26
5.73
3.52
5.29
7.05
3.96
0.88
0.88
0.88
0.00
0.44
0.44
AA-
5.66
60.38
25.47
1.89
1.89
2.83
0.00
1.89
0.00
0.00
0.00
0.00
0.00
0.00
A+
0.96
54.81
39.42
1.92
2.88
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
A
5.97
36.65
24.72
9.38
7.67
5.40
3.69
2.27
1.14
2.56
0.28
0.28
0.00
0.00
A-
1.88
35.71
33.83
6.39
1.88
7.14
7.89
3.76
0.75
0.38
0.38
0.00
0.00
0.00
BBB+
3.48
36.10
40.11
4.81
4.28
5.61
0.80
1.60
0.80
0.53
0.80
1.07
0.00
0.00
BBB
4.22
26.09
31.88
8.75
8.59
11.09
4.53
3.44
1.25
0.16
0.00
0.00
0.00
0.00
BBB-
2.49
26.57
34.42
15.18
11.13
6.94
1.31
1.57
0.26
0.00
0.13
0.00
0.00
0.00
BB+
5.40
38.73
35.68
15.49
2.58
0.70
0.70
0.70
0.00
0.00
0.00
0.00
0.00
0.00
BB
2.62
22.54
36.82
18.71
7.65
4.63
3.82
2.01
0.80
0.40
0.00
0.00
0.00
0.00
BB-
2.70
18.92
35.14
24.32
8.11
0.00
8.11
0.00
2.70
0.00
0.00
0.00
0.00
0.00
B+
4.55
4.55
22.73
27.27
13.64
4.55
9.09
9.09
0.00
4.55
0.00
0.00
0.00
0.00
B
0.47
13.92
45.05
16.27
9.67
5.90
3.77
2.12
1.18
1.42
0.00
0.24
0.00
0.00
B-
0.00
7.41
24.07
24.07
16.67
7.41
11.11
5.56
1.85
0.00
1.85
0.00
0.00
0.00
CCC
0.00
0.00
0.00
11.11
33.33
44.44
0.00
0.00
11.11
0.00
0.00
0.00
0.00
0.00
Total
3.46
31.18
33.93
11.69
6.91
5.79
3.20
2.17
0.76
0.54
0.20
0.13
0.02
0.02
*'AAA' ratings from the same transaction are treated as a single rating in the calculation of this table.
At the end of 2008, the cumulative original issuance amount of defaulted global securities denominated in U.S. dollars had reached approximately $140 billion since the inception of the structured market. With an additional €3 billion in defaulted euro-denominated securities and £500 million in British pounds sterling, the cumulative original issuance amount for the defaulted global securities totaled roughly $145 billion. To put this number in perspective, the total outstanding balance of global structured securities in 2008 was about $9.8 trillion.
Table 9 further breaks down the cumulative defaults by issuance year for investment- and speculative-grade ratings. Overall lifetime default rates for investment- and speculative-grade securities were 3.0% and 10.3% through the end of 2008, respectively. As shown in chart 11, speculative-grade default rates were higher for issuance years 1994-2001 and 2005-2006.
