Spanish SME CLO ratings are resilient in scenarios where the collateral performance significantly deteriorates but sovereign or counterparty risk does not increase, according to a new report by Fitch Ratings. This is despite their exposure to the real estate sector. Under a severe stress, no losses are expected for 'AA-sf' tranches, the highest rating achievable for Spanish structured finance transactions.
Fitch's report, entitled 'Spanish SME CLO Stress Test', shows the stresses required to see multi-category downgrades of Spanish SME CLO ratings.
"Spanish SME CLOs have built-up a high level of credit enhancement through the continuing deleveraging of SME static portfolios," says Laurent Chane-Kon, Director in Fitch's Structured Finance group. "As a result, AA-sf tranches can sustain a severe portfolio deterioration stress involving the collapse of the real estate sector in which 75% of SMEs from this sector would default and property prices would depreciate by 80%."
In addition, the report highlights that 69% of 'AA-sf' rating are driven by the sovereign-risk driven cap. These tranches benefit from a higher credit enhancement level, averaging 67%, and are not expected to be downgraded below investment grade under a severe portfolio deterioration stress.
However, sovereign and counterparty risk remains significant downside risks for Spanish SME CLOs. A further downgrade of Spain ('BBB'/Negative/'F2') would result in a rating cap for structured finance transactions up to a maximum of six notches above Spain's sovereign IDR. In addition, if transactions becomes subject to material counterparty risks that are not mitigated, SME CLOs' ratings would be affected.
The report is available at www.fitchratings.com. It is part of a series of stress tests which Fitch is performing across structured finance asset classes and regions. The stress focuses solely on collateral performance deterioration and is not accompanied by a corresponding stress to the sovereign or transaction counterparties.
