Default, Transition, and Recovery: 2021 Annual Global Structured Finance Default And Rating Transition Study (2024)

(Editor's Note: On July 7, 2022, we revised table 3 of this study. )

The global structured finance annual default rate dropped to a 14-year low of 0.6% in 2021 from 1.4% in 2020 (see table 1). This was the fourth year the default rate has held under 2% since the Great Recession.

S&P Global Ratings had 32,861 ratings outstanding on global structured finance securities at the start of 2021. The sector's global average change in credit quality (see definition in Appendix I) recovered from its 2020 slump in 2021, ending the year at +0.17 notch (see chart 1). The upgrade rate (the proportion of upgrades among all ratings outstanding) more than doubled to 8.2% from 3.7%, rising well beyond the one-year average of 3.8%. The downgrade rate (measured as the proportion of downgrades, including defaults, among all ratings outstanding) dropped to a 15-year low of 2.4% from 2020's elevated 7.6%, remaining well below the one-year average of 15.6%.

The European commercial-backed securities sector (CMBS) sector exhibited the highest downgrade rate (among all sector-region combinations we track in this study) for the second consecutive year. The U.S. CMBS, U.S. structured credit, and U.S. residential mortgage-backed securities (RMBS) sectors also exhibited higher downgrade rates. Upgrade rates rose across all sectors in the U.S. in 2021.

Credit Performance: The Default Rate Fell To A 14-Year Low

The overall credit performance (as measured by the average change in credit quality) of global structured finance securities we rate turned negative at midyear 2020 and remained so until midyear 2021, finally recovering by the end of the year. Last year the upgrade rate rose, the annual default rate hit a 14-year low, and the downgrade rate declined.

The average change in credit quality for global structured finance was +0.17 rating notch at the end of 2021, up from -0.13 rating notch in 2020. 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 +0.2 notch for the first time in August 2018 (see chart 1).

The 12-month-trailing default rate fell to 0.6% in 2021 from 1.4% in 2020. This default rate has been on a downtrend since mid-2016, with a small uptick in late 2020 (see chart 2).

The 12-month-trailing default rate for investment-grade ratings ('BBB-' or higher) reached a 15-year low of 0.005% in 2021. The speculative-grade ('BB+' or lower) 12-month-trailing default rate was 1.9%, down from 3.9% 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-financial-crisis levels in 2021.

Region and sector comparisons

Structured finance credit performance in 2021 was positive across most sectors and regions, barring global CMBS and overall structured finance for "other emerging markets" (emerging markets not included within other regions; see Appendix I for regional definitions), where downgrades outpaced upgrades. There were no rating actions on Japanese structured finance issues in 2021.

The European CMBS sector had the highest downgrade rate globally, at 13.5%, followed by the U.S. CMBS sector at 5.7%; both rates held well below their respective one-year averages (see chart 3 and table 1). In fact, downgrade rates across all sectors held below their one-year averages.

The upgrade rate was highest in the U.S. ABS sector, at 16.0% in 2021, well above the one-year average of 5.2%. Upgrade rates in 2021 were above their respective one-year averages for roughly half of the region-sector combinations.

The U.S. CMBS sector had the highest annual default rate, at 2.2%, just above the European CMBS sector at 2.16%, but these rates were still below their one-year averages of 3.2% and 3.0%, respectively (see chart 4). Following U.S. and European CMBS, the next-highest annual default rate in 2021 was in the U.S. RMBS sector, at 1.0%; this sector also accounted for the most defaults by number.

There were no defaults among European ABS, Australian securities, or Japanese securities. Default rates were below the long-term averages for all region-sector groupings with the exception of the "other" region.

Table 1 shows a summary of 2021 credit performance for global structured finance, segmented in various ways, compared with the 1976-2021 one-year weighted average statistics.

By region, Australasia (Australia and New Zealand) had the highest upgrade rate in 2021, at 18.6%, well above its one-year average of 5.1%, with Australasian RMBS, ABS, and other sectors all showing double-digit upgrade rates. In all regions except Japan and other emerging markets, upgrades outpaced downgrades (Asia [excluding Japan] had no rated securities at the start of 2021).

The downgrade rate was the highest in other emerging markets, at 64.3%, more than double the 31.6% in 2020 and well above the one-year average of 15.1%. Conditions in other emerging markets deteriorated during the year. The elevated downgrade rate can also be explained by the small number of outstanding ratings at the start of 2021 (28). Meanwhile, the upgrade rate in other emerging markets fell to 14.3% in 2021 from 34.2% in 2020.

