Delinquencies for U.S. Commercial Real Estate Loan Collateralized Debt Obligations closed out 2009 with a two basis-point increase to 12.3%.
Accounting for previously delinquent loans written down or disposed of at a loss, the CREL CDO delinquency rate would have neared 15%, in line with Fitch’s expectation for year-end 2009.
A continued steady increase in delinquencies is likely for 2010, Fitch Senior Director Karen Trebach.
Fitch projects CREL CDO delinquencies to reach 25% by the end of the year.
The removal of 21 delinquent assets last month nearly offset the addition of 26 new delinquent assets, resulting in only a slight increase from the November total of 12.1%.
Realized losses continue to accumulate with approximately $80 million noted in the December reporting period. To date, total realized losses to CREL CDOs are approximately 4% of the fully-ramped collateral balance.
For details see Fitch CREL CDO Delinquency Index – As of December 2009. (Premium)
Technorati Tags: CDO, collateralized debt obligations, commercial-real-estate
Though the U.S. economy is on a slow path to recovery, collateral performance will continue to be weak for all U.S. structured finance sectors next year, Fitch Ratings says in its 2010 outlook report.
Despite modestly weakening collateral performance, ABS ratings are expected to remain largely stable. Elsewhere, downgrades will likely continue in the RMBS, CMBS and CDO sectors, though at a slower pace.
U.S. Asset-Backed Securities
With unemployment to reach fresh highs by the middle of next year, collateral performance will continue to decline as chargeoffs escalate for credit card ABS. But by and large, U.S. ABS ratings will continue to be stable for both credit card and auto ABS.
Fitch’s ABS projections for 2010 are as follows:
- Unemployment: 10.5% by mid-2010;
- Credit card chargeoffs: 12%;
- Annualized auto net losses: between 2% and 2.25%.
U.S. Commercial Mortgage-Backed Securities
Protracted illiquidity and refinance risk remain Fitch’s chief concerns for CMBS in 2010. Commercial real estate will also continue to lag the broader economy, with operating cash flows expected to decline across all property types over the next 18-24 months.
Losses will remain elevated for recent vintage CMBS, though ratings should remain stable since Fitch’s 3Q’09 prospective ratings review factored in steeper future performance declines over the next 18-24 months. Fitch is reviewing pre-2006 vintage CMBS and expects downgrades for these older vintages into 2010.
Fitch’s CMBS projections for 2010 are as follows:
- Loan delinquencies: 6% by 1Q’10; 12% by end of 2012; -
- Pre-2006 vintage downgrades likely for bonds rated lower than ‘AAA’;
- Property performance: Declining for all property types.
U.S. Residential Mortgage-Backed Securities
While temporary government support programs are providing some relief, it will not be enough to stem rising delinquencies and losses for RMBS in 2010.
Downgrades for RMBS will continue to outnumber upgrades, though they will not be as severe as in prior years. Another silver lining is the high recovery rates that Fitch is projecting for prime and Alt-A RMBS that have been downgraded to distressed levels (as highlighted below).
Fitch’s RMBS projections for 2010 are as follows:
- National home prices: down an additional 10%;
- Modification re-defaults: 50% for Prime; 65-75% on Alt-A and subprime;
- Recovery rates for distressed prime RMBS: 95%;
- Recovery rates for distressed Alt-A RMBS: 80%;
- Recovery rates for distressed subprime RMBS: 50%.
U.S. Collateralized Debt Obligations
Asset performance will continue to deteriorate for all major U.S. CDO sectors in 2010. While recently reviewed CDO notes that have retained high investment-grade ratings maintain sufficient cushion, lower rated classes will generally be more susceptible to negative rating actions.
Fre details see U.S. Structured Finance: 2010 Outlook (Premium)
Technorati Tags: ABS, CDO, CMBS, RMBS, structured-finance
Moody’s has launched a new weekly research report, “Structured Finance Ratings Quick Check,” accessible without charge to any registered user of its public website. This MS Excel workbook is intended to provide a summary view and intuitive means of navigating Moody’s current ratings, rating changes, other monitoring activity, and credit research for all sectors of structured finance globally. Sectors included are Residential and Commercial Mortgage-backed Securities, Asset-backed Securities, Asst-backed Commercial Paper, Covered Bonds and Derivatives (Collateralized Debt and Collateralized Loan Obligations).
The report, expected to be updated each Monday, has three categories of content: first, a thumbnail sketch of current rating and credit activity and reviews by sub-sector; second, a list and capsule summary of recent special comments, recurring reports and announcements, with a link to our compendium of methodologies; and third, transition tables for recent ratings changes. Much of the information is hyperlinked to the full research documents on moodys.com, some of which are restricted to subscribers of the research service.