Table 9
Global SF Cumulative Defaults ('D' Only) By Year Of Issuance (Vintage)—1978-2008*
Issuance Year
Cumulative SG default %
Cumulative IG default %
Cumulative default %
No. of new ratings
No. of new IG ratings
No. of new SG ratings
Total No. of defaults
Total No. of IG defaults
Total No. of SG defaults
1978
N/A
0.00
0.00
14
14
0
0
0
0
1979
N/A
0.00
0.00
29
29
0
0
0
0
1980
N/A
0.00
0.00
21
21
0
0
0
0
1981
N/A
0.00
0.00
23
23
0
0
0
0
1982
N/A
0.00
0.00
27
27
0
0
0
0
1983
N/A
5.88
5.88
51
51
0
3
3
0
1984
N/A
1.54
1.54
65
65
0
1
1
0
1985
N/A
0.00
0.00
111
111
0
0
0
0
1986
0.00
0.39
0.39
259
257
2
1
1
0
1987
0.00
0.26
0.26
381
381
0
1
1
0
1988
0.00
1.16
1.16
432
431
1
5
5
0
1989
33.33
1.23
1.42
492
489
3
7
6
1
1990
0.00
2.74
2.74
658
657
1
18
18
0
1991
50.00
1.77
1.88
906
904
2
17
16
1
1992
10.53
0.09
0.25
1,178
1,159
19
3
1
2
1993
7.41
0.26
0.73
1,233
1,152
81
9
3
6
1994
16.04
1.09
2.39
1,211
1,105
106
29
12
17
1995
20.16
1.24
2.90
1,415
1,291
124
41
16
25
1996
16.55
2.51
3.83
1,541
1,396
145
59
35
24
1997
16.89
3.96
5.00
1,841
1,693
148
92
67
25
1998
18.01
4.58
6.14
2,246
1,985
261
138
91
47
1999
14.29
3.22
4.19
2,554
2,330
224
107
75
32
2000
11.07
3.06
3.93
2,821
2,514
307
111
77
34
2001
10.71
2.36
3.58
4,557
3,894
663
163
92
71
2002
5.65
1.87
2.46
6,953
5,873
1,080
171
110
61
2003
1.96
1.24
1.35
9,551
8,073
1,478
129
100
29
2004
5.42
0.83
1.46
13,722
11,840
1,882
200
98
102
2005
13.31
2.32
3.97
17,435
14,813
2,622
693
344
349
2006
20.56
6.98
8.72
20,076
17,498
2,578
1,751
1,221
530
2007
5.01
4.02
4.14
15,610
13,614
1,996
647
547
100
2008
0.00
0.42
0.38
3,728
3,323
405
14
14
0
All
10.31
3.04
3.97
111,141
97,013
14,128
4,410
2,954
1,456
*'AAA' ratings from the same transaction are treated as a single rating in the calculation of this table. Defaults in this table include securities with 'D' ratings only. N/A-Not available.
Chart 11
Cumulative default rates (CDRs), which are summed across many years, provide another way to summarize the behavior of static pools. Table 10 shows the default rates for global structured finance using this methodology for up to 10 years, updated through 2008. We calculated the CDRs by dividing the number of ratings in a static pool that defaulted at the end of a specific time horizon by the number of ratings that survived or did not default up to that point (the statistical term is "conditional on survival"). We assigned all ratings in the study to one or more static pools (i.e., the constituents in each pool didn't change) according to their age. We used the number of ratings to weight each static pool. After creating the pools, we averaged and weighted the first-year default rates for all the pools, then the second-year default rates, and so forth. The CDRs equal one minus the product of the proportion of survivors.
The results of our CDR analysis again suggest that lower ratings are generally associated with higher default rates, and vice versa. The table also provides standard deviations in default rates; high standard deviations indicate that the default rates are spread out over a large range of values. Speculative-grade ratings, in particular, show high standard deviations over longer periods.
Table 10
Global SF Cumulative Default Rates (%), Conditional On Survival—1978-2008*
(Standard deviations are in parentheses)
1-year
2-year
3-year
4-year
5-year
6-year
7-year
8-year
9-year
10-year
AAA
0.08
0.15
0.17
0.18
0.18
0.19
0.20
0.20
0.20
0.20
(0.09)
(0.09)
(0.03)
(0.03)
(0.04)
(0.04)
(0.06)
(0.07)
(0.07)
(0.06)
AA
0.14
0.43
0.50
0.60
0.73
0.84
0.93
0.97
0.99
1.01
(0.11)
(0.36)
(0.64)
(1.04)
(1.25)
(1.26)
(1.29)
(1.32)
(1.34)
(1.37)
A
0.27
1.01
1.37
1.65
1.91
2.17
2.48
2.70
2.80
2.89
(0.23)
(0.54)
(0.48)
(0.66)
(0.83)
(1.17)
(1.36)
(1.40)
(1.42)
(1.45)
BBB
0.68
3.01
4.79
6.51
8.26
9.68
10.46
11.14
11.68
11.98
(0.43)
(1.64)
(1.46)
(3.16)
(4.04)
(4.81)
(5.23)
(5.45)
(5.67)
(5.91)
BB
2.02
5.64
8.31
9.81
11.03
12.39
13.43
13.98
14.21
14.28
(12.33)
(12.62)
(12.76)
(13.02)
(14.59)
(16.35)
(17.00)
(16.95)