The average change in credit quality across regions outside Japan and other emerging markets broadly increased. These regions reported an upgrade rate of 8.3% and a downgrade rate of 2.4%. The only defaults outside of the U.S. and Europe were from Latin America, and the regions with no defaults accounted for a total of 1,755 rated securities at the start of 2021.

By sector, ABS had the highest upgrade rate globally in 2021, at 15.6%, well above its one-year average of 5.2%. The RMBS and single-name synthetics upgrade rates were also higher than their respective one-year averages. 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 "other" sectors. CMBS had a downgrade rate of 5.7% in 2021, below the one-year average of 12.6%. Meanwhile, the "other" sector had a downgrade rate of 0.7%, significantly below the one-year average downgrade rate of 20.6%; the upgrade rate in the "other" sector was zero.

Default rates across all global structured finance sectors were below their one-year averages in 2021. CMBS had the highest default rate, at 2.2%, followed by RMBS at 0.8%.

Rating category

Across rating categories globally, the 'BB' category showed particularly strong performance in 2021, with an upgrade rate of 18.5%, well above its one-year average of 8.9%. Additionally, upgrades were prominent in the 'B' and 'BBB' rating categories, with respective upgrade rates of 17.2% and 13.5%. However, these rating categories also had some of the highest downgrade rates in 2021.

The overall investment-grade upgrade rate was 6.8% in 2021, above the one-year average of 3.5%, while the downgrade rate of 1.5% was well below the one-year average of 10.8%. The investment-grade default rate was near zero and below its one-year average of 0.25%. The sole investment-grade default was in the 'BBB' rating category and came from the U.S. RMBS sector.

Downgrades were higher among the 'BB' to 'CCC' rating categories. The 'BB' rating category had a downgrade rate of 5.6% in 2021, followed by the 'CCC' rating category at 4.3%. Defaults were the highest in the 'CCC' and 'CC' rating categories, at 3.9% and 2.0%, respectively. The overall speculative-grade upgrade rate was 10.8% in 2021, while the downgrade rate was 4.2% and the default rate was 1.9%--all improved compared with their respective one-year averages.

The structured credit default rate has held steady over the past seven years, though it increased to 0.10% in 2021 from 0.04% in 2020. The upgrade rate for the sector had been steadily declining since 2014, but it picked up to a four-year high of 4.4% in 2021. The downgrade rate fell to the lowest since 1990 at 0.3%; the only years with lower downgrades were years with no downgrades.

Vintages

Structured finance credit performance remains 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 reveals that the upgrade rates in 2021 among most vintages outperformed the previous year. The 2019 vintage had the highest upgrade rate, at 15.9%. Only two vintages in 2021 had worse upgrade rates than in the year prior. As for downgrades, all but three vintages recorded lower downgrade rates than in 2020.

For the 2017 vintage, the downgrade rate improved significantly, to 0.7% in 2021 from 8.6% the year before. The downgrade rates for the 2006 and 2007 vintages fell to 1.5% and 2.9%, respectively, following the weak credit performance exhibited by these transactions during the financial crisis (chart 5).

The post-financial-crisis vintages (2010-2021) performed better than their pre-crisis counterparts in 2021, with 9.5% of the outstanding ratings originated in 2010 or later experiencing upgrades in 2021, compared with 6.2% for pre-crisis vintages. Each of the vintages from 2009 and before reported downgrade rates higher than those of the post-crisis vintages put together, while the latest eight vintages reported lower downgrade rates than the pre-2010 average.

The 2011 vintage reported the highest default rate last year, at 3.6%, well above its one-year average of 0.2%. The 2005-2008 vintages exhibit the highest one-year average default rates, given their performance during the financial crisis, but default rates for these vintages in 2021 were much lower and on par with those of other vintages (see chart 6). Nonetheless, half of the vintages recorded default rates higher than their respective one-year 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. That said, our ratings also consider credit stability as a secondary factor.

Across global structured finance, upgrade and downgrade rates in 2021 were generally differentiated by the ratings at the beginning of the year. Downgrade rates were generally higher for lower rating categories, ranging from 5.6% for securities rated 'BB' to just 0.2% 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. Meanwhile, upgrade rates increased across all rating categories in comparison to 2020. Securities rated 'BB' recorded the highest upgrade rate in 2021, at 18.5%.

