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The Credit Outlook provides an overview of Fitch Ratings outlook across all rated sectors and regions, identifying the main macro factors that will drive credit trends over the next 12-24 months. It is published semi-annually.
Analysts
Monica Insoll +44 20 3530 1060 monica.insoll@fitchratings.com Mariarosa Verde +1 212 908 0791 mariarosa.verde@fitchratings.com Trevor Pitman (Regional Credit Officer EMEA and APAC) +44 20 3530 1059 trevor.pitman@fitchratings.com Eileen Fahey (Regional Credit Officer US) +1 312 368 5468 eileen.fahey@fitchratings.com
a
Sovereign Corporates
Financials
40 30 20 10 0
Q108
Q107
Q207
Q307
Q407
Q208
Q308
Q408
Q109
Q209
Q309
Q409
Q110
Q210
Q310
Q410
Q111
Q211
Q311
Q411
Q112
Q212
Q312
Q412
Q113
Source: Fitch
(Quarter/year)
www.fitchratings.com
17 July 2013
Q213
Sovereigns
Global sovereign ratings remain under downward pressure due to the eurozone crisis, high public- and private-sector debt levels, weak banking sectors, a difficult growth and economic policy environment and idiosyncratic EM political and other credit developments. In H113 there were 13 notches of downgrades of foreign-currency ratings, compared with 10 notches of upgrades. The ratio of Negative to Positive Outlooks is just under 3:1, signalling that further downgrades are likely, with ten developed-market (DM) names on Negative Outlook and none on Positive Outlook.
Figure 2 Figure 3
Rating Distribution
As at 30 Jun 2013
B 18%
40 35 30 25 20 15 10 5 0
BB 17%
A 11%
Q208
Q410
Q213
Q207
Q407
Q408
Q209
Q409
Q210
Q211
Q411
Q212
Q412
Source: Fitch
(Quarter/year)
There were also two recordings of a comparative rarity: the sovereign defaults of Jamaica and Cyprus (Local-Currency IDR). The trend of convergence in the ratings of DM and EM ratings is continuing, with the majority of the foreign-currency downgrades year to date taking place in DM and most of the upgrades in EM countries. This trend should continue in 2013 and 2014. Fitch Ratings expects global growth to gradually pick up in H213 and 2014-15 as the US gathers steam and the eurozone approaches a cyclical turning point. Its latest forecasts for world GDP growth are 2.4% in 2013, 3.1% in 2014% and 3.2% in 2015. However, forecasts are lower for many EMs owing to strains from spill-overs from advanced countries and China, more difficult policy trade-offs, a decline in credit growth, and structural bottlenecks. US Federal Reserve forward guidance on the timing of the tapering of quantitative easing (QE) and eventually raising interest rates precipitated a broad market sell-off and increase in volatility from the middle of May, even though the comments should not have been a great surprise and reflect more upbeat US growth prospects. Other major central banks, including the ECB and Bank of England have indicated that monetary tightening is distant, while the Bank of Japan plans to continue expanding its balance sheet aggressively. Nevertheless, US monetary policy has the greatest impact on global interest rates and risk appetite owing to the role of the US dollar as the pre-eminent reserve currency and main denomination for foreign-currency borrowing, as well as the size of the US capital markets. Key Risks
Eurozone crisis. Sharp slow-down in China. Tightening of US monetary policy, triggering more adverse financing conditions.
Fitch expects the prolonged and uncertain process of central bank exit from unprecedented QE and historically low interest rates to generate periodic bouts of market volatility.
Developed Markets
The eurozone crisis and related economic, fiscal, political and financial trends are continuing to drive negative rating actions. However, the intensity of the crisis eased in H113, despite recession, record unemployment, uncertainty following the Italian elections and the bail-out in Cyprus which led to bank failure, capital controls and a domestic debt default. Fitchs longstanding view is that a resolution of the crisis will require ongoing country-level fiscal and structural adjustment, greater progress towards a banking union and a broad-based economic recovery across the currency union.
