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Lessons From 2008 Ease Ratings Toll Across Global Structured Finance Facing COVID-19

May 29, 2020, 09:25 AM
Filed Under: Industry News

Negative rating actions across global structured finance (SF) from the coronavirus pandemic will be distributed more broadly and are expected to be less severe in most sectors than experienced by the worst performing areas during the period from 2008 to 2012, according to Fitch Ratings. Travel-related ABS and CMBS with exposure to retail and hotels have experienced the most significant rating changes to date, unlike the global financial crisis (GFC) when US RMBS and SF CDOs accounted for roughly 80% of all downgrades. Bond ratings in a number of sectors, particularly those that experienced the greatest rating changes during the GFC, benefit from more credit protection today for a given rating due to revisions in rating methodologies since 2008.

SF transactions are currently facing a faster and more severe economic contraction of major economies than seen during the GFC in 2008-2009. The ultimate number and severity of rating downgrades depend upon the duration of the health crisis and the trajectory of the recovery, both of which remain uncertain with downside risk. Fitch expects the recovery to begin in the second half of the year, with unemployment rebounding from the peak more quickly than in 2009, but remaining elevated.

Rating performance through the current crisis is supported by enhancements to various sector rating methodologies since the GFC. Criteria revisions have increased rating credit protection meaningfully when adjusting for the improved credit quality of post-GFC transactions, most notably in the US RMBS, global structured credit and US CMBS sectors that experienced the highest number of downgrades from 2008 to 2012.

The rating methodologies of other major sectors that incurred a relatively high percentage of negative actions, such as EMEA CMBS, and those that performed relatively well, such as EMEA and Australian RMBS, have also made meaningful enhancements since 2009 that resulted in increased credit protection for a given rating.

Negative rating actions between 2008 and 2012 were disproportionately concentrated in the US RMBS sector, which accounted for 79% of all negative rating changes on investment-grade classes across global SF. An additional portion of total investment-grade downgrades during that period were driven by SF CDOs with underlying US RMBS. The severity of the rating changes was also much greater in US RMBS and related SF CDO transactions than in other sectors. On average, investment-grade ratings were lowered by approximately five and four full rating categories within US RMBS and SF CDOs, respectively. Investment-grade ratings in all other asset classes globally performed significantly better than US RMBS and SF CDOs through the last global crisis.

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