(17.04)
(17.33)
B
4.64
8.84
12.36
14.65
16.66
18.42
19.77
20.86
21.62
22.01
(2.99)
(4.93)
(6.93)
(7.50)
(7.87)
(8.57)
(9.26)
(9.13)
(8.53)
(8.82)
CCC
43.80
50.63
55.11
58.40
60.58
61.80
62.04
62.37
62.79
62.79
(16.82)
(17.85)
(19.30)
(21.65)
(23.43)
(24.83)
(25.12)
(25.44)
(25.82)
(26.80)
CC
23.56
32.53
40.59
45.86
49.20
49.76
49.76
49.76
49.76
49.76
(24.84)
(23.90)
(21.78)
(21.74)
(23.44)
(24.11)
(25.55)
(25.40)
(24.98)
(21.34)
Investment-grade
0.26
0.95
1.37
1.72
2.04
2.28
2.43
2.54
2.60
2.64
(0.18)
(0.56)
(0.38)
(0.50)
(0.62)
(0.68)
(0.70)
(0.72)
(0.70)
(0.65)
Speculative-grade
6.51
10.57
13.74
15.71
17.31
18.79
19.88
20.62
21.07
21.27
(9.38)
(9.32)
(9.59)
(9.96)
(10.45)
(10.09)
(9.53)
(9.93)
(10.35)
(10.73)
All rated
1.13
2.26
3.01
3.54
3.98
4.33
4.55
4.69
4.77
4.82
(0.73)
(0.85)
(0.75)
(0.88)
(1.02)
(1.14)
(1.16)
(1.11)
(1.00)
(0.89)
*'AAA' ratings from the same transaction are treated as a single rating in the calculation of this table.
CreditWatch Placements And Wide Credit Spreads Point To Challenges Ahead
Credit spreads increased across all structured products in 2008 and have reached historically wide levels. Although many factors can influence credit spreads, they tend to be sensitive to the market's expectations of credit risk and can provide clues about the future performance of structured securities—so the continued high spreads could be a sign of difficulties down the road.
CreditWatch data are another gauge of the potential near-term rating behavior of global structured securities. A large number of securities—including subprime and Alt-A RMBS and CDOs of ABS, as well as synthetic corporate CDOs—are currently on CreditWatch with negative implications, indicating that these securities are likely to experience downgrades over the next few months following our extensive review of their performance. Table 11 summarizes the number of ratings on CreditWatch among the global structured finance subsectors.
Table 11
Global Structured Finance On CreditWatch As Of Jan. 27, 2009
(Tranche level)
Region/sector
Developing
Negative
Positive
U.S. ABS
24
224
1
U.S. CDO
50
2,161
9
U.S. CMBS
2
177
2
U.S. RMBS
0
2,488
0
U.S. single-issue synthetics
17
92
3
Euro. ABS
0
89
5
Euro. CDO
2
630
2
Euro CMBS
1
129
1
Euro. RMBS
0
202
65
Euro. single-issue synthetics
11
36
0
Asia (non-Japan)
2
89
0
Australia/New Zealand
12
48
14
Canada
0
7
2
Japan
0
148
1
Latin America/Emerging markets
2
20
7
Total
123
6,540
112
Although the CreditWatch data provides insight into the probable behavior of those securities over the next few months, the credit performance of global structured securities for 2009 will ultimately depend primarily on the health of global economy—in particular, the performance of global corporate credits, the unemployment picture, and interest rates, as well as any changes in housing market fundamentals.
Appendix I: Methodology And Terminology
This section provides a detailed discussion of the rating transition and default methodology. It also explains the study's terminology, including definitions of transition windows, rating modifiers versus full rating categories, near-defaults, treatment of rating withdrawals and identical ratings, and region and sector combinations.
Rating transition
The rating transition of a single static pool (cohort approach) is based on the rating of each security at the beginning and end of the observed transition window. For instance, we calculated the transition rates by determining the ratings of each security at the beginning and end of the period. We then tabulated these ratings in a two-dimensional table to calculate the percentage of ratings that stayed the same and the percentage of ratings that changed. During this process, we count every security only once, even if it had more than one rating change during the period. In other words, we use a security's rating on the first day of the period and the last day of the period to calculate the transition rates, while disregarding the interim rating changes.