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 2021 (see chart 8). Default rates in 2021 were generally higher at lower rating categories. There were no defaults from the 'AAA', 'AA', and 'A' rating categories. Securities we rated in the 'BBB' category at the beginning of the year had a default rate of 0.2%, contrasting with a default rate of 3.9% 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 2021--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.

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 intact 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 only 0.04% at the end of 2021, up just barely from 2018, 2019, and 2020, but this slight uptick bucked the trend of continuous year-over-year improvements since 2013. By contrast, the five-year-trailing 'B' default rate was 6.3%, up from 6.2% at the end of 2020 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 2021, the one-year Gini coefficient for defaults of rated global structured finance securities was 79.2%, up from 77.3% the previous year. The three-year Gini coefficient, however, was lower, at 75.0% for 2021, compared with 78.5% in 2020. The five-year Gini coefficient declined again in 2021 to 77.1%, after having ticked up slightly to 79.8% in 2020 (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--such as U.S. RMBS and U.S. structured credit--coincided with fewer defaults among lower-rated securities from other sectors, lowering Gini coefficients.

Finally, we also calculated sector-specific historical one-year Gini coefficients. For most sectors, 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 remained lower in 2021, at about 68%, up from 64% in the previous year. Although about 96% of the global RMBS defaults in 2021 were from the 'CCC' and 'CC' rating categories, a default from the 'BBB' category lowered the Gini coefficient for this sector significantly. With the exception of ABS, each sector reported a decrease in the one-year Gini coefficient.

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--such as 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 2021, the overall average change in credit quality for U.S. RMBS stopped its decline and began to recover, ending 2021 at +0.15 notch, a two-year high (see chart 12). On a 12-month-trailing basis, the U.S. RMBS default rate fell marginally, to 1.0% in 2021 from 2.6% in 2020 (see chart 13). The 1.0% default rate represented 140 of the 14,687 securities outstanding within the U.S. RMBS sector at the start of 2021 (see table 3).

The subprime subsector, which accounts for the largest share of U.S. RMBS securities, at 32%, had a default rate of 0.7% in 2021. The subprime downgrade rate modestly improved to 2.1% in 2021 from 5.9% in 2020. Meanwhile, the upgrade rate in the subsector was almost five times the downgrade rate, at 9.9%, which was triple the 3.3% in 2020.

For the prime subsector, which accounts for the second-largest portion of U.S. RMBS, the default rate dropped to 1.0% in 2021 from 3.5% the year before. Downgrades decreased as well, with the downgrade rate falling to 6.3% from 12.1%--still the highest downgrade rate among RMBS subsectors in 2021. The upgrade rate declined to 0.3% from 0.9%.

Among the remaining U.S. RMBS subsectors, overall credit quality improved in 2021, with all default rates sitting below their one-year averages.

Credit performance was mixed across transaction vintages in U.S. RMBS. Pre-financial-crisis vintages, specifically those from 2001 through 2007, which have exhibited generally weaker fundamentals, accounted for all of the defaults in 2021. However, the 2006 and 2007 vintages saw their respective downgrade rates improve to 1.4% and 3.1%, respectively, both down from 3.7% the previous year. In fact, downgrade rates across most pre-2007 vintages (except 2000) decreased from the year prior, as did the default rates for all vintages with the exception of 2000-2001. By number of defaults, the 2005 vintage led with 48 defaults.

The vast majority (96%) of U.S. RMBS defaults in 2021 were from the 'CCC' and 'CC' rating categories, which constituted about 35% of our U.S. RMBS ratings at the beginning of 2021. Default rates decreased in all of the rating categories in 2021 excluding 'AAA' (which had no defaults in 2020 or 2021), and all remained well below the one-year averages.

U.S. structured credit

The overall change in credit quality for U.S. structured credit turned positive in 2021, finishing at +0.10 notch. The U.S. structured credit 12-month-trailing default rate bottomed out at 0% between May 2020 and July 2021 (see chart 15). However, the U.S. structured credit sector's headline annual default rate increased in 2021 to 0.10% (see table 4).

The subsector's downgrade rate decreased to 0.3% from 12.3% in 2020, well below the one-year average downgrade rate of 17.4%. The upgrade rate rose to a four-year high of 4.9% in 2021 from 0.2% the previous year.

The U.S. structured credit default rate spiked in 2011 following the defaults of a large number of 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 due to 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 grew to 97.6% of the U.S. structured credit sector at the beginning of 2021 (see table 4). The subsector's downgrade rate fell to 0.3% in 2021 from 12.3% in 2020. There were five CLO defaults in 2021--compared with zero in 2020--yielding an annual default rate of 0.1%, below the subsector's one-year average of 3.7%. The upgrade rate increased significantly, to 4.9% from 0.2%.

