The asset performance of almost 90% of structured finance (SF) transactions globally have the high or moderate vulnerability to disruptions as a result of the coronavirus and containment efforts, according to a recent report by Fitch Ratings. The report categorizes each sector’s asset performance vulnerability to the effects of a temporary coronavirus disruption scenario, including travel restrictions, business and school closures, and a moratorium on large gatherings in major metropolitan areas in all countries around the globe.
Fitch’s assessment categorizes asset performance vulnerability as high, moderate or low. We assume for this risk ranking exercise that the disruptions will last one to three months, and that servicers and governments are likely to provide temporary payment relief to borrowers.
Fitch recognizes the growing risk of a more severe and sustained scenario and is currently analyzing the asset performance and rating implications of more protracted scenarios that will be explored in upcoming research and commentary.
We assign a high asset performance vulnerability assessment to the assets underlying SF transactions in China, Italy and South Korea. Our analysis assumes for China that the current measures will continue until their announced expiration date, and for Italy will be extended to last between one and three months in total. The high assessment also applies globally to aircraft ABS and CMBS loans secured by the hotel and retail properties.
The remaining Fitch-rated SF transactions are ranked as having moderate or low asset performance vulnerability. Most transactions have sufficient liquidity provisions in place that can support timely interest payments despite higher arrears and lower cash flow due to the temporary disruption. These provisions vary by region and asset class.
We do not see negative rating risk in sectors with a moderate or low asset vulnerability assessment as a direct result of a temporary disruption such as that described above. Subordinate ratings for SF transactions backed primarily by assets with a high vulnerability assessment will be more susceptible to negative rating pressure. The risk of negative rating actions will increase for all sectors in a more sustained or severe disruption.
Source: Fitch Ratings