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Moody’s: Stabilizing Economic Growth to Support Structured Finance Asset Quality

December 21, 2016, 07:28 AM
Filed Under: Industry News
Related: Moodys

Several overarching themes will affect securitization markets around the world in 2017, Moody’s Investors Service says in its global structured finance outlook overview. Asset credit quality will continue to weaken in some sectors but will stabilize in most others. Slow but stable  economic growth and monetary conditions in advanced economies will support the credit performance of most structured finance assets around the globe. Major regulatory developments will come into full effect in the US and Europe, which will have a varied effect on structured finance sectors in those regions . The market for environment sector-related asset-backed securities (ABS) will continue to develop, as will the marketplace lending and other technology-related sectors.

Credit Quality of New Transactions

“In the year ahead, the credit quality of the assets underlying new securitizations will remain stable or weaken for most asset classes, driven by macroeconomic factors or changing demand and supply dynamics,” says Moody’s Senior Vice President, Joseph Snailer. “Meanwhile, issuers in some asset classes, such as US RMBS, will expand into new products, mostly at the low end of the credit spectrum.”

In the US, the credit quality of loans in newly issued auto ABS, commercial mortgage-backed securities (CMBS), credit card ABS and marketplace lending ABS will stay mostly stable in 2017.  Meanwhile the credit quality of new collateralized loan obligations (CLOs) and student loan ABS will weaken somewhat.

The credit quality of Canadian covered bond programs will be strong in the new year as will the loan receivables backing Canadian auto ABS.  New issue Mexican RMBS will include additional credit positive features, new Brazilian trade receivables ABS will feature tighter underwriting but new Argentine securitizations will have weaker underwriting standards. New European CMBS in 2017 will continue to include riskier loans.  While the credit quality of most new ABS and RMBS in Europe will be similar to 2016 transactions, new auto ABS will be affected by a few credit negative factors such as longer contract terms and higher loan-to-values.

Moody’s expects the credit quality of assets backing new Chinese auto ABS and RMBS to remain strong in the coming year, and that commercial vehicle loan portfolios backing new auto ABS in India will have good credit characteristics. In Korea, new credit card ABS deals issued next year will be of good credit quality while that of Singaporean and Korean covered bonds will likewise remain good. However, riskier loans will have a negative impact on the credit quality of 2017 Australian RMBS and auto ABS.

Performance of Outstanding Transactions

“Economic growth in advanced economies will continue at a slow pace, of around 1%-2%, in 2017 benefiting the credit performance of existing transactions in most structured finance asset classes to varying degrees,” says Moody’s Snailer.

Low unemployment rates and rising wages in the US will benefit outstanding RMBS and student loans. Loans in existing CLOs will continue to perform solidly in 2017 as the impact of weakness in the energy sector ebbs and the economy continues to grow, nudging the US speculative-grade corporate default rate lower. Meanwhile, annualized loss rates will rise in outstanding auto ABS transactions, but performance will remain strong.

Improving economies in Canada, Mexico and Argentina will help structured sectors there while the lagging effects of a recession will somewhat weaken ABS performance in Brazil.

Continued low interest rates,  1% - 2% GDP growth and an improving employment picture will support the credit performance of existing European securitizations.
Slowing but still robust economic growth in China will keep ABS and RMBS delinquencies low while CLO performance will decline somewhat.

Legal & Regulatory Developments

The UK electorate’s decision to exit the EU will have credit and legal implications on UK, and some EU, transactions, Moody’s says. Brexit creates legal uncertainty for existing structured finance transactions because many cross-border deals depend on harmonization and mutual recognition of EU laws.

In the US, the Dodd-Frank Act’s risk-retention rules and Reg AB II will be in full effect. Although President-elect Donald Trump has called for a temporary moratorium on new regulations and a possible repeal or roll-back of certain facets of the Dodd-Frank Act, at this point, it is too early to assess Trump’s policy choices.

In Argentina, new asset classes, such as inflation-adjusted mortgages, will emerge as a result of new regulation in fast-growing economic sectors. Meanwhile, impending regulation on covered bonds will provide an additional funding source for Brazilian banks.

Regulatory capital treatment for securitization in Australia has been clarified under the final revised prudential framework for securitization, APS 120.  Meanwhile, the scope of foreign investors in Indian securitizations will likely expand following the recent notification from the Reserve Bank of India allowing foreign investors to invest in pass through certificates issued by a special purpose vehicle.

Environmental Initiatives

Moody’s expect issuance of green bonds to grow in 2017, following several Moody’s-rated transactions globally in 2016. The US PACE and solar securitization markets will continue to develop as credit quality remains strong. Volkswagen’s US diesel vehicle settlement is positive for its auto ABS and the  VW fallout will continue to filter through transactions in the US and Europe.

Marketplace Lending & Technology-related Sectors

Securitization will remain an option for funding marketplace lenders in both the US and Europe, and risk characteristics will remain largely unchanged. In the US, mobile phone and wireless tower ABS transaction will continue to emerge as the sectors grow.

This report, “Global Structured Finance Outlook 2017– Tepid Growth Props Up Asset Quality,” is part of a series of 2017 Credit Outlooks that provide insight into next year’s credit conditions across all sectors, and is a summary of 30 individual structured finance sector outlook reports already published. See more at

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