Other U.S. structured credit makes up about 2% of U.S. structured credit ratings and had a default rate of zero in 2021, below the one-year average of 1.7%. There were no downgrades in the subsector in 2021, and the upgrade rate was 1.0%.

Considering only vintages with more than 30 ratings outstanding at the beginning of 2021, the highest upgrade rate was in the 2015 vintage, at 35.9%. Within this vintage, CLO transactions in particular are now amortizing, increasing the relative credit enhancement for the rated securities and therefore raising their creditworthiness, all else being equal. Downgrades were highest in the 2013 vintage, with a downgrade rate of 13.3%.

Of the five defaults in U.S. structured credit in 2021, all were on securities that we rated in the 'CCC' category or below at the beginning of the year.

U.S. ABS

Credit performance for the U.S. ABS sector remained positive in 2021. The annual average change in credit quality rose to +0.48 notch in 2021 from +0.13 notch in 2020 (see chart 16). The 12-month-trailing default rate has historically remained very low and dropped to 0.06% in 2021 from 0.19% 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 U.S. RMBS and U.S. structured credit--accounting for 17.0% of U.S. structured finance securities at the start of 2021. The majority of these securities fall within the student loan and auto subsectors (see table 5). The sector's upgrade rate was 16.0% in 2021, well above the one-year average of 5.2%. The downgrade rate dropped to 0.9% in 2021 from 2.9% in 2020 and remains well below its one-year average of 5.1%. The annual default rate for ABS was 0.1% in 2021, down by half from 2020 and below its one-year average of 0.4%.

The only U.S. ABS defaults in 2021 occurred in the student loan and manufactured housing subsectors, from the 'B' and 'CC' rating categories (see table 5). Two defaults came from student loans, yielding an annual default rate of 0.13% for this subsector, above the one-year average of 0.07%. The remaining default from manufactured housing yielded an annual subsector default rate of 1.1%, well below the one-year average of 2.4%.

The majority of downgrades were for speculative-grade-rated notes. Further, most downgrades were from manufactured housing and student loans, with downgrade rates of 3.4% and 1.4%, respectively. All U.S. ABS subsectors with the exception of timeshare ABS maintained downgrade rates below their one-year averages.

The U.S. ABS auto subsector experienced a wave of upgrades in 2021, yielding the highest upgrade rate of all the U.S. ABS subsectors at 36.1%, well above the one-year average of 13.5%. Most other subsectors experienced upgrade rates above their one-year averages, with the exception of credit card and timeshare ABS.

U.S. CMBS

In U.S. CMBS, the average change in credit quality remained negative at the end of 2021 at -0.17 notch, continuing its negative trend since 2019, albeit significantly improved from the previous year at -0.47 notch (see chart 18). The 12-month-trailing default rate for U.S. CMBS spiked to 2.2% at the end of 2021 (from 0.6% in 2020), much higher than the equivalent global rate of 0.7% (see chart 19).

The upgrade rate increased to 0.2% from 0.1% in 2020 and was well below the one-year average of 5.8%. The downgrade rate decreased to 5.0% from 14.6% in 2020, below the one-year average of 12.0%.

A total of 55 defaults occurred within U.S. CMBS in 2021, the majority within the conduit/fusion subsector, with a 1.9% default rate, followed by large loans/floaters (see table 6), whose annual default rate increased to 16.4%, over 10x its one-year average of 1.5%. Defaults were primarily concentrated in the 2014-2018 vintages, and all were speculative-grade.

The large loan/floater downgrade rate was the highest, at 32.8%, though down from 50.9% the previous year, while the conduit/fusion downgrade rate dipped to 5.1% (from 10.6%). Meanwhile, the U.S. CMBS single-borrower downgrade rate was 1.7%. Downgrade rates for the single-borrower and conduit/fusion subsectors fell below their respective one-year averages. Further, downgrades primarily occurred in the 2011-2014 vintages, and all were speculative-grade.

Upgrade rates within U.S. CMBS subsectors underperformed compared with their corresponding one-year averages. The only upgrades came from the single-borrower subsector, which had a 0.5% upgrade rate, well below the one-year average of 4.4%.

Europe

Credit performance across European structured finance sectors has historically been more positive than that of U.S. counterparts, and the same held true in 2021. Though the average change in credit quality rose to +0.15 notch in 2021 from +0.04 notch the previous year, it remained a ways off from the peak of +0.41 notch from February and March 2020 (see chart 20). The 12-month-trailing default rate decreased to 0.2% in 2021 from 0.25% the previous year (see chart 21).