Emerging Markets
The strong net upward momentum in EM sovereign ratings since 2010 has slowed as many face more challenging growth conditions and political pressures. Future EM rating changes are likely to be driven more by country-specific factors than global macro trends. Several large EMs are experiencing strains from spill-overs from advanced economies as well as China, difficult policy trade-offs, a declining impact from credit growth and structural bottlenecks. 2012-13 will see the second-weakest BRICs' growth (after 2009) since the Russian crisis in 1998. Fitch has reduced its 2013-2014 growth forecasts for all four of the BRIC nations, although forecasts for China remain high with projected growth of 7.5% in 2013 and 2014, followed by 7% in 2015 despite current challenges. In H113, the balance of EM upgrades and downgrades remained skewed slightly to the upside, with upgrades of Lithuania, Mexico, Thailand, Jamaica, Philippines and Uruguay the latter two to investment grade. Three-quarters of the J.P.Morgan Emerging-Market Bond Index (EMBI) is now rated investment grade by Fitch, up from one-third in 2008. But there were downgrades for Egypt, Jamaica and South Africa, as well as China local-currency ratings. The latter mainly reflects an increase in risks to financial stability related to rapid credit growth and size of the banking and shadow-banking sectors, as well as the increased indebtedness and contingent liabilities of local governments. So far in H213, Egypt was downgraded again following an intensification of political instability, while Mozambique and Latvia was upgraded, the latter after the decision that it will adopt the euro in January 2014. EM bonds, currencies and equities were hit disproportionately hard by the market reappraisal of US monetary policy, despite prior concerns over excessive capital inflows and strong exchange rates. Fitch does not anticipate widespread EM credit distress owing to a secular improvement in credit fundamentals, which reduces risks from tighter global liquidity, higher interest rates and FX risk. However, the Fed move adds to worries over slowing growth, Chinas financial stability, softer commodity prices and a series of political shocks. Prospective Fed tightening raises risks facing weaker EMs, such as those with large external financing needs and low foreign reserves, high levels of leverage, vulnerable debt structures, those that have seen strong inflows of hot money and bank credit growth, or have weak policy frameworks or credit fundamentals. The Feds early move may be for the better in the long term for EM by taking some froth off the top of the market, slowing the pace of hot money capital inflows, easing the pace of credit growth and preventing a misallocation of risk storing up greater problems further down the line.
Related Research
2013 Mid-Year Sovereign Review and Outlook (July 2013) Sovereign Data Comparator (June 2013) Global Economic Outlook (June 2013) Banking Union's Impact on Sovereigns (June 2013) Why Sovereigns Can Default on Local Currency Debt (May 2013) Ageing Costs: The Second Fiscal Crisis (January 2013)
Public Finance US
Figure 4 Figure 5
Rating Distribution
As at 30 Jun 2013
CCC & B BB 0.4% below 0.3% 2% AAA 13%
12 10 8 6 4 2 0
BBB 8%
A 26%
Q209
Q211
Q407
Q208
Q408
Q409
Q210
Q410
Q411
Q212
Q412
Q213
Key Risks
Rising employee healthcare, pension and other benefit related costs. A low growth economy. Negative economic effects following deep or accelerated federal deficit reduction.
Related Research
U.S. Public Finance Credit View: States (May 2013) U.S. College Tuition and Affordability (May 2013) Hospitals, Medicare,and Sequestration Cuts (March 2013) U.S. Public Power Peer Study (June 2013) Local Government Pension Analysis (April 2013)
Rating Distribution
As at 30 Jun 2013
B 6% BB 20% AAA 10% AA 16%
A 9%
Q407
Q212
Q213
Q207
Q208
Q408
Q209
Q409
Q210
Q410
Q211
Q411
Q412
Source: Fitch
Key Risks
A sovereign downgrade in France, Italy or Spain would lead to multiple downgrades. Weaker economic performance or austerity measures could lead to reduced financial flexibility and downgrades. Changes in methods of funding or increased responsibilities could result in downgrades.
Developed Markets
Almost half the portfolio of international public finance issuers with foreign-currency ratings remain on Negative Outlook despite some stabilisation in the most recent quarter. The majority of these Negative Outlooks reflect the Negative Outlook attached to the sovereign of the country in which the issuers are located mainly Italy or Spain. In the past year, numerous issuers in the A category, notably in Italy and Spain, have been downgraded, boosting the proportion of ratings in the BBB category. There could still be selective downgrades in these countries and possibly in France and Poland, as either the local economy weakens, expenditure rigidity increases or central government tightens its purse strings. Meanwhile, issuers in the BB category have grown , partly due to several new issuers having been assigned BB category ratings. Fitch has introduced a rating floor for regiona l issuers in Spain, currently set at BBB or one notch below the sovereign rating. Based on the creation of an emergency liquidity fund, giving issuers access to government funding, the agency believes that sovereign support would be forthcoming for selected Spanish entities at an investment-grade level of probability. Elsewhere in Europe there is mostly stability. In Germany, for example, a constitutional mechanism, obliging the sovereign and other Laender to support a Land in difficulties, underpins the AAA ratings of the Laender.
