(The following statement was released by the rating agency)
July 31 - Most 'AA-sf' rated tranches of Spanish SME CLOs would retain an investment grade rating even if 75% of SMEs in the real estate sector defaulted, and commercial and residential property depreciated by over 80%, Fitch Ratings says.
Their ability to withstand such severe stress, which we think is well beyond the realm of plausible scenarios for the Spanish real estate market, is due to the high level of credit enhancement built up through continuing deleveraging of the static Spanish SME portfolios. This mitigates their exposure to the real estate sector.
This is particularly true of two thirds of 'AA-sf' tranches which are subject to a five-notch sovereign-risk driven cap (we rate Spain 'BBB' with a Negative Outlook). Credit enhancement for these capped tranches averages 67% and they would remain investment grade in our severe scenario.
Indeed, capped tranches would only experience losses under circumstances that we think are wholly implausible. An example of this would be if cumulative default rates in the portfolios - that is, the cumulative share of the portfolio balance ever to be more than 90 days in arrears at any time in the life of a deal - reached 90% and property market value declines exceeded 80%.
A majority of the remaining 'AA-sf' tranches would be downgraded below investment grade in our severe scenario, but no losses would be expected.
SME CLO performance and resilience to stress was one of the topics discussed on our recent conference call, "Hopes and Fears for Spanish Securitisation."
Fitch's stress tests on the sector are part of a series performed across structured finance asset classes and regions, and focus solely on collateral performance, not sovereign or counterparty risk, which remain significant for Spanish transactions. For more detail, see Spanish SME CLO Stress Test published on 4 July.
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