Weighted average transition
For weighted average transition rates, we calculate the individual transition rates of static pools as described earlier. We then create a single averaged matrix weighted by the number of ratings in each static pool.
Transition window
A transition window refers to a defined period in which we observe a security's rating transition. For example, the 2008 performance transition window starts at the beginning of 2008 and ends at the end of 2008. For historical data, transition windows follow annual windows, running from January to December of the same year.
Rating modifiers
We use rating modifiers ("+" and "-") to calculate the upgrade and downgrade percentages, as well as the magnitude of rating changes throughout this study. However, some transition tables may use full rating categories for practical reasons. In other words, the use of a full rating category suggests that transitions from, for example, 'AA' to 'AA-' or from 'BBB+' to 'BBB-' are not considered to be rating transitions because the rating remained within the full rating category.
Rating withdrawal
A security with a withdrawn rating at the beginning of a transition window is not included in the transition and default rate calculations for that period.
Identical 'AAA' ratings
In assessing rating transitions, this study collapses the rating history of identical 'AAA' ratings in a given transaction. Where we treat original 'AAA' ratings from the same transaction as a single rating, we include only the rating with the longest expected maturity in the calculation of rating transitions.
Near-defaults
In this study, near-defaults include securities downgraded to 'CC' or 'C' during the period or in any other transition window. If a security's rating is already 'CC' or 'C' at the beginning of a transition window, we don't include it in the near-default category because that event did not take place during the transition window analyzed. The study's tables show the default and near-default rates. We consider securities rated 'CC' or 'C' to be highly vulnerable to nonpayment risk.
Structured finance region
Canadian transactions are not included in the U.S. region. Europe includes transactions mainly in the countries of the European Union. Asia (non-Japan) includes all transactions in Hong Kong and Taiwan, as well as in other countries in the region. Japan includes transactions only in Japan. The Latin America and emerging markets segment includes emerging market countries, such as Brazil, Mexico, Turkey, and South Africa. We use a transaction's issuer country as the primary variable to determine its region. However, when the issuer was established in a tax-haven territory, such as the Cayman Islands, then we use its domicile of assets as the secondary variable for defining the region. In some cases, the domicile of assets may fail to provide additional insight into the region, especially when a transaction's domicile of assets includes more than one country. In those cases, we use Standard & Poor's surveillance office and/or the transaction's primary currency to complete the region classification for all structured finance securities we rate.
Structured finance sector
We further segment the U.S. and European regions according to the structured finance sectors. We don't use the sector to segment the data in other, smaller regions because the sample size would typically be too small to calculate meaningful transition rates. ABS includes typical collateral types, such as credit cards and auto loans. It also includes manufactured housing, franchise loans, 12b-1 transactions, and corporate securitizations. Home equity loan transactions are included in the RMBS sector. Single-name synthetics, also known as "repacks" in Europe, are included in the U.S. and European single-name synthetic categories. However, the CDO sector includes all synthetic CDO ratings, in addition to cash and market value CDOs and leveraged funds.
Appendix II: Default And Transition Tables
Appendix tables I-XIV provide various default and transition rates for global structured securities.