Related Research
French Regions Financial Monitor 2013 (June 2013) Group of Mexican States Rated by Fitch: Medians of Key Indicators (April 2013) Public Finance (EMEA) International Rating Criteria Hierarchy (April 2013) Russian Subnationals: Stable Performance Amid Increasing Centralisation (March 2013) The Credit Outlook July 2013
An increasing proportion (18%) of the portfolio is composed of specialised public-sector entities not directly supported by tax revenues, as distinct from local or regional governments. This reflects governments seeking to instil a more market-aware approach in their departments, agencies and subsidiaries; and to encourage markets to share more directly in the risks of certain government supported activities. Fitch expects this trend to intensify as these entities seek to reduce their dependence on sovereign or subnational governments for funding and expand their scope of action.
Financial Institutions
Outlook Trend
Risks are most pronounced in peripheral Europe. Globally capital and liquidity levels now provide healthy buffers to limit downside rating risk as earnings and asset quality remain under pressure. Support remains a key factor driving rating Outlooks and IDRs and sovereign rating volatility will flow through to bank ratings
Figure 8 Figure 9
Rating Distribution
As at 30 Jun 2013
CCC & B below 11% 1% BB 12% A 34% BBB 34% Source: Fitch AAA 1%
60
50 40 30 20
AA 7%
10
0
Q207
Q408
Q210
Q407
Q208
Q209
Q409
Q410
Q211
Q411
Q212
Q412
Source: Fitch
(Quarter/year)
Key Risks
Macroeconomic trends in developed markets remain weak (Europe), tepid (US) and driven by government programmes (Japan). Investor caution regarding reduced monetary stimulus will produce volatility in market pricing and funding access as evidence of firm economic growth remains elusive. Regulatory moves to establish resolution regimes that place more burden on financial stakeholders will continue to influence funding levels and the cost of capital. Increased restrictive regulation could promote movement of some core and profitable business activities from regulated banks to less supervised areas present in shadow banking.
Developed Europe
The level of banks carrying Negative Outlooks remains above historical norms. This is partly a result of roughly one-third of European banks having IDRs driven by the Support Rating Floor. Rating actions, including Outlook changes, at the sovereign level will remain a key variable in rating actions for many banks. Low economic growth, elevated levels of sovereign indebtedness and unemployment are pressure points for sovereign and bank ratings. These challenges slow bank progress toward establishing levels of profitability and asset quality seen prior to the crisis. More positively, the credit outlook for banks continues to improve at the fundamental level as they have built the level and quality of capital as well as creating improved liquidity cushions. The establishment of these financial buffers is providing improved operating flexibility and limiting the magnitude of any potential rating downgrades. The improvements are expected by Fitch to serve as a foundation for further improvement in bank funding profiles. Banks that have borrowed from the ECBs Long Term Refinancing Operation facility have reached the half -way point of its three year life. Some has been repaid, but the ability of these banks to borrow in the financial markets remains important in the next 18 months to enable the remainder of the LTRO to be repaid on time. Structural and regulatory reforms aimed at stabilising the financial system and removing taxpayer subsidies continue to progress to the benefit of bank credit profiles. The pace of reform is measured, in order to avoid unnecessarily disrupting banks progress in shoring up their financial profiles. Overall, the approach to bank support has been mixed. In Cyprus uninsured bank depositors were bailed in. Generally, subordinated debt has been subject to haircuts in order to recapitalise banks and therefore distressed bank situations are bringing clarity to creditors (junior creditors so far) and shareholders taking on the primary burden for absorbing losses. Continued greater clarity on resolution frameworks is expected as the EU Recovery and Resolution Directive moves toward a vote in late October. The ultimate impact of resolution frameworks on the cost of senior debt will be an important factor to determining expected levels of future profitability for European banks.
