Fitch: Highest Global Structured Finance Upgrades Post-Crisis
In 2014 global structured finance upgrades exceeded downgrades for the first time since the financial crisis, Fitch Ratings says. Twelve percent of ratings improved while 7% were downgraded. The ‘AAAsf’ level exhibited the most stability, as almost 99% of ratings either remained the same or were paid in full. Ratings in the CMBS sector showed the most improvement year-over-year in 2014. The RMBS sector also saw upgrades, as the housing markets in the US and UK gained strength.
The number of CMBS downgrades decreased sharply, retreating to levels not seen since before the financial crisis. Fitch reported the ratings on pre-crisis transactions have begun to stabilize. A majority of the downgrades that occurred last year were legacy multiborrower deals in the US and Germany. In addition, European CMBS transactions have suffered as many loans have repaid and outstanding loans are backed by lower-quality collateral with weaker refinancing prospects.
In 2014, RMBS ratings improved for the second consecutive year. In Fitch’s view, the strength of the U.S. and UK residential markets and improvements in underlying collateral performance were the main drivers. In the U.S., most peak-vintage legacy RMBS sectors have seen steady performance improvement over the last several years, reflecting the recovery in the housing and job markets and positive selection among remaining borrowers. U.S. non-prime saw the most improved performance and received the majority of the U.S. RMBS upgrades in 2014. Fitch has a stable outlook for U.S. RMBS in 2015, reflecting moderate home price growth, and stable to improving collateral performance. EMEA RMBS also improved on the recovery in the housing markets and a rise in credit enhancement levels.
Asset-backed securities, the most resilient sector during the crisis, continued to be robust. Upgrades accounted for 8% of the rating actions, while downgrades represented just 3%. Consumer ABS ratings continued to be particularly stable. The majority of downgrades were from the tobacco sector, which was weighed down by non-settling states and ongoing underperformance relative to expectations.
The structured credit sector experienced the lowest level of credit deterioration in a decade, as upgrades outstripped downgrades by more than a 21 margin in 2014. Small and medium enterprise CDO transactions saw the most improvement, benefitting from the upwards revision of the sovereign-related cap on structured finance ratings in Spain and Italy.