Appendix Table I
Global Structured Finance One-Year Default Rates*
One year ended
AAA
AA
A
BBB
BB
B
CCC
CC/C
Inv-grade
Spec-grade
All
12/31/1978
0.00
N/A
0.00
N/A
N/A
N/A
N/A
N/A
0.00
N/A
0.00
12/31/1979
0.00
0.00
0.00
N/A
N/A
N/A
N/A
N/A
0.00
N/A
0.00
12/31/1980
0.00
0.00
0.00
N/A
N/A
N/A
N/A
N/A
0.00
N/A
0.00
12/31/1981
0.00
0.00
0.00
N/A
N/A
N/A
N/A
N/A
0.00
N/A
0.00
12/31/1982
0.00
0.00
0.00
N/A
N/A
N/A
N/A
N/A
0.00
N/A
0.00
12/31/1983
0.00
0.00
0.00
N/A
N/A
N/A
N/A
N/A
0.00
N/A
0.00
12/31/1984
0.00
0.00
0.00
N/A
N/A
N/A
N/A
N/A
0.00
N/A
0.00
12/31/1985
0.00
0.00
0.00
0.00
N/A
N/A
N/A
N/A
0.00
N/A
0.00
12/31/1986
0.00
0.00
0.00
N/A
N/A
N/A
N/A
N/A
0.00
N/A
0.00
12/31/1987
0.00
0.00
0.00
0.00
N/A
N/A
0.00
N/A
0.00
0.00
0.00
12/31/1988
0.00
0.00
0.00
0.00
57.14
N/A
0.00
N/A
0.00
44.44
0.42
12/31/1989
0.00
0.00
0.00
0.00
N/A
0.00
0.00
N/A
0.00
0.00
0.00
12/31/1990
0.00
0.00
0.00
0.00
0.00
0.00
0.00
N/A
0.00
0.00
0.00
12/31/1991
0.00
0.00
0.00
0.00
0.00
0.00
0.00
N/A
0.00
0.00
0.00
12/31/1992
0.00
0.00
0.00
0.00
0.00
0.00
0.00
N/A
0.00
0.00
0.00
12/31/1993
0.00
0.00
0.00
0.00
0.00
5.88
0.00
N/A
0.00
2.56
0.02
12/31/1994
0.00
0.00
0.00
0.00
0.00
1.75
0.00
N/A
0.00
0.76
0.02
12/31/1995
0.00
0.00
0.00
0.30
0.93
0.93
48.39
71.43
0.02
8.66
0.37
12/31/1996
0.00
0.00
0.09
0.00
1.13
0.00
20.00
100.00
0.02
3.01
0.17
12/31/1997
0.00
0.00
0.00
0.00
0.00
0.00
0.00
50.00
0.00
1.13
0.08
12/31/1998
0.00
0.00
0.77
0.13
0.85
2.19
13.33
31.25
0.15
2.42
0.32
12/31/1999
0.00
0.00
0.06
0.09
0.00
1.38
16.67
23.08
0.02
1.22
0.12
12/31/2000
0.00
0.00
0.00
0.07
0.47
1.85
4.55
6.25
0.01
1.18
0.12
12/31/2001
0.05
0.00
0.09
0.42
0.64
2.78
31.91
15.00
0.10
2.75
0.38
12/31/2002
0.00
0.04
0.14
0.51
1.78
8.24
30.34
13.64
0.12
5.64
0.78
12/31/2003
0.00
0.00
0.07
0.52
0.92
2.29
34.95
24.59
0.12
4.17
0.68
12/31/2004
0.00
0.00
0.00
0.14
0.68
2.19
14.78
11.24
0.03
2.22
0.36
12/31/2005
0.00
0.00
0.00
0.06
0.19
1.35
12.34
27.10
0.02
1.78
0.28
12/31/2006
0.00
0.00
0.00
0.08
0.26
0.48
19.40
18.48
0.02
1.28
0.21
12/31/2007
0.04
0.06
0.11
0.67
2.49
1.42
24.02
24.44
0.22
3.07
0.65
12/31/2008
0.53
0.62
1.06
2.00
4.64
11.83
58.79
27.44
1.03
16.05
4.13
Average
0.02
0.02
0.08
0.22
3.61
2.23
14.98
31.71
0.06
4.65
0.29
Median
0.00
0.00
0.00
0.06
0.56
1.40
12.84
24.52
0.00
2.00
0.02
Std. Dev.
0.10
0.11
0.23
0.44
12.65
3.07
17.22
25.78
0.19
9.60
0.75
Min.
0.00
0.00
0.00
0.00
0.00
0.00
0.00
6.25
0.00
0.00
0.00
Max.
0.53
0.62
1.06
2.00
57.14
11.83
58.79
100.00
1.03
44.44
4.13
*'AAA' ratings from the same transaction are treated as a single rating in the calculation of this table. Full rating categories are used when determining rating transitions such as upgrades and downgrades.
