Fitch: Europe SME CLOs See Largely Positive Rating Migration
Over the last 12 months, upgrades have outpaced downgrades by an approximate ratio of 3:1. Largely stable underlying loan performance, combined with rapid deleveraging, has driven increased credit enhancement and has led to the vast majority of Fitch's rating actions over this period being maintained or improved, with only a limited number of tranche downgrades.
European SME CLO loan issuance remained hampered by sluggish growth prospects, a lack of economic viability and unfavourable regulatory treatment for securitisations. Over the last 12 months, Fitch has rated four new transactions; three of these were Italian-based, with a total initial combined portfolio balance of EUR2.3bn. The remaining transaction was the Sagres, STC S.A. / Pelican SME No. 2 Portuguese transaction, which had an initial portfolio balance of EUR1.09bn.
Seventeen Fitch-rated SME CLOs were called since August 2014. In total, including called transactions and individual tranches across Fitch-rated transactions, 62 tranches were paid in full over the period. The majority of these called deals were Spanish SME CLOs, with all but two of these deals closing prior to the onset of the financial crises in 2007.
At 2.4%, the lowest in four years, delinquency levels in Fitch-rated Spanish SME CLOs continue to fall. Over the last 12 months, delinquencies have fallen by over 1%, while recoveries continue to filter through. With Fitch's economic forecast for Spain showing continued improvement this trend is expected to continue.
Fitch has reflected this through an adjustment in its Spanish criteria, driven by a reduction in expected annual default rates for the real estate and construction sector, and a reduction in the proportion of debt assumed in this sector. Fitch reduced the average annual default rate expectation for Spain to 5%, from 6.25%.
Recovery signs are visible it Italy, driven by an improving economy and stabilising insolvency environment. This has helped lower delinquencies, with a downward trend emerging towards end-2014. Fitch forecasts GDP growth and falling unemployment levels in the short- to medium-term.
Fitch rates only a small number of SME CLOs in Germany, the Netherlands, UK, France and Portugal. Their performance has largely been within expectations, with the Outlook on all tranches either Stable or Positive.
The report, European SME CLO Performance Tracker, is available on www.fitchratings.com or by clicking on the link above.