Credit Performance: One Default In 2020, Upgrades Bottom Out As Downgrades Surge

Overall Mexican structured finance credit quality declined in 2020, with the downgrade rate exceeding the upgrade rate by a factor of 10. Additionally, the default rate rose to 0.8% in 2020, following a year of no defaults in 2019.

S&P Global Ratings had 121 Mexican national scale ratings outstanding on structured finance securities at the beginning of 2020. Of these securities, one default led the annual default rate rise to 0.8% in 2020. The upgrade rate (the number of upgrades expressed as a portion of the number of ratings outstanding) declined to 0.8% in 2020, down significantly from 6.5% in 2019. Meanwhile, the downgrade rate (the number of downgrades as a portion of the number of ratings outstanding) expanded to 8.3% in 2020, up from 2.6% in 2019, reaching its highest level since 2013.

After consecutive months of positive 12-month trailing average changes in credit quality (see definition in Appendix I) from August 2019 through May 2020, the 12-month trailing average change in credit quality for Mexican structured finance was 0.36 rating notches lower at -0.53 at the end of 2020 (see chart 1).

Chart 1

There was only one default within Mexican structured finance national scale ratings in 2020, the result of a residential mortgage-backed security (RMBS) origination. While the default rate rose to 0.8%, following a year of no defaults in 2019 (see chart 2), it was the second lowest rate for any year which recorded a default rate since 2005.

Chart 2

Mexican structured finance credit performance in 2020 diverged between sectors, although some sectors have very few ratings, so comparisons may not always be meaningful. For example, the future flows sector recorded a downgrade rate of 100% in 2020, but the entire pool of outstanding ratings for the sector is just two credits (for 2020). Downgrade rates in 2020 across most sectors remained at or lower than their respective one-year averages except for future flows and asset backed securities (ABS), which account for the second largest number of ratings in Mexico (see chart 3). Simultaneously, the only upgrades recorded in 2020 were from the ABS sector, which reported an upgrade rate of 2.6%.

The RMBS sector accounted for most of the outstanding securities included in this study and provided the sole default of 2020. Additionally, the downgrade rate rose to 2.6%, well below the one-year average of 10%.

Once again, the ABS sector had the highest one-year average default rate among all the sectors at 4.9%. Both the RMBS and future flows sectors reported a slightly lower one-year average default rate in 2020 (see chart 4).

Chart 3

Chart 4

Table 1 shows a summary of 2020 credit performance for Mexican structured finance, along with the 2000-2020 one-year weighted-average statistics.

Table 1

Ratings Performance: Ratings Have Historically Differentiated Default Rates

Our structured finance ratings express an opinion on the securities' creditworthiness, for which the focus is 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 Mexican structured finance, downgrade rates in 2020 differed somewhat by ratings (see chart 5). While the overall downgrade rates improved, the downgrade rates for the 'mxAAA', 'mxA', and 'mxCC' rating categories increased. The rating categories with highest number of ratings outstanding at the start of 2020 were the 'mxAAA' and 'mxAA' categories, which experienced downgrade rates of 9.3% and 2.8%, respectively, and no defaults. The 'mxA' and 'mxCC' rating categories recorded the highest downgrade rates of 50% and 100%, respectively. However, both these categories ('mxA' and 'mxCC') have a small pool of ratings. The only upgrade of the year was reported from the 'mxAA' category, which had an upgrade rate of 2.8% (see table 1).

Downgrade rates in 2020 across most rating categories remained below their respective one-year averages while upgrade rates for all rating categories in 2020 were below or at their one-year averages.

Chart 5

We would typically expect default rates to be lower for higher-rated securities, provided 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 Mexican structured finance, higher-rated securities were generally associated with lower one-year weighted-average default rates from 2000 to 2020 (see chart 6). The one default recorded in 2020 transitioned from the speculative-grade 'mxCC' rating category, which recorded the highest one-year average default rate of 31.71% among all rating categories.

Chart 6

Appendix I: Terminology, Data Selection, And Calculation Approaches

This Mexican structured finance default and rating transition study uses our database of long-term Mexican national scale issue credit ratings.

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-contained and effectively supersedes all previous editions.

Issues included in this study

This study analyzes the rating histories of 603 Mexican structured finance instruments that S&P Global Ratings first rated between 1999 and Dec. 31, 2020. The term "structured finance" in this report refers to asset-backed securities, commercial mortgage-backed securities, future flow transactions (including partial-credit guaranteed [PCG] and future tax revenue-backed transactions), RMBS, and structured credit (including issues backed by a single credit, where the rating on the note is directly linked to that on the underlying credit--so-called repackaged transactions or "repacks").

In this report, we consider future flow transactions as a separate sector, given the relatively large number of such transactions historically in the Mexican market. In our global structured finance default and rating transition study, we include these transactions in the structured credit sector. We include PCG transactions (also known as multiple-credit-dependent obligations) in the future flow sector because, like future flow securities, PCGs are linked to the rating on an entity--in this case, the issuer.

National scale ratings

National and regional scale ratings express relative opinions about the creditworthiness of an issuer or the credit quality of an individual debt issue within the universe of credit risk on the national scale. National scale ratings are not directly comparable with our global scale ratings or with national scale ratings for other countries. Our Mexico national scale credit ratings generally include a prefix of 'mx' to distinguish them from global scale ratings and other national scale ratings.

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 2020 transition rates by determining the ratings on each security outstanding at the start of 2020 and determining the ratings on those same securities at the end of 2020. 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.

Rating modifiers

We use rating modifiers ('+' and '-') to calculate the upgrade, downgrade, and stability rates given in the text, tables, and charts throughout this study. However, the transition matrices in Appendix II of this report show only the full rating categories for practical reasons.

In other words, the use of a rating category suggests that transitions to, for example, 'mxAA' from 'mxAA-' or to 'mxBBB+' from 'mxBBB-' are not considered to be rating transitions because the rating remained within the rating category.

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 "non-NR" 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 'D' ratings

Counts of defaults and default rate statistics in this report are based on securities that we downgraded to 'D'. For the purposes of this report, when a rating has moved to 'D', we consider this a terminal state and do not 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 rating history as if it were for a new security, beginning from the date that the rating changed from 'D'.

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 different static pools over different five-year periods and aggregating.

Appendix II: Detailed Default And Transition Statistics

Tables 2 and 3 provide various default and transition rate statistics for Mexican structured finance securities.

Table 2

Table 3

Related Criteria

• S&P Global Ratings Definitions, Nov. 10, 2021
• Mexican Government Agency RMBS Credit Quality Remains Stable Despite Pandemic Pressures, Oct. 20, 2021
• Default, Transition, and Recovery: 2019 Annual Mexican Structured Finance Default And Rating Transition Study, Dec. 17, 2020
• Methodology For National And Regional Scale Credit Ratings, June 25, 2018