The tool is designed to organize and summarize the high volume of Moody’s global structured finance rating and research activity in a way that improves its usability and provides some additional context and perspective. www.moodys.com/SFquickcheck
Technorati Tags: ABS, CDO, CLO, CMBS, Covered Bonds, derivatives, RMBS, structured-finance
Traditional non-mortgage consumer assets continue to dominate U.S. asset backed commercial paper (ABCP) programs, according to an analysis by Fitch Ratings.
Combined credit card, auto, and student loan exposures made up approximately 53% of the holdings in Fitch rated multiseller conduits at year-end 2008.
While Fitch expects the performance of consumer related assets to continue to deteriorate through the recession, the impact on ABCP conduits is expected to be limited.
Conduits have historically financed senior positions of consumer related transactions. Over the past two years, many conduit transactions have been restructured with higher levels of protection in the form of credit enhancement or other means of support. Taken with the availability of programwide credit enhancement facilities, these actions will help to insulate ABCP investors from consumer asset related performance concerns, Fitch says.
The most recent data shows the growth in consumer assets has come as exposures to residential mortgage and collateralized debt obligations (CDO) have fallen from their highs from previous points in the prior two years. Combined residential mortgage and CDO exposure made up close to 5% of Fitch rated multiseller conduits at year-end 2008, down from over 16% two years prior.
U.S. ABCP outstandings have declined more than 7% from year-end 2007 to year-end 2008 from $780 billion down to $724.5 billion. Overall exposures to non-mortgage consumer assets grew significantly during the period.
Fitch analyzed ABCP collateral pool compositions including exposures to residential mortgages as well as CDO and financial guarantors, and any other related counterparties. The analysis also included a Monte Carlo simulation analysis of multiseller and securities-backed programs if applicable.
For details see: U.S. Multiseller ABCP Ratings Remain Insulated From Consumer Credit Concerns.
Technorati Tags: ABCP, asset-backed-securities, CDO, collateralized debt obligations, residential mortgage-backed securities, 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.
Technorati Tags: CDO, CLO, corporate defaults, corporate-debt, derivatives, global recession, global-economy, structured-finance
Despite the collapse and discrediting of the structured finance market, CreditSights believes its importance to credit creation will ensure an eventual recovery, albeit in a substantially different form.
In Strategy Outlook: Structured Finance Part 1, CreditSights says the market has all but shut down owing to the collapse in real estate prices, the credit crisis and the resulting economic downturn. “Investor confidence in complex structures which suffer from too little liquidity, too little information and too little alignment of incentives for issuers and investors, has been decimated”
Despite the evident shortcomings of many of the structures that are currently inflicting losses on balance sheets across the globe, the tailoring of, and the dispersion of, risk that securitization offers is so key to the credit creation process that we believe its resurgence, in a different form, is guaranteed.
“We believe securitization is a key means of providing liquidity to the banking system and as such it will reemerge in the coming months. The final form that newly securitized structures will take is uncertain but there are characteristics that will be inherent in any reformation – transparent reporting and pricing, aligned incentives that are legally enforceable, and structural resilience.”
Technorati Tags: CDO, collateralized debt obligations, credit-markets, structured-finance
Fitch Ratings expects to see significant negative rating effects in 2009 across broad sectors of the US structured finance due to continued turbulence in the financial markets and a dramatic slowdown in the real economy. However, the high investment-grade ratings for seven of the 14 asset classes generally expected to have ratings stability.
Fitch anticipates that the ‘AAA’ through ‘A’ ratings on prime credit cards, prime autos, FFELP student loans, large loan, and multiborrower commercial mortgage transactions and investment-grade corporate collateralized debt obligations (CDOs), among others, will remain well insulated from the tumultuous conditions and have limited risk of downgrade actions.
In contrast, the ‘AAA’ through ‘A’ rated tranches for the remaining seven sectors, including all areas of residential mortgages, are more susceptible to downgrades due to continued substantial deterioration in collateral performance.
The ‘BBB’ and below rating categories in all of the sectors are at the greatest risk of downgrades given their positions in the capital structure and sensitivity to deteriorating macroeconomic conditions, Fitch said.
For details by sector see: 2009 U.S. Structured Finance Outlook.
Technorati Tags: asset-backed-securities, auto-loans, CDO, collateralized debt obligations, credit card debt, mortgage-backed-securities, RMBS, structured-finance, student-loans
Structured financial products linked to homebuilding and real estate continued to suffer more downgrades than upgrades in the third quarter and the outlook remains dim, according to a Standard & Poor’s quarterly report on rated global structured securities.
Both areas could experience additional stress if housing demand is further constrained by a deeper, more protracted recession and/or continued turmoil within the home lending industry. We will continue to closely monitor homebuilder cash positions and revolver availability, as liquidity remains critical to surviving this downturn.
Downgrades on residential mortgage-backed securities (RMBS) rose in the quarter ended Sept. 30 as monthly delinquencies and foreclosures on the underlying collateral increased, especially for transactions issued between 2005 and 2007, S & P said.