The annual default rate for European structured finance fell in 2021 to 0.2%, below the one-year average of 1.0% (see table 7). The overall upgrade rate grew to 7.8%, slightly below its one-year average of 7.9%. The overall downgrade rate was 1.0% in 2021, down from 3.6% in 2020 and well below the one-year average of 14.1%.

The European structured finance sector consists of a diverse array of subsectors. In terms of defaults, the structured credit SF CDO subsector was the worst performing in 2021, with a default rate of 6.1%, above the one-year average of 5.1%. There were four defaults from CMBS and one from RMBS prime, representing default rates of 2.2% and 0.2%, respectively. Meanwhile, there were no defaults within European ABS, the same as in the previous year.

All defaults across European structured finance occurred among speculative-grade ratings. There were four defaults from the 'B' rating category, leading to a 1.3% default rate in 2021, lower than its one-year average rate of 2.0%. The remaining three defaults were from the 'CCC' rating category, leading to a 3.8% default rate in 2021, still well below its one-year average rate of 10.6%.

Downgrades fell across many European sectors in 2021. As with defaults, downgrades were the most prominent in the European CMBS subsector, which recorded a downgrade rate of 13.5% in 2021. The European SF CDO downgrade rate increased to 9.1% from 2.4% in 2020, while single-name synthetics recorded a downgrade rate of 4.8%, down considerably from 57.1% the year prior. European ABS had no downgrades in 2021. All downgrades in European structured finance occurred within the speculative-grade segment, with the 'CCC' rating category showing the highest downgrade rate at 5.0%.

Most European subsectors reported upgrade rates below their respective one-year averages, with the exception of the RMBS prime, structured credit other, ABS auto, ABS consumer, and ABS other subsectors. Upgrades were highest in the European ABS consumer sector, with a 37.1% upgrade rate. European CMBS upgrades picked up in comparison to 2020, rising to 2.2% from 0.5%; however, this was still below the one-year average of 3.6%. Within European ABS, ABS other and ABS auto upgrade rates were also elevated, at 14.9% and 14.2%, respectively.

Further, upgrades were concentrated among the 2003-2009 vintages, all of which had double-digit upgrade rates in 2021. Meanwhile, upgrade rates for investment- and speculative-grade were similar, at 7.5% and 9.0%, respectively.

Outside U.S. and Europe

Outside the U.S. and Europe, the average change in credit quality remained positive in 2021 at +0.23 notch (see chart 22). After four years of no defaults, the annual default rate for all regions outside the U.S. and Europe reached 0.1% after two defaults from Latin America were recorded in 2021 (see table 8).

Structured finance ratings outside the U.S. and Europe accounted for 6.0% of outstanding ratings at the start of 2021. The upgrade rate increased to 13.6%, well above its one-year average of 5.7%. The downgrade rate fell to 1.7% in 2021 from 3.1% the prior year, still well below its one-year average of 5.0%.

The majority of ratings outstanding at the start of the year were concentrated in Australasia and Japan, specifically within the RMBS sector. Downgrades in 2021 were primarily concentrated in emerging markets, with a downgrade rate of 64.3%, quadruple the one-year average of 15.1% (see table 8). There were no downgrades in Canada or Japan, but downgrades occurred in Australasian ABS, Latin America, and Australasian RMBS, with downgrade rates of 3.5%, 2.8%, and 0.5%, respectively. Downgrades were largely concentrated among issuers rated in the 'BB' and 'CCC' categories at the beginning of the year.

The highest upgrade rate in 2021 was in Australasian RMBS, at 19.1%, compared with a one-year average of 4.7%. Elevated upgrades were also seen in the Australasian ABS and emerging markets subsectors, with upgrade rates of 15.0% and 14.3%, respectively. Meanwhile, there were no upgrades recorded in Japan. The majority of upgrades in 2021 outside the U.S. and Europe were concentrated among investment-grade ratings.

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

Issues included in this study

This study analyzes the rating histories of 250,224 global structured finance instruments that S&P Global Ratings first rated between 1973 and Dec. 31, 2021. 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 insight 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 2021 transition rates by determining the ratings on each security outstanding at the start of 2021 and determining the ratings on those same securities at the end of 2021. 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 to determine, for example, 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 is 0.42% and the three-year average is 6.16%.

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

U.S. RMBS