STRUCTURED FINANCE RESEARCH

Transition Study:

Six Years On, Only 1.5% of European Structured Finance Has Defaulted
Primary Credit Analyst: Arnaud Checconi, London (44) 20-7176-3410; checconia@standardandpoors.com Secondary Contact: Andrew H South, London (44) 20-7176-3712; andrew_south@standardandpoors.com

Table Of Contents
New Ratings Methodologies Have Adversely Affected Ratings Consumer-Related Asset Classes Continue To Outperform Corporate Transactions The 'AAA' Default Rate Since Mid-2007 Is Only 1.03% Two-Thirds Of Structured Finance Notes Have Redeemed Since Mid-2007 Appendix Related Criteria And Research

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT

DECEMBER 6, 2013 1
1224833 | 301112013

Transition Study:

Six Years On, Only 1.5% of European Structured Finance Has Defaulted
Despite a deep European recession and subsequent lackluster economic growth, only 1.50% (by original balance) of European structured finance notes rated by Standard & Poor's Ratings Servicesand outstanding in mid-2007had defaulted by the end of Q3 2013. By contrast, we estimate that more than 65% had fully redeemed. Considering recent economic developments, most countries have at best seen sluggish growth in the past six months. The eurozone (European Economic and Monetary Union) unemployment rate was still high at 12.2%, at the end of September 2013. There were however some positive indicators, such as Spain recording its first quarter of growth since Q1 2011. The 12-month rolling European structured finance downgrade rate was 23% at the end of Q3 2013, while the 12-month rolling default rate remained elevated at 0.43% because of several interest shortfalls and principal losses in commercial mortgage-backed securities (CMBS). Overview Only 1.50% (by original issuance volume) of European structured finance notes outstanding in mid-2007 have defaulted. The 12-month rolling downgrade rate remains at about 20%, due to the knock-on effect of our downgrade of three large European banks, along with the roll out of our SME CLO and European CMBS criteria. Consumer-related securitizations have outperformed those backed by corporate loans, with cumulative default rates since mid-2007 of 0.04% and 4.90%, respectively. Higher-rated notes outperformed those ranked junior in the capital structure, with only 1.03% of ratings on 'AAA' issuance defaulting since mid-2007. On aggregate, 65.4% of notes that were outstanding in mid-2007 have since seen rating withdrawalsusually due to full redemption.

This report is the latest update of our regular transition study, which we originally published on May 17, 2010 (see "European Structured Finance Cumulative Default Rate Since Mid-2007 Remains Below 0.5%"). As before, we quantify credit performance by analyzing rating transitions and defaultsaggregating them by the securities' original issuance volume, rather than by the number of ratings. This approach gives greater weight to higher-value securities, where the most investor funds are actually deployednotably, those more senior in the capital structure and those in asset classes where transactions are typically larger. In this study, we update our analysis to consider cumulative ratings transition and default rates from the beginning of the current financial downturnwhich we assume to be in mid-2007until the end of Q3 2013. We also analyze rating changes on a 12-month rolling basis, to highlight recent trends.

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT

DECEMBER 6, 2013 2
1224833 | 301112013

Transition Study: Six Years On, Only 1.5% of European Structured Finance Has Defaulted