Related Research
Asset Quality: New IFRS Impact on CreditLoss Reserves (July 2013) U.S. Banks: Interest Rate Risks (What Happens When Rates Rise) (June 2013) EM Banking System Datawatch (June 2013) Global Quarterly Bank Rating Trends Q113 (May 2013) Peer Review: Global Trading and Universal Banks (Balance Sheets Stronger but Profitability Could be Improved) - Amended (May 2013)
Q213
Emerging Markets
The credit profiles of banks across emerging markets will be affected by how recent asset growth seasons and how future growth is managed. Broadly, economic conditions remain relatively stable and risk management should continue to help keep the level of developing problem assets at manageable levels. These dynamics can be seen at work in Brazil where sharper than expected economic deceleration following high asset growth is producing some downward pressure on bank performance. However, ratings (some recently upgraded to investment grade) are expected to hold as liquidity and capital buffers are proving resilient. Contrary to the situation in developed markets, a dozen sovereign ratings have been upgraded to investment grade (three being restored to investment grade) since the onset of the crisis. This has provided lift for support-driven IDRs, but more importantly highlights potential for a more favourable operating environment for banks, albeit still subject to periods of volatility. Credit trends in China are raising concern given the level of growth and the activity of shadow banking making system asset quality trends difficult to track. Outlook Trend
Stable outlooks dominate majority of markets. Negative sector outlooks continue in Taiwan, Italy and French Life.
Insurance
Greater economic stability in 2013 has steadied insurance companies financial strength, and especially those in EMEA, which is reflected by the decline in Negative Outlooks. Most insurers maintain moderate debt and have not been encouraged by low interest rates to issue disproportionate volumes of debt. Any upward movement in interest rates is therefore not expected to materially raise interest costs. In most major developed countries, the sovereign rating remains two or three notches above the highest-rated domestic insurer. In Spain, however, the highest-rated domestic insurer is at the same level as the sovereign, and in Italy and Japan as a result of international diversification at one notch higher than the sovereign, making it more likely that these ratings would move if the sovereign rating were downgraded.
Key Risks
Continuing low interest rates or significant spike of 500 bp or more (slow steady increase would be a positive). Potential reach for greater yield adding to asset risk. Sovereign downgrades or contagion.
Rating Distribution
All
NA
As at 30 Jun 2013
BB 3% BBB 33% B AAA 1% 0.5% AA 9%
Q208
Q209
Q412
Q207
Q407
Q408
Q409
Q210
Q410
Q211
Q411
Q212
Source: Fitch
(Quarter/year)
Q213
A 52%
Source: Fitch
Life
The greatest concern for life insurers is the risk of a prolonged low interest rate environment as asset rollover is putting pressure on interest margins. As a consequence, insurers are increasingly considering placing a small portion of investments in higher-yielding assets, including mortgage loans in the US and infrastructure and commercial real estate investments in Europe. Credit risks may increase, but in view of the small volumes and slight additional risk involved, should remain manageable over a short-term period. Heightened scrutiny of the use of captive reinsurers led by New York regulators, who highlighted the shadow insurance industry in a recent report, could spur some change in current financing and risk management practices.
Non-Life
More frequent and severe losses from catastrophes since 2011 have not depleted the reserves or earnings of reinsurers as much as might have been anticipated. Sound risk management has generally kept claims manageable, premiums remain at economic levels and investors in search of diversification and better yields have been willing to provide sufficient quantities of funding and capital at reasonable rates. The low interest rate environment is also impacting non-life insurers, but to a lesser extent than life insurers. Non-life insurers are seeing steady improvement in 2013 earnings.
Related Research
Workers Compensation Insurance Market Update (June 2013) Hurricane Season 2013 (A Desk Reference for Insurance Investors) (May 2013) 2012 Statutory Trends for U.S. Life Insurance Sector (May 2013) Property/Casualty Industry Statutory Results and Forecast (May 2013)
Corporates
Figure 12 Figure 13
Rating Distribution
As at 30 Jun 2013
CCC & below 2% AA 1%
30
20 10 0
B 16%
A 18%
BB 20%
Q208
Q209
Q412
Q207
Q407
Q408
Q409
Q210
Q410
Q211
Q411
Q212
Source: Fitch
Key Risks
Interest rate increases negatively affecting US and European HY bond markets. EMEA recession and disruptive market access.