Commercial mortgage-backed securities (CMBS) also took a turn for the worse in the quarter, with four times as many rated CMBS sinking to speculative-grade status.
Among the other trends for the third quarter:
–Asset-backed securities (ABS) saw fewer downgrades in the third quarter, with S & P lowering its ratings on 119 ABS classes, down from a record-high 555 downgrades in the second quarter of 2008.
–Collateralized debt obligations (CDOs) were most negatively impacted by the September bankruptcy filing of Lehman Bros. Holdings Inc.
–Downgrades outnumbered upgrades by more than 4.7 to 1 in Europe, with CDOs accounting for the majority of the lowered ratings.
For details, see “Ratings Roundup: Third Quarter 2008 Global Structured Finance Trends.”
Technorati Tags: ABS, asset-backed-securities, CDO, CMBS, commercial mortgage-backed securities, commercial-real-estate, home sales, homebuilders, homebuilding, housing crisis, residential mortgage-backed securities, residential real estate, RMBS, structured-finance
The market for collateralized debt obligations is unlikely ever to fully recover from the credit crunch, no matter how much better the credit rating agencies get at assessing the risks of the complex structured finance derivatives, a new working paper* published by Harvard Business School argues.
Some practitioners believe that the credit crunch of 2007 and 2008 will work itself out, as such episodes tend to do, and the market for structured credit will return as before, the paper’s authors write.
We hold the more skeptical view that the market for structured credit appears to have serious structural problems that may be difficult to overcome.
“As we have explained, these claims are highly sensitive to the assumptions of (1) default probability and recovery value, (2) correlation of defaults, and (3) the relation between payoffs and the economic states that investors care about most. Beginning in late 2007 and continuing well into 2008, it became increasingly clear to investors in highly-rated structured products that each of these three key assumptions were systematically biased against them. These investors are now reluctant to invest in securities that they do not fully understand.”
The ability to create large quantities of AAA-rated securities from a given pool of underlying assets is likely to be forever diminished, as the rating process evolves to better account for parameter and model uncertainty, the authors write. “The key is recognizing that small errors that would not be costly in the single-name market, are significantly magnified by the collateralized debt obligation structure, and can be further magnified when CDOs are created from the tranches of other collateralized debt obligations, as was common in mortgage-backed securitizations. The good news is that this mistake can be fixed. For example, a Bayesian approach that explicitly acknowledges that parameters are uncertain would go a long way towards solving this problem. Of course, adopting a Bayesian perspective on parameter uncertainty will necessarily mean far less AAA-rated securities can be issued and therefore fewer opportunities to offer investors attractive yields.”
“Additionally, investors need to recognize the fundamental difference between single name and structured securities, when it comes to exposure to systematic risk. Unlike traditional corporate bonds, whose fortunes are primarily driven by firm-specific considerations, the performance of securities created by tranching large asset pools is strongly affected by the performance of the economy as a whole. In particular, senior structured finance claims have the features of economic catastrophe bonds, in that they are designed to default only in the event of extreme economic duress.”
Because credit ratings are silent regarding the state of the world in which default is likely to happen, they do not capture this exposure to systematic risks. The lack of consideration for these types of exposures reduces the usefulness of ratings, no matter how precise they are made to be.
*The Economics of Structured Finance by Joshua D. Coval (Harvard), Jakub Jurek (Princeton), Erik Stafford (Harvard).
Technorati Tags: CDO, collateralized debt obligations, credit-rating-agencies, mbs, mortgage-backed-securities, structured-finance
A survey of major bond market firms from mid-July to mid-August found that pessimism remains high in the industry and few participants see an end in sight to the downturn in global bond issuance, with structured debt hit hardest in 2008.
Standard & Poor’s Ratings Services commissioned the survey from Massachusetts-based Business Communication Strategies for 11 categories of bonds and five categories of structured finance.
Industry estimates of 2008 bond issuance remain very pessimistic and vary more widely than they usually do. In addition, bond market professionals seem very unsure about how low issuance is going and when it will turn around.
Among the findings of the survey:
- CDO, or collateralized debt obligation, issuance is expected to plunge 89 percent in 2008 after rising 1.1 percent in 2007.
- RMBS, or residential mortgage-backed securities, are down 90 percent in 2008, with respondents expecting little recovery through the end of the year.
- Corporate bond issuance is forecasted to decline through year-end, paced by an expected 43 percent drop in speculative-grade issuance.
- Credit card-backed securities could drop 6 percent in 2008, after surging 41 percent last year.
For details, see “Bond Market Professionals See Less Global Issuance in 2008.”
Technorati Tags: bond issuance, CDO, collateralized debt obligations, corporate-issuance, credit-crisis, credit-default-swaps, credit-markets, credit-outlook, residential mortgage-backed securities, RMBS, subprime-mortgage