Appendix Table II
Global Structured Finance Three-Year Default Rates*
Three years ended
AAA
AA
A
BBB
BB
B
CCC
CC/C
Inv. Grade
Spec. Grade
All
12/31/1980
0.00
N/A
0.00
N/A
N/A
N/A
N/A
N/A
0.00
N/A
0.00
12/31/1981
0.00
0.00
0.00
N/A
N/A
N/A
N/A
N/A
0.00
N/A
0.00
12/31/1982
0.00
0.00
0.00
N/A
N/A
N/A
N/A
N/A
0.00
N/A
0.00
12/31/1983
0.00
0.00
0.00
N/A
N/A
N/A
N/A
N/A
0.00
N/A
0.00
12/31/1984
0.00
0.00
0.00
N/A
N/A
N/A
N/A
N/A
0.00
N/A
0.00
12/31/1985
0.00
0.00
0.00
N/A
N/A
N/A
N/A
N/A
0.00
N/A
0.00
12/31/1986
0.00
0.00
0.00
N/A
N/A
N/A
N/A
N/A
0.00
N/A
0.00
12/31/1987
0.00
0.00
0.00
0.00
N/A
N/A
N/A
N/A
0.00
N/A
0.00
12/31/1988
0.00
3.15
0.00
N/A
N/A
N/A
N/A
N/A
1.21
N/A
1.21
12/31/1989
0.00
1.61
0.00
0.00
N/A
N/A
0.00
N/A
0.69
0.00
0.69
12/31/1990
0.00
0.00
0.00
0.00
57.14
N/A
0.00
N/A
0.00
44.44
0.42
12/31/1991
0.00
0.00
0.00
0.00
N/A
0.00
0.00
N/A
0.00
0.00
0.00
12/31/1992
0.00
0.00
0.00
0.00
0.00
0.00
0.00
N/A
0.00
0.00
0.00
12/31/1993
0.00
0.11
0.00
0.00
0.00
0.00
0.00
N/A
0.04
0.00
0.04
12/31/1994
0.00
0.00
0.00
1.72
0.00
20.00
0.00
N/A
0.03
7.69
0.06
12/31/1995
0.00
0.00
1.78
4.17
7.69
11.76
44.44
N/A
0.43
17.95
0.59
12/31/1996
0.00
0.06
1.51
1.60
17.46
5.26
33.33
N/A
0.35
13.64
0.68
12/31/1997
0.00
0.00
0.10
0.90
3.70
6.48
67.74
71.43
0.07
14.57
0.66
12/31/1998
0.00
0.00
0.09
0.23
3.95
5.63
44.00
100.00
0.03
8.47
0.47
12/31/1999
0.00
0.00
0.30
0.19
1.49
6.90
23.53
66.67
0.07
6.05
0.47
12/31/2000
0.00
0.00
0.83
0.79
1.13
6.93
33.33
43.75
0.22
5.30
0.59
12/31/2001
0.06
0.14
0.45
1.12
2.95
6.61
27.78
38.46
0.27
5.43
0.71
12/31/2002
0.10
0.32
0.72
3.65
7.73
10.19
18.18
25.00
0.72
9.15
1.49
12/31/2003
0.08
0.32
0.65
2.65
7.73
25.74
38.30
30.00
0.58
16.36
2.24
12/31/2004
0.00
0.28
0.90
2.97
5.86
20.52
39.33
22.73
0.73
13.14
2.20
12/31/2005
0.00
0.24
0.64
1.86
3.98
7.15
41.75
37.70
0.55
8.30
1.63
12/31/2006
0.00
0.00
0.06
0.74
2.29
6.08
34.35
32.58
0.19
6.07
1.07
12/31/2007
0.01
0.03
0.07
0.99
1.83
3.99
34.18
53.27
0.27
5.37
1.04
12/31/2008
0.09
0.13
0.95
4.85
7.50
7.47
35.79
35.87
1.51
8.91
2.64
Average
0.01
0.23
0.31
1.35
7.36
8.37
25.80
46.46
0.27
9.54
0.65
Median
0.00
0.00
0.00
0.90
3.83
6.75
33.33
38.08
0.07
8.00
0.47
Std. Dev.
0.03
0.65
0.49
1.50
13.13
7.13
19.80
22.75
0.39
9.83
0.76
Min.
0.00
0.00
0.00
0.00
0.00
0.00
0.00
22.73
0.00
0.00
0.00
Max.