New Ratings Methodologies Have Adversely Affected Ratings

Based on our calculations, only 41.5 billion of notes from an original issuance volume of 2,774.0 billion have defaulted since mid-2007, representing a 1.50% cumulative default rate. By definition, this cumulative default measure can only increase over time, and it rose from 1.43% in Q1 2013. However, the European structured finance cumulative default rate remains low in absolute terms, for example, compared with the equivalent measure for U.S. structured finance, which is 18.4% (see table 1). Downgrade rates are always higher than default rates because deteriorating creditworthiness is more likely than actual failure to pay, in our view. The cumulative downgrade rate in the 25-quarter observation period between mid-2007 and the end of Q3 2013 was 33.8%, which represents a slight decline compared with 34.8% at the end of Q1 2013. In other words, our ratings on two-thirds of European structured finance notes have either been stable or have risen since mid-2007. See table 3 in the appendix for a full ratings transition matrix for European structured finance in that period. The 12-month rolling default rate stabilized at a relatively elevated level of 0.43% during Q3 2013 (see chart 1). Most recent European structured finance defaults were due to interest shortfalls and principal losses on CMBS tranches. The application of our European CMBS and small and midsize enterprise collateralized loan obligation (SME CLO) criteria, weak collateral performance in Spain, and the knock-on effect of three large European bank downgrades, were the main contributing factors behind the 12-month rolling downgrade rate of 23% (see "European CMBS Methodology And Assumptions," published on Nov. 7, 2012, "European SME CLO Methodology And Assumptions," published on Jan. 10, 2013, and "S&PCORRECT: Mainly Negative Rating Actions Taken On 4 Large European Banks; Teleconference July 3, 2013, 2:00 p.m. BST," published on July 3, 2013). See table 4 in the appendix for a full ratings transition matrix for European structured finance over the past 12 months.

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT

DECEMBER 6, 2013 3
1224833 | 301112013

Transition Study: Six Years On, Only 1.5% of European Structured Finance Has Defaulted

Chart 1

Consumer-Related Asset Classes Continue To Outperform Corporate Transactions

Many of the ratings transition and default trends vary substantially by asset class. We classify transactions into two broad categories: Consumer: Residential mortgage-backed securities (RMBS), covered bonds, and consumer asset-backed securities (ABS); and Corporate: Corporate securitizations, structured credit, CMBS, and some other ABS. When considering these classifications, consumer transactions have outperformed corporate transactions by a wide marginwith a cumulative default rate of only 0.04% and a cumulative downgrade rate of 27.8%, compared with 4.90% and 47.8%, respectively, for corporate transactions (see table 1 and chart 2).

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT

DECEMBER 6, 2013 4
1224833 | 301112013

Transition Study: Six Years On, Only 1.5% of European Structured Finance Has Defaulted

Table 1

Summary Of Mid-2007 To Q3 2013 Ratings Transition, Default, And Withdrawal Rates

By asset class Ratings transition rate* (%) Asset class ABS Credit cards Other consumer ABS Other ABS Structured Credit Synthetic corporate Leveraged loan CLOs SME CLOs CDO of ABS Other CDOs CMBS Corporate securitizations Covered bonds RMBS All consumer transactions All corporate transactions Overall Overall U.S. Total (bil. ) 169.6 33.2 68.0 68.4 535.2 254.3 71.3 103.0 28.9 77.8 163.3 64.9 1,085.0 756.0 1,942.2 831.8 2,774.0 5,823.9 Upgraded 4.9 0.0 8.9 3.3 2.5 3.2 1.9 0.8 0.4 3.4 1.9 8.2 0.1 1.1 0.8 2.9 1.4 1.1 Stable 66.7 97.0 61.5 57.2 54.0 62.5 29.8 52.9 10.7 65.6 30.5 49.7 80.2 58.7 71.4 49.3 64.8 39.9 Downgraded 28.4 3.0 29.6 39.4 43.6 34.2 68.3 46.4 88.9 31.0 67.6 42.0 19.8 40.2 27.8 47.8 33.8 59.0 Defaulted 0.05 0.00 0.13 0.00 4.58 2.86 0.10 0.41 40.40 6.51 9.89 0.13 0.00 0.10 0.04 4.90 1.50 18.42 Withdrawn 82.1 94.3 87.8 70.6 72.7 92.1 20.2 69.4 22.3 80.3 43.9 21.6 68.9 59.7 66.4 62.9 65.4 39.8

Note: For ratings outstanding in mid-2007. Based on original issuance volume. *We classify withdrawn ratings according to their levels immediately before withdrawal. ABS--Asset-backed securities. SME--Small and midsize enterprise. CLO--Collateralized loan obligation. CDO--Collateralized debt obligation. CMBS--Commercial mortgage-backed securities. RMBS--Residential mortgage-backed securities.

