Credit Performance: Mexican Structured Finance Credit Quality Improved In 2023

Mexican structured finance credit quality improved in 2023 as measured on a 12-month-trailing basis. The average change in credit quality (ACCQ) turned positive in the last three months of the year, ending the year at +0.17 notches, up from -0.13 as of year-end 2022. This snapped a streak of 40 consecutive months of negative ACCQ readings. Additionally, no defaults were recorded in 2023, the same as the year before.

S&P Global Ratings had 53 Mexican national scale ratings outstanding on structured finance securities at the beginning of 2023. The upgrade rate (the number of upgrades as a portion of total number of ratings) increased significantly to 13.2% in 2023 from 0.0% the year prior as no upgrades were recorded. Meanwhile, the downgrade rate also exhibited a sharp increase to 7.5% from 2.9% in 2022 (see chart 1). However, these percentages are based on a rather small population of outstanding ratings at the beginning of 2023.

Chart 1

Last year was the first instance where there have been no defaults among structured finance securities rated on the Mexican national scale for two consecutive years since 2008 (see chart 2).

Chart 2

Mexican structured finance credit performance in 2023 was largely concentrated in residential mortgage-backed securities (RMBS). Some sectors, however, have very few ratings, so comparisons may not always be meaningful.

The RMBS sector accounted for all four of the downgrades in 2024 and 64% of the outstanding ratings at the start of the year. Meanwhile, there were also three upgrades in the sector in 2023, up from zero the year prior.

The overall downgrade rate (including defaults) for the RMBS sector was 11.8% in 2023, up significantly from 4.3% in 2022. This also eclipsed its long-term average of 10.3% (see chart 3). Downgrades in the sector came from the prime segment.

Meanwhile, the three upgrades in the RMBS sector yielded an upgrade rate of 8.8% in 2023, up from 0.0% in 2022 and well above the long-term average of 3.0%. Upgrades were also from the prime RMBS space.

Of the three outstanding commercial mortgage-backed securities (CMBS) at the beginning of 2023, all three were upgraded, yielding a 100% upgrade rate. This far exceeds the one-year average of 19.0%. The upgraded tranches were from one transaction and were a result of an increase on the securitized portfolio's valuation and considerably higher occupancy rates, resulting in lower loan-to value metrics on the transaction.

The asset-backed securities (ABS) sector had one upgrade in 2023, bringing its upgrade rate to 6.7% after no rating activity in 2022. The upgrade came from the equipment lease ABS subsector, which makes up a majority of outstanding ABS ratings in Mexico. The transaction's revolving period ended in May 2023 and entered full turbo amortization, increasing credit enhancement levels to withstand a higher rating. Despite that ABS made up just 28% of outstanding ratings at the start of the year, the ABS sector once again had the highest one-year average default rate of any sector, at 3.4% (see chart 4).

The overall downgrade rate for tranches across all sectors was 7.5% at the end of 2023, well above the 2.9% of 2022 though still below its own long-term average of 10.4%. Meanwhile, there were no rating actions in single-name synthetics, which had just one outstanding rating at the beginning of the year.

Chart 3

Chart 4

Table 1 shows a summary of 2023 credit performance for Mexican structured finance, along with the 2000-2023 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 have historically differed across the rating spectrum (see chart 5).

The rating categories with the most ratings outstanding at the start of 2023 were the 'mxAAA' and 'mxAA' categories, representing 43% and 32% of the outstanding Mexican structured finance ratings at the beginning of the year, respectively.

The 'mxCCC' category recorded the highest downgrade rate in 2023--of 75%--as three of the four rated tranches in this category at the start of the year were downgraded, while one was upgraded.

There was one investment-grade downgrade in 2023 at the 'mxA' category. As there were only three outstanding ratings in this category at the beginning of 2023, this yielded a downgrade rate of 33%. Both of these rates are above their respective one-year averages.

There were seven upgrades across several rating categories in 2023, including: 'mxAA', 'mxA', 'mxBBB', 'mxB', and 'mxCCC'. There were no upgrades recorded in 2022.

There was one upgrade at the 'mxAA' rating category, yielding an upgrade rate of 5.9% in 2023, slightly below that of its long-term average of 6.4%.

There were two upgrades at the 'mxA' rating category, yielding an upgrade rate of 66.7% in 2023, well above the one-year average of 6.9%.

The 'mxBBB' rating category had the highest upgrade rate in 2023 of 100% as the only outstanding rating at the 'mxBBB' level was upgraded. This is well above its 11.0% one-year average.

The 'mxB' rating category also had an upgrade rate well above its one-year average (2.7%) of 50%. Two of the four outstanding ratings in this category were upgraded in 2023.

There was one upgrade at the 'mxCCC' rating category, representing a 25% upgrade rate, also well above its long-term average of 1.2% (see table 1).

(A majority of these rates are based off a relatively small proportion of outstanding ratings in each of the rating categories.)

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 2023 (see chart 6).

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 618 Mexican structured finance instruments that S&P Global Ratings first rated between 1999 and Dec. 31, 2023. 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 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 2023 transition rates by determining the ratings on each security outstanding at the start of 2023 and determining the ratings on those same securities at the end of 2023. 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 Research

• 2022 Annual Mexican Structured Finance Default And Rating Transition Study, Dec. 12, 2023
• Mexican RMBS: Navigating Choppy Waters, Sept. 14, 2023
• S&P Global Ratings Definitions, Nov. 10, 2021
• Methodology For National And Regional Scale Credit Ratings, June 25, 2018