0.10
3.15
1.78
4.85
57.14
25.74
67.74
100.00
1.51
44.44
2.64
*'AAA' ratings from the same transaction are treated as a single rating in the calculation of this table. Full rating categories are used when determining rating transitions such as upgrades and downgrades.
Appendix Table III
Global Structured Finance Five-Year Default Rates*
Five years ended
AAA
AA
A
BBB
BB
B
CCC
CC/C
Inv. grade
Spec. grade
All
12/31/1982
0.00
N/A
0.00
N/A
N/A
N/A
N/A
N/A
0.00
N/A
0.00
12/31/1983
0.00
0.00
0.00
N/A
N/A
N/A
N/A
N/A
0.00
N/A
0.00
12/31/1984
0.00
0.00
0.00
N/A
N/A
N/A
N/A
N/A
0.00
N/A
0.00
12/31/1985
0.00
0.00
0.00
N/A
N/A
N/A
N/A
N/A
0.00
N/A
0.00
12/31/1986
0.00
0.00
0.00
N/A
N/A
N/A
N/A
N/A
0.00
N/A
0.00
12/31/1987
0.00
0.00
0.00
N/A
N/A
N/A
N/A
N/A
0.00
N/A
0.00
12/31/1988
0.00
4.23
0.00
N/A
N/A
N/A
N/A
N/A
1.86
N/A
1.86
12/31/1989
0.00
4.65
0.00
0.00
N/A
N/A
N/A
N/A
1.79
N/A
1.79
12/31/1990
0.00
3.15
0.00
N/A
N/A
N/A
N/A
N/A
1.21
N/A
1.21
12/31/1991
0.00
1.61
0.00
0.00
N/A
N/A
0.00
N/A
0.69
0.00
0.69
12/31/1992
0.00
0.00
0.00
0.00
57.14
N/A
0.00
N/A
0.00
44.44
0.42
12/31/1993
0.00
0.16
0.00
0.00
N/A
0.00
0.00
N/A
0.07
0.00
0.07
12/31/1994
0.00
0.12
0.91
0.00
0.00
0.00
0.00
N/A
0.11
0.00
0.11
12/31/1995
0.00
0.76
2.28
3.85
0.00
0.00
0.00
N/A
0.68
0.00
0.67
12/31/1996
0.00
0.90
2.27
15.52
40.00
20.00
0.00
N/A
1.01
23.08
1.10
12/31/1997
0.00
0.39
2.41
6.25
15.38
11.76
44.44
N/A
0.74
20.51
0.92
12/31/1998
0.00
0.40
1.72
2.13
17.46
8.77
33.33
N/A
0.52
15.15
0.88
12/31/1999
0.00
0.00
0.10
1.81
8.33
14.81
70.97
71.43
0.12
20.47
0.96
12/31/2000
0.00
0.00
0.09
0.46
5.65
12.50
44.00
100.00
0.05
12.30
0.69
12/31/2001
0.00
0.00
0.30
0.58
3.36
11.64
35.29
75.00
0.09
9.64
0.73
12/31/2002
0.00
0.21
1.34
3.83
7.89
12.77
53.33
50.00
0.63
11.97
1.45
12/31/2003
0.11
0.37
1.01
9.18
10.81
14.60
44.44
38.46
1.33
13.40
2.35
12/31/2004
0.13
0.51
1.15
9.45
11.99
15.28
22.73
25.00
1.60
13.68
2.71
12/31/2005
0.12
0.60
1.64
5.72
9.92
28.87
48.94
30.00
1.26
19.18
3.14
12/31/2006
0.00
0.71
1.62
5.10
8.44
24.97
53.93
22.73
1.31
16.93
3.16
12/31/2007
0.00
0.51
1.08
4.04
5.77
10.68
52.91
55.74
1.14
11.65
2.59
12/31/2008
0.01
0.07
0.40
4.23
3.87
9.97
40.00
48.31
1.11
9.03
2.31
Average
0.01
0.74
0.68
3.80
12.88
12.29
30.24
51.67
0.64
13.41
1.10
Median
0.00
0.29
0.10
3.83
8.39
12.13
37.65
49.16
0.63
12.85
0.88
Std. Dev.
0.04
1.28
0.84
4.15
15.07
8.12
24.11
24.71
0.63
10.75
1.04
Min.
