OREANDA-NEWS. The fall in German corporate insolvencies in 2015 will lead to further decreases in default rates in German SME CLO transactions, supporting Fitch Ratings' stable asset performance and ratings outlook for this sector.

The Federal Statistical Office said on Friday that German local courts had reported 23,123 business insolvencies in 2015, down 4% on the previous year and the lowest level since the start of the current time series in 1999. The last recorded annual rise in business insolvencies was in 2009, immediately after the onset of the global financial crisis, when 32,930 firms filed for insolvency.

The trend in the official data is consistent with that in private sector data, for example from Creditreform and Euler Hermes, and the historical data from originators that we use to determine our default rate assumptions when rating German SME CLOs. In our updated Global SME CLO criteria released on 3 March, we reduced the average annual default rate expectation for Germany to 1.75% from 2.5% to reflect the steady decline in corporate insolvencies since 2009. We think the scope for further reductions may be limited with German corporate insolvency rates at historical lows, and growth rates steady but slightly below the 2010-2014 average.

Nevertheless, we think the macroeconomic environment will support German SME performance, and this expectation is incorporated into our base case default assumptions. Our real GDP growth forecasts of 1.7% this year and 1.8% next year incorporate growing private consumption underpinned by sound household fundamentals, a tight labour market and low inflation boosting real disposable incomes.

Our annual default expectation is for a typical German SME portfolio over a five-year horizon. It forms the basis of our lender-specific deal-by-deal base-case default assumptions, which are based on the originator's historical data and origination and servicing standards. This bank benchmark is further adjusted for each transaction to reflect portfolio characteristics like loan terms, or industry, obligor, and geographic concentration.

The positive effect of the decline in default rates since 2009 is already incorporated into our ratings of German SME CLO transactions. We therefore do not expect our updated assumptions to affect any existing ratings.