New Risks Seen Emerging in Global Structured Finance
The three ratings agencies have all issued reports in the past week warning of heightening risk in corporate structured finance in Europe and the Asia-Pacific region as the global economy moves deeper into recession and expectations rise for corporate defaults.
The latest from Standard & Poor’s Credit Research warns of ratings risk on European cash flow collateralized loan obligations that invest primarily in loans made to investment-grade corporations. A high degree of overlap in CLO investment could exacerbate the trend.
During late 2008 and early 2009 the default rate among European corporate borrowers increased significantly and we expect this trend to continue through the rest of 2009… Based on a sample of 184 CLOs that we rate, the top 35 obligors each appear in more than half of the portfolios. If the credit risk of any of these obligors deteriorated—or if any defaulted—then the effect on CLO portfolios could be widespread.
Collateralized debt obligations in the Asia-Pacific region are mainly concentrated in corporate assets and the news there is also not good, according to Fitch Ratings. In a report on the region, Fitch assigns a “negative” outlook to synthetic corporate CDOs and notes that asset performance is declining.
The exception in the region is Japanese CDOs, Fitch says, which are more “seasoned” transactions concentrated in residential and commercial mortgage-backed securities. While these MBS could deteriorate, Fitch says the way the transactions are structured makes severe problems unlikely, thus its “stable” outlook for them.
For a detailed sector outlook for global CDOs and derivatives organized by each major deal type and geography, see Moody’s Investor Services’ “2009 Outlooks for Global CDOs and Derivatives.”
The main takeaway from Moody’s is a negative outlook for major asset classes of derivatives in the U.S., Asia-Pacific and Europe, Middle East and Africa regions, but with little further ratings actions needed after severe rating cuts in 2008:
The scenario to which Moody’s assigns the greatest probability for the next two years is the one of stagnation and de-leveraging…most of the rating levels are already low and are expected to be stable going forward despite the continuing challenging credit conditions.
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