0.00
0.00
0.00
0.00
0.00
0.00
0.00
22.73
0.00
0.00
0.00
Max.
0.13
4.65
2.41
15.52
57.14
28.87
70.97
100.00
1.86
44.44
3.16
*'AAA' ratings from the same transaction are treated as a single rating in the calculation of this table. Full rating categories are used when determining rating transitions such as upgrades and downgrades.
Appendix Table IV
Global Structured Finance 10-Year Default Rates: 1978-2008*
10-year period ended
AAA
AA
A
BBB
BB
B
CCC
CC/C
Inv. grade
Spec. grade
All
12/31/1987
0.00
N/A
0.00
N/A
N/A
N/A
N/A
N/A
0.00
N/A
0.00
12/31/1988
0.00
0.00
0.00
N/A
N/A
N/A
N/A
N/A
0.00
N/A
0.00
12/31/1989
0.00
0.00
0.00
N/A
N/A
N/A
N/A
N/A
0.00
N/A
0.00
12/31/1990
0.00
0.00
0.00
N/A
N/A
N/A
N/A
N/A
0.00
N/A
0.00
12/31/1991
0.00
0.00
0.00
N/A
N/A
N/A
N/A
N/A
0.00
N/A
0.00
12/31/1992
0.00
0.00
0.00
N/A
N/A
N/A
N/A
N/A
0.00
N/A
0.00
12/31/1993
0.00
4.23
0.00
N/A
N/A
N/A
N/A
N/A
1.86
N/A
1.86
12/31/1994
0.00
4.65
0.00
0.00
N/A
N/A
N/A
N/A
1.79
N/A
1.79
12/31/1995
0.00
3.15
0.00
N/A
N/A
N/A
N/A
N/A
1.21
N/A
1.21
12/31/1996
0.00
2.02
0.00
0.00
N/A
N/A
0.00
N/A
0.86
0.00
0.86
12/31/1997
0.00
0.23
0.00
0.00
57.14
N/A
0.00
N/A
0.11
44.44
0.52
12/31/1998
0.00
0.82
0.00
0.00
N/A
0.00
0.00
N/A
0.37
0.00
0.37
12/31/1999
0.00
0.61
5.45
0.00
50.00
0.00
0.00
N/A
0.61
14.29
0.66
12/31/2000
0.19
1.51
2.56
11.54
50.00
0.00
0.00
N/A
1.18
14.29
1.22
12/31/2001
0.22
1.47
2.65
18.97
40.00
20.00
0.00
N/A
1.45
23.08
1.53
12/31/2002
0.06
0.65
2.79
8.33
15.38
23.53
44.44
N/A
0.98
25.64
1.20
12/31/2003
0.00
0.45
2.48
2.66
19.05
12.28
41.67
N/A
0.69
18.18
1.13
12/31/2004
0.00
0.00
0.39
6.93
10.19
20.37
74.19
71.43
0.46
24.02
1.43
12/31/2005
0.00
0.00
1.13
5.56
11.30
20.00
52.00
100.00
0.55
18.85
1.51
12/31/2006
0.00
0.06
2.66
1.93
16.04
17.67
41.18
75.00
0.64
18.90
1.86
12/31/2007
0.00
0.31
1.60
11.21
14.93
18.61
60.00
50.00
1.36
18.33
2.58
12/31/2008
0.15
0.56
1.85
13.11
13.75
19.28
44.44
38.46
1.98
16.94
3.25
Average
0.03
0.99
1.07
5.73
27.07
13.80
27.53
66.98
0.73
18.23
1.05
Median
0.00
0.45
0.00
4.11
16.04
18.61
41.18
71.43
0.62
18.33
1.17
Std. dev.
0.07
1.41
1.49
6.14
18.18
9.26
27.89
23.85
0.66
11.17
0.91
Min.
0.00
0.00
0.00
0.00
10.19
0.00
0.00
38.46
0.00
0.00
0.00
Max.
0.22
4.65
5.45
18.97
57.14
23.53
74.19
100.00
1.98
44.44
3.25
*AAA ratings from the same transaction are treated as a single rating in the calculation of this table. Full rating categories are used when determining rating transitions such as upgrades and downgrades.
Appendix Table V
Standard & Poor's Global SF 2008 Rating Transition (%)*
