Fitch says Spanish SME delinquency rates are now showing signs of stabilisation, but maintains its negative outlook on all European SME CLOs. The rating agency has also published an SME tracker report on European CLOs and launched Fitch SME Compare, a new tool to compare transaction performance.

The number of Spanish SMEs that are more than three months late on debt repayments has stabilised over the past four-to-six months at 2.5% of the Fitch Spanish SME CLO universe. The stabilisation coincides with a levelling-off and slight reduction in the Spanish unemployment rate, but Fitch expects unemployment to increase slightly in the rest of 2010. The agency also believes it reflects more proactive loss mitigations strategies implemented by servicers, including loan refinancing and restructuring strategies.

"Although it is a positive sign that the pace of deterioration on Spanish SMEs has slowed, Fitch believes that delinquency rates will remain at the current elevated levels in the short term, with a significant proportion of these delinquent debtors ultimately defaulting during the next 12 months," says Glenn Moore, senior director in Fitch's structured credit team.

SMEs employ between 60%-70% of Europe's working population, and contribute approximately 60% of the gross income from operating activities. Fitch says the reduction in global demand for goods and services and the reduction in the availability of affordable credit for the refinancing of existing debt have created a difficult environment. The agency expects continued delinquency volatility during 2010, which is reflected in the negative outlooks on the majority of junior tranches of Fitch-rated SME CLO transactions.

"When the current and expected SME defaults are combined with extended recovery timelines it places pressure on junior notes of SME CLO transactions," says Moore. Currently, two Fitch-rated Spanish SME transactions have depleted their reserve funds due to rising defaults and the agency expects more to follow.

"Over the past year, German SME portfolios have generally witnessed increasing negative credit migration across all transactions," says Jeffery Cromartie, Fitch's head of EMEA structured credit surveillance. "Fitch associates the weaker credit scores with the triple-C and lower rating categories - including default - which now range between 3% and 13% across transactions."

The agency expects negative portfolio migration to steadily increase. To date defaults for German balance sheet transactions are on average 1.7%.

Secured loans that have completed the work-out process have, on average, recovered 67%. Fitch expects that unsecured loans will recover 20% on average.

Fitch has published an SME Tracker report comparing the performance of 87 Fitch-rated European SME CLO transactions, and an accompanying tool called SME Compare for investors to compare transaction performance and view average vintage benchmarks.