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT

DECEMBER 6, 2013 5
1224833 | 301112013

Transition Study: Six Years On, Only 1.5% of European Structured Finance Has Defaulted

Chart 2

The overall cumulative downgrade rate decreased due to a string of ratings upgrades in covered bonds. For example, we upgraded Dexia's covered bond program (see "Dexia Kommunalbank's Public-Sector Covered Bond Rating Raised To 'A+' On Increased Available OC; Outlook Stable," published on Aug. 8, 2013). Cumulative downgrade rates also declined in corporate securitizations and structured credit. For CMBS, downgrades were mainly due to collateralrelated issues, including sharp commercial real estate value declines affecting loan recovery expectations, as well as the resolution of CreditWatch placements following the roll out of our updated European CMBS criteria (see "Ratings On 240 Tranches In 77 European CMBS Transactions Placed On CreditWatch Negative Following Criteria Update," published on Dec. 6, 2012 and "European CMBS Monthly Bulletin (July/August 2013): Weak Growth Prospects For Commercial Real Estate Values In Europe's Five Largest Economies," published on Aug. 28, 2013). Our July 3, 2013 downgrades of Barclays Bank PLC, Deutsche Bank AG, and Credit Suisse AG led to the downgrades of 169 tranches in primarily U.K. and Dutch RMBS transactions (see "Ratings Lowered On 169 European RMBS Tranches After Counterparty Downgrades; 12 Tranches Placed On CreditWatch Negative," published on July 26, 2013).

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT

DECEMBER 6, 2013 6
1224833 | 301112013

Transition Study: Six Years On, Only 1.5% of European Structured Finance Has Defaulted

By contrast, nearing maturities and transaction amortization (so-called "structural deleveraging") in leveraged loan CLOs helped to marginally lower the cumulative downgrade rate for structured credit to 43.6% from 43.8%, six months earlier. Despite their modest recent rise, the 12-month rolling default rates for ABS and RMBS are still very low in absolute terms, at 0.09% and 0.04%, respectivelya fraction of those for structured credit and CMBS at 0.76% and 7.47%, respectively (see chart 4). We lowered to 'D (sf)' our ratings on 27 CMBS tranches during Q2 and Q3 2013 due to interest shortfalls and principal losses (see "Ratings Lowered In German CMBS Transaction Talisman-4 Finance Following Review," published on May 24, 2013, "Ratings Lowered To 'D (sf)' On EuroProp (EMC) (Compartment) 1's Class A To E CMBS Notes Due To Payment Default," published on May 31, 2013, and "Ratings Lowered On U.K. CMBS Transaction Prominent CMBS Conduit No. 2's Class A, B, And C Notes; Other Classes Affirmed," published on Aug. 16, 2013).
Chart 3

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT

DECEMBER 6, 2013 7
1224833 | 301112013

Transition Study: Six Years On, Only 1.5% of European Structured Finance Has Defaulted

Chart 4

The 'AAA' Default Rate Since Mid-2007 Is Only 1.03%

In our view, the position of notes in the capital structure affects their credit performance. In fact, the cumulative downgrade rate for speculative-grade notes between mid-2007 and Q3 2013 was 84% higher than for investment-grade notes, with the former recording a cumulative downgrade rate of 61.9%, compared with 33.7% for the latter (see table 2 and chart 5). More significantly, the cumulative default rate for speculative-grade notes, at 10.67% in the same period, has been more than seven times higher than that for investment-grade notes, at 1.45%. This result is not surprising, in our view. The gap in both downgrade and default rates is consistent with our ratings framework: Default propensity and credit stability are key rating factors, and we therefore expect ratings on more senior notes generally to be more stable than those on junior notes experiencing similar stresses (see "Methodology: Credit Stability Criteria," published on May 3, 2010).

