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June 25 (The following statement was released by the rating agency)
Banks and other market participants are increasingly looking to securitise residential mortgage and small and medium-sized enterprise (SME) loan portfolios materially exposed to refinanced or restructured assets in Europe, Fitch Ratings says. The variety of loan restructurings means that if we were to rate such securitisation transactions our credit analysis of these assets would have to be supported by detailed data on their causes, terms, and outcome. We would also assess the servicer's expertise in managing restructured assets.
The enquiries we have received on potential deals mainly concern collateral in countries which have experienced sharp economic and/or housing market corrections since the credit crisis. Restructured or refinanced loan portfolios in Spain, for example, are estimated at EUR211.3bn at end-2013, equivalent to 15.3% of total lending to the private sector, of which around two-thirds are to SME or corporate borrowers and a third to individuals, mostly via residential mortgages.
We think the number of debt restructuring agreements in such countries will rise over the coming months, reflecting deleveraging by the banking sector and recent legislative initiatives. Spain's insolvency law has been modified, making pre-insolvency debt restructuring agreements easier. Legal