Though losses should be contained due to structural mitigants and the limited number of speculative-grade ratings
Fitch Ratings-Frankfurt/London-03 March 2021: Forecast losses on structured finance (SF) bonds have fallen despite the impact of the coronavirus pandemic, Fitch Ratings says in a new report. Asset performance was strong pre-pandemic and SF losses should be contained due to structural mitigants and the limited number of speculative-grade ratings.
Our analysis of realized losses on Fitch-rated SF tranches issued in North America (NA), EMEA and APAC in 2000-2020 and our estimate of future expected losses is the latest in a series of SF loss studies in the past decade. Total loss expectations have fallen since our previous report in 2019, continuing the trend seen in recent years.
This is only partly due to the dilutive effects of new issuance. For example, total realized and expected losses for NA SF decreased to 4.22% of the original balance from 4.70% in 2019. However, even excluding new issuance since 2018, total losses for post-2000 NA issuance have decreased to 4.63%.
We expect arrears to increase for consumer assets as the pandemic hits labour markets, although extended forbearance measures and furlough schemes continue to cushion borrowers from severe economic dislocation.
However, the positive impact of factors (such as tightened origination standards, rising home prices and low interest rates) that sustained strong asset performance pre-pandemic outweigh the negative factors of 2020. Total losses in Fitch-rated SF notes issued since 2009 remain below 0.05% of the original issuance volume, and the global financial crisis (GFC) remains a bigger cause of SF losses (notably in US SF CDOs) than the pandemic.
Nevertheless, the pandemic has compounded pre-existing structural pressures in some asset classes. For example, post-GFC losses for NA CMBS (0.255% expected and 0.02% realized) are concentrated in transactions exposed to underperforming malls and retail assets.
“Global Structured Finance Losses: 2000-2020 Issuance” is available here.