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COVID Vaccine Will Relieve Pressure on Global Structured Finance Sectors, Fitch

December 16, 2020, 09:05 AM
Filed Under: Industry News

Widespread vaccine availability later in 2021 will alleviate pressures on global structured finance (SF) asset performance by reducing the duration of the pandemic and likelihood of lockdown measures, mitigating downside risk in 2H21, Fitch Ratings says. Positive vaccine developments are a significant factor in Fitch’s expectations for global GDP growth in 2021, with further government support and policy easing expected until the health crisis is brought under control. However, delayed vaccine availability would result in significantly weaker growth in 2021.

Consumer confidence will improve as pandemic-based restrictions ease, but reopening depends on individual willingness to be vaccinated and reducing coronavirus case counts. Unemployment and shutdowns will drag on the economy well into 2021, leading to weakening asset performance in certain SF transactions, particularly for subprime transactions and credits exposed to the travel and leisure sector. Fitch expects continued government support in many regions and extended lender payment-relief measures to help bridge the gap until economic activity picks up in 2H21.

Sectors that were hit hard by declines in travel and leisure volume will begin to recover with the lifting of travel restrictions, but will take some time to return to pre-pandemic performance. Hotel CMBS performance will receive a boost with the rollout of a vaccine, although property net cash flows face a steep recovery from the severe contractions. Travel and leisure spending recovery is also dependent upon household income and may be slow and fragmented if the vaccine rollout is disrupted.

ABS sectors with the largest exposure to the travel and leisure industries -- timeshare, rental car and aircraft -- will also benefit from pent-up demand as more people are vaccinated. Aircraft ABS rating actions will be driven by airline recovery, expected to continue through 2023-2024, and travel would need to pick up materially in 2021 to alleviate aircraft ABS rating pressure.

More certainty around the end of the pandemic will boost credit card spending and may reverse the recent trend of reduced balances. ABS sectors exposed to lower credit-quality consumers, namely subprime auto, retail credit card and student loans, may see weaker performance over the next few months before the economy improves. These sectors face worsening asset performance driven by high unemployment and reduced borrower ability to service debt, which may be mitigated somewhat by government assistance and lender payment-relief programs to cover the period before the vaccine is more widely available.

Vaccine availability is expected to significantly improve student housing CMBS performance in the fall. The vaccine will have a more muted effect on the recovery of some CMBS sectors that face longer-term challenges from secular behavioral changes. As a result of remote working, Fitch expects increasing cap rates and vacancies, resulting in lower valuations for office CMBS. E-commerce will endure beyond the pandemic, negatively affecting brick-and-mortar retail. Many B-class malls, affected by tenant bankruptcies, store closures and negative rent growth, will not see a significant rebound.

Home prices and mortgage performance will benefit from widespread vaccination but will be constrained in 1H21 by shutdowns and elevated unemployment. Additional government assistance will help borrowers struggling with payments until economic activity recovers, but failing this, forbearance plan extensions are likely. Lenders may be able to avoid loan modifications or foreclosures with a more assured economic recovery.

Certain leveraged loan issuers, namely gaming, leisure and entertainment and non-grocery retail companies, will see an improved operating environment as social distancing restrictions are removed, easing some pressure on CLO portfolio credit quality.

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