Unemployment Continues to Weigh on Some Structured Finance Sectors in Europe
CDOs, CMBS and Spanish consumer and RMBS transactions most at risk of downgrade.
Fitch Ratings says today that while the tentative global macro-economic recovery is positive for the European structured finance sector, unemployment is still rising in many European countries and therefore scope for deterioration in European structured finance asset performance remains.
“It is too early for Fitch to change its overall negative rating sentiment for European structured finance,” says Philip Walsh, Managing Director in the EMEA structured finance team at Fitch Ratings. “However, as we have seen so far in the recession, rating downgrades are likely to be focused on junior tranches. The main exceptions to this have been CMBS and Structured Credit where downgrades across the rating spectrum have been more common.”
The rating Outlook is Negative for all classes of CDO, reflecting the drag that macro-economic conditions are exerting on the various types of reference entities in CDO portfolios.
Fitch expects Spanish RMBS to remain under pressure over the next 12-24 months due to the ongoing correction in the housing market, tighter credit conditions and the sharp increase in unemployment. While these factors will continue to drive higher arrears and defaults across portfolios, the agency believes that RMBS transactions backed by recent vintage collateral (post-2005) and higher risk attributes remain the most vulnerable in the downturn.
The UK has suffered the most significant reduction in commercial real estate values out of the main European markets funded by CMBS. Investor sentiment towards UK commercial property has improved recently, however, due to comparatively attractive yields, especially relative to other asset classes. Prime yields have rebounded quite quickly causing a surge in property returns during the fourth quarter 2009, although it has been limited to prime assets. Refinance risk continues to loom on existing transactions across Europe, including the UK, and could cause further ratings declines on specific portfolios.
For details see EMEA Structured Finance Sector Outlook – January 2010. (Premium)
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