North America
The outlook for US corporate credit quality continues to be favourable with a definite bias towards affirmations and upgrades outnumbering downgrades. Credit conditions in the US corporate market remain stable despite lacklustre first quarter GDP growth and profitability remains at very healthy levels. First-quarter earnings were largely within expectations, with shortfalls occurring predominantly in revenues rather than profits. Efficiency programmes and weaker commodity prices point to continued favourable margin performance, and headcount reductions remain commonplace. This should result in a stronger second half, but full-year expectations have moderated. Capital spending remains constrained due to lack of end-demand, with few sectors needing increased capacity. Longer-term overseas expansion plans in markets such as China and Brazil have also been restrained. Regulatory concerns remain prominent with US issuers as the implementation of the Affordable Care Act approaches, and climate change and tax reform remain on the political agenda. Although M&A activity was not as strong as expected in the first half, strategic acquisitions should pick up as the cost of capital remains attractive and topline growth remains slow. Shareholder-friendly actions continue to increase, particularly among investment-grade names.
EMEA
Fitch continues to rate EMEA corporates assuming anemic economic growth prospects, with most turnover growth above 2% to 3% attributable to issuers with EM exposure. Negative Outlooks are concentrated within the Italian, Portuguese and Spanish utility portfolio, reflecting weak domestic growth and energy demand), regulatory and fiscal interference, and structural changes in generation (renewables, nuclear). The recent market upheaval caused a pause in bond issuance. Lesser established lower quality credits may find even 8%-10% coupon debt harder to place as investors are more selective.
APAC
Related Research
Fitch 50 Europe (July 2013) Fitch 50 - Structural Profiles of 50 Leveraged U.S Credits (July 2013) US Corporate Bond Market: First-Quarter 2013 Rating and Issuance Activity (May 2013) Scenario: Effects of a European Lost Decade on Corporates (May 2013) Asia-Pacific Corporates: Financial Forecast Update (April 2013)
Speculation surrounding the scale of the Feds asset purchase programme will continue to drive sentiment in both equity and credit markets. However, Fitch expects longer-term asset price movements to reflect corporate fundamentals that cannot be obscured entirely by the flow of liquidity into the markets and a reach for yield by investors in a low-rate environment. Optimism about higher Chinese growth in early 2013, which saw a flood of cross-border corporate bond issuance in both investment grade and high yield (HY) averaging more than USD17bn a month, has been tempered by market reactions to potential US reductions in QE. Nonetheless, growth remains steady across the majority of countries within the region and is supportive of stable and improving corporate credit profiles in most sectors. Rating figures have
Q213
BBB 43%
High Yield
The threat of rising interest rates could provide headwinds to the US HY bond market and slow the pace of issuance from its record-setting start in 2013 (H113: USD150bn). The leveraged loan market (H113: USD610bn) seems less affected by the recent pullback as demand continues to outstrip supply. In the absence of a global shock, leveraged loan activity is expected to pick back up and spreads to tighten at some point in H213. Refinancing and repricing will probably continue to drive most new issues in the near term as issuers continue to lengthen their debt profiles. However, opportunistic financings could increase if spreads are attractive and demand for loans remains strong. European HY investors may increasingly focus more on fundamental credit quality than search for yield. Global liquidity has supported asset price performance, yet European growth remains anemic and several sectors continue to struggle with excess capacity and weak cash flow generation. Rising benchmark borrowing rates may pull global liquidity from this market. These prospects will probably hit aggressively priced BB as well as B credits exposed to excess capacity in their sectors that may also exhibit high leverage. New issuance in 2013 remains firmly on track to surpass the EUR65bn recorded in 2012 (H113: EUR60bn).
Outlook Trend
North American infrastructure largely stable with a negative outlook in the merchant power sector. Latin American infrastructure largely stable; latent demand outweighs potential slower economic growth. EMEA infrastructure largely stable in northern Europe but trending to negative in southern Europe. UK whole-business sector remains negative despite a few bright spots.
Rating Distribution
As at 30 Jun 2013
CCC & B below AAA 5% 2% 3%
(% of portfolio) 80 70 60 50 40 30 20 10 0
BB 8%
AA 20%
Q212
Q412
Q213
Q409
Q210
Q410
Q211
Q411
BBB 26%
A 36%
Source: Fitch
Key Risks
Continued slow growth in US and LatAm economies. Recession deepening and spreading in Europe. Government budget pressure destabilising cash flows in European projects.