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT

DECEMBER 6, 2013 8
1224833 | 301112013

Transition Study: Six Years On, Only 1.5% of European Structured Finance Has Defaulted

Table 2

Summary Of Mid-2007 To Q3 2013 Ratings Transition, Default, And Withdrawal Rates

By rating grade Transition rate* (%) Total (bil. ) Investment-grade 'AAA' only Speculative-grade Overall 2,760.5 2,415.1 13.5 2,774.0 Upgraded 1.4 0.0 9.2 1.4 Stable 65.0 67.4 29.0 64.8 Downgraded 33.7 32.6 61.9 33.8 Defaulted 1.45 1.03 10.67 1.50 Withdrawn 65.4 66.1 51.6 65.4

Note: For ratings outstanding in mid-2007. Based on original issuance volume. *We classify withdrawn ratings according to their levels immediately before withdrawal.

Chart 5

Two-Thirds Of Structured Finance Notes Have Redeemed Since Mid-2007

Regardless of whether note ratings have remained stable, moved up, or moved down, it is also important to consider that much of the principal outstanding in mid-2007 is by now no longer at riskand has been returned to noteholdersdue to amortization. In fact, many of these notes have now fully redeemed. We can obtain a proxy for

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT

DECEMBER 6, 2013 9
1224833 | 301112013

Transition Study: Six Years On, Only 1.5% of European Structured Finance Has Defaulted

the scale of full note redemptions by considering rating withdrawals, as these have most often occurred following full note redemption. By Q3 2013, we had withdrawn our ratings on 65.4% of notes that were outstanding in mid-2007 (see chart 6). This high number is all the more positive, in our view, given that European structured finance is currently experiencing a period of unusually low prepayment rates on many types of underlying collateral. Withdrawal rates vary widely across different asset classes (see chart 7). ABS, structured credit, and covered bonds report the highest cumulative withdrawal rates at 82%, 73%, and 69%, respectively. Withdrawals were generally for different reasons in each asset class: ABS and covered bonds traditionally have short maturities, which many of the notes outstanding in mid-2007 would now have reached. Structured credit withdrawals often followed early terminations. The CMBS cumulative withdrawal rate is comparatively low at 44% because many of the underlying loans' bullet maturity dates have been extended, making early repayment of the notes unlikely.
Chart 6

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT

DECEMBER 6, 2013 10
1224833 | 301112013

Transition Study: Six Years On, Only 1.5% of European Structured Finance Has Defaulted

Chart 7

We believe that the European recession may have found a bottom in Q2 2013. However, we should discount a marked improvement in collateral performance as we expect subpar economic growth in most European countries for the coming two years (except for the U.K. and Germany) and only a gradual decline in unemployment, especially in the peripheral eurozone countries (see "Europe Is Moving From Subzero To Subpar Growth," published on Sept. 18, 2013).

Appendix
Table 3

Mid-2007 To Q3 2013 Ratings Transition Matrix For All European Structured Finance Notes
Rating To (%) Original issuance volume (bil. equivalent) 2,415.1 164.1 106.9 74.4

Rating from AAA AA A BBB

AAA 67.4 9.0 1.4 2.9

AA 13.6 57.3 3.0 0.4

A 11.5 10.8 54.6 9.9

BBB 3.6 3.1 22.9 53.9

BB 1.0 2.4 4.2 9.8

B 1.0 3.3 6.0 8.4

CCC 0.8 9.6 3.6 8.4

CC 0.1 0.1 0.6 0.5

D 1.0 4.3 3.7 5.7

Upgraded 9.0 4.4 13.2

Stable 67.4 57.3 54.6 53.9

Downgraded 32.6 33.7 41.0 32.9

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT

DECEMBER 6, 2013 11
1224833 | 301112013

Transition Study: Six Years On, Only 1.5% of European Structured Finance Has Defaulted

Table 3

Mid-2007 To Q3 2013 Ratings Transition Matrix For All European Structured Finance Notes (cont.)
BB B CCC Ending original issuance volume (bil. equivalent) 11.1 1.8 0.6 2,774.0 0.1 1,645.8 4.0 426.5 1.4 362.4 4.0 156.0 39.6 43.7 28.0 24.7 46.7 16.9 72.7 6.1 47.3 2.3 3.2 4.0 7.9 2.6 86.7 41.6 5.5 4.0 30.0 39.6 24.7 6.1 1,824.8 54.9 75.3 90.0 919.2

Note: For ratings outstanding in mid-2007. Based on original issuance volume.

Table 4

12-Month-Rolling Ratings Transition Matrix For All European Structured Finance Notes
Rating to (%) Original issuance volume (bil. equivalent) 1,280.3 697.7 511.8 164.2 41.1 48.5 23.7 4.0 2,771.3

Rating from AAA AA A BBB BB B CCC CC Ending original issuance value (bil. equivalent)

AAA 94.8 9.7 0.1 0.0 1,281.8

AA 0.7 69.5 2.9 508.5

A 4.5 10.4 83.0 2.7 0.1 559.8

BBB 0.0 10.0 9.9 87.2 4.7 0.2 265.3

BB 0.4 2.0 6.6 60.3 1.7 0.3 49.5

B 0.0 1.4 2.7 24.1 82.8 2.8 0.2 62.6

CCC 0.3 4.9 11.3 83.6 5.3 28.1

CC 0.0 0.4 2.5 72.7 3.7

D 0.7 0.4 5.9 3.6 10.7 21.8 11.9

Upgraded 9.7 3.0 2.8 4.8 1.9 3.2 5.6 91.5

Stable 94.8 69.5 83.0 87.2 60.3 82.8 83.6 72.7 2,353.9

Downgraded 5.2 20.8 14.0 10.1 34.9 15.3 13.2 21.8 325.9

Note: Based on original issuance volume. To Q3 2013.

Related Criteria And Research

Europe Is Moving From Subzero To Subpar Growth, Sept. 18, 2013 Ratings Lowered On U.K. CMBS Transaction Prominent CMBS Conduit No. 2's Class A, B, And C Notes; Other Classes Affirmed, Aug. 16, 2013 Dexia Kommunalbank's Public-Sector Covered Bond Rating Raised To 'A+' On Increased Available OC; Outlook Stable, Aug. 8, 2013 Ratings Lowered On 169 European RMBS Tranches After Counterparty Downgrades; 12 Tranches Placed On CreditWatch Negative, July 26, 2013 S&PCORRECT: Mainly Negative Rating Actions Taken On 4 Large European Banks; Teleconference July 3, 2013, 2:00 p.m. BST, July 3, 2013 Ratings Lowered To 'D (sf)' On EuroProp (EMC) (Compartment) 1's Class A To E CMBS Notes Due To Payment Default, May 31, 2013 Ratings Lowered In German CMBS Transaction Talisman-4 Finance Following Review, May 24, 2013 Ratings Affirmed On Bank Of Scotland's U.K. Structured 60 Billion Covered Bonds Following Review, May 3, 2013

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT

DECEMBER 6, 2013 12
1224833 | 301112013

Transition Study: Six Years On, Only 1.5% of European Structured Finance Has Defaulted Counterparty Risk Framework Methodology And Assumptions, June 25, 2013 European SME CLO Methodology And Assumptions, Jan. 10, 2013 Ratings On 240 Tranches In 77 European CMBS Transactions Placed On CreditWatch Negative Following Criteria Update, Dec. 6, 2012 European CMBS Methodology And Assumptions, Nov. 7, 2012 European Structured Finance Cumulative Default Rate Since Mid-2007 Remains Below 0.5%, May 17, 2010 Methodology: Credit Stability Criteria, May 3, 2010 Understanding Standard & Poor's Rating Definitions, June 3, 2009 European CMBS Monthly Bulletin
Additional Contact: Structured Finance Europe; StructuredFinanceEurope@standardandpoors.com

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT

DECEMBER 6, 2013 13
1224833 | 301112013

Copyright 2013 by Standard & Poor's Financial Services LLC. All rights reserved. No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor's Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an "as is" basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT'S FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages. Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P's opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof. S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process. S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription) and www.spcapitaliq.com (subscription) and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees.

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT

DECEMBER 6, 2013 14
1224833 | 301112013