EMEA
Slow growth and recession are having varied effects on European transportation. Size matters and outlooks are stable for international gateway and primary hub airports, large toll-road networks and ports with strong and diverse franchises. Negative outlooks are concentrated in smaller concessions, facilities in ramp-up, or assets exposed to the weaker economies in southern Europe. The prospects for energy infrastructure projects are varied. The outlook is negative for renewable energy projects in southern Europe exposed to the risk of tax increases and additional operating requirements that may reduce net revenues, as recently observed in Spain and Italy. Oil and gas project outlooks are stable as these continue to benefit from high selling prices and strong demand despite a sluggish international economy. Transmission networks for UK offshore windfarms have a stable outlook given supportive regulation and solid operating performance to date. The outlook for UK whole-business securitisations remains predominantly negative. Pub groups continue to suffer declines in rents and beer income as consumer habits change and
10
Related Research
Toll Road Network Peers Positioning (June 2013) Peer Review of U.S. Toll Roads, (May 2013) Peer Review of U.S. Ports (April 2013) Infra-Read: Semi-Annual Newsletter for the Infrastructure Sector (April 2013)
Structured Finance
Outlook Trend
Stable in the US as economic recovery gathers pace. Negative for the recession-mired eurozone periphery.
Figure 16 Figure 17
Rating Distribution
As at 30 Jun 2013
CCC 14% B 12% BB 9%
(% of portfolio) 70 60 50 40 30 20 10 0
AAA 26%
Q408
Q212
Q209
Q409
Q210
Q410
Q211
Q411
Q412
Q213
Source: Fitch
Key Risks
Market volatility blows US recovery off course. Persistent deepening recession in the eurozone.
US
The overall outlook for US structured finance ratings remains stable. Fitch also expects collateral asset performance to continue on a trend of either stability or gradual improvement in most sectors. While the US economic recovery has been shallow, it has nevertheless been sufficient to support a strengthening of credit performance across most sectors. This is expected to continue, although perhaps unevenly. Downside risks associated with macroeconomic, fiscal and monetary issues remain. Market volatility has also increased, as speculation regarding the timing of the inevitable winding down of the QE3 monetary stimulus grows. While shocks from these sources may affect the pace of economic growth and cause periodic market turbulence, we do not expect their magnitude to be sizeable enough to significantly impact ratings.
ABS
In auto ABS the outlook remains stable for performance of prime assets and positive for ratings, and stable for subprime asset performance and ratings. Asset quality metrics in auto ABS have begun to weaken slightly but Fitch believes this represents a return to more long-term sustainable levels, and base-case loss assumptions and positive rating momentum should not be materially affected. In the credit card ABS sector, continued rating stability is expected, with continued declines in personal bankruptcy filings being positive for performance, and reflecting improvement in consumer quality, as economic growth supports a slowly falling unemployment
The Credit Outlook July 2013
11
CMBS
The outlooks for CMBS asset performance and ratings are generally stable. Property market fundamentals are expected to continue the improving trend underway since 2010, benefiting from economic growth coupled with limited new supply resulting from low construction. The multifamily and hotel sectors in particular have recovered strongly, and income levels for such properties in many markets have reached and even surpassed pre-recession peaks. The sustainability of trailing-twelve month income is being carefully scrutinised in these sectors, especially where higher income levels have attracted new construction in stronger markets. Recovery of office properties has been strong among class A assets in core urban markets, but uneven elsewhere. Retail has seen a slight improvement overall, but property-specific trends vary widely, with some very high loss severities on properties in challenged areas or with idiosyncratic issues. Rating stability will continue to be greater for investment-grade classes, as lower-rated bonds still have some vulnerability to idiosyncratic losses on individual properties.
RMBS
An improving housing market and relatively stable macro environment have supported improvement in asset performance metrics in most legacy RMBS. Fitch expects the trend of increased rating stability in this sector to continue, although positive rating pressure will be limited in the near term. Pre-crisis RMBS securities will continue to face a number of challenges. Increases in house prices have outpaced the improvement in economic fundamentals in many areas, and in some cases reflect more technical factors such as limited supply and/or investor-driven demand. Furthermore, improvement in asset performance has not been uniform across sectors and vintages, as pre-2005 prime transactions continue to see performance deterioration from the effects of adverse selection. Asset quality for transactions issued since 2009 remains exceptionally strong with very strong performance supported by low LTVs, full documentation and solid credit enhancement reserves.
Structured Credit
Fitch expects CLO collateral performance trends and ratings to remain stable, as these transactions continue to benefit from historically low levels of HY defaults coupled with ongoing deleveraging of their capital structures. Ratings of structured-finance CDOs are also expected to remain stable as many have already accumulated enough credit enhancement to provide a buffer against limited downgrades to their collateral assets, and the performance trends of the latter are now generally stabilising or improving.
EMEA
Related Research
Fitch Voice: Structured Finance (April 2013) US RMBS 3Q12 Sustainable Home Price Projection (April 2013) US CMBS Loss Study: 2012 (April 2013) US CMBS 2012 Loan Default Study (April 2013) Student Loan ABS and the College Tuition Bubble (July 2013) SME Market Review: UK (June 2013) SME Market Review: Spain (June 2013) Covered Bonds Surveillance Snapshot (April 2013)
The continuing recession in the eurozone is resulting in persistently high unemployment in a number of countries. Combined with fiscal austerity and tightening of credit terms, this will pose a challenge for the performance of securitised assets, especially in peripheral Europe. Price declines and liquidity issues that are affecting residential and commercial property markets are expected to put further pressure on transactions whose performance is closely related to cash flows from property sales or refinancing. The macroeconomic environment is unlikely to improve sufficiently in the next 6-12 months to moderate the sovereign-linked maximum ratings currently applied to Spanish, Portuguese, Irish, Greek and most recently Italian transactions. For France and the Netherlands only downgrades of several categories would result in caps on ratings below AAAsf.
12
ABS
The asset performance outlook for consumer ABS remains broadly stable. Jurisdictions such as Germany and the UK have more positive outlooks, where default and delinquency levels have consistently outperformed our base case expectations. Even in economies that have suffered greater stress, such as Spain, asset performance now appears more stable. Defaults and delinquencies in Spain remain at high levels compared to other countries but are no longer deteriorating. There is a greater risk of deterioration in asset performance in Italy and France as delinquencies have previously been relatively low and economic strains are increasing. Across ABS, the majority of negative rating Outlooks reflect ratings capped by, or linked to, sovereign ratings. Indeed, the only negative Outlooks for Spain relate to the sovereigns negative Outlook. Negative Outlooks for asset performance are most prevalent in Italian ABS.
RMBS
Similarly, the asset performance outlook for RMBS is also in large part driven by unemployment and disposable income trends, mitigated for more recent transactions by stricter post-crisis underwriting. Asset performance is supported by exceptionally low and stable base interest rates, which have improved loan affordability. While an increase in base interest rates would be negative for performance, rating outlooks assume continued low rates for the next two years. Despite low base rates, the availability and terms associated with new mortgage debt continue to deter or exclude potential purchasers. Very low property market liquidity and falling property values have depressed loan recovery prospects and extended recovery times generally, but especially in distressed markets (Greece, Ireland and Spain). Further pressure could come from more extensive government intervention (payment holidays, restrictions on foreclosures, forced debt forgiveness), which is already a factor in Ireland, Greece, Spain and Italy. Rating Outlooks vary by country with expectations of deterioration in the peripheral eurozone, but with stability generally expected elsewhere.
CMBS
Refinancing risk continues to be the main factor driving the largely negative Outlooks. New credit availability for commercial property will remain low, focused on top-quality assets. Financing is expected to gradually shift from bank to non-bank provision (senior debt funds, insurance companies). With legal bond maturities totalling EUR3.1bn until the end of 2015, then EUR5.0bn in 2016 and peaking at EUR10.4bn in 2017, servicers may be forced to liquidate collateral on unfavourable terms with low recoveries, especially for transactions backed by non-prime assets. These pressures are already reflected in ratings, with Stable Outlooks for transactions backed by prime properties and a mixture of stable and negative for non-prime assets.
Structured Credit
Lending constraints are also a major concern for leveraged loan CLOs, where traditional banking and structured finance-related funding sources have dried up. Over the past two years, these transactions have seen the refinancing wall reduced and pushed back thanks to intense amend and extend activity. The return of the European CLO, albeit on a limited basis, should provide a financing exit for some credits, notably those that cannot tap other means of financing. Nonetheless, a portion of underlying obligors are likely to default and recoveries will be lower due to the cyclical and highly leveraged nature of those obligors. Outlooks are stable on the most senior classes and stable to negative on the mezzanine and junior classes. The Outlooks for SME CLOs is stable, as Fitch anticipates that asset performance deterioration affecting Spanish, Italian and Portuguese transactions will be offset by high levels of credit enhancement and amortisation. In these countries, the prolonged recession and property market downturn will lead to further rises in arrears and falls in recovery rates.
The Credit Outlook July 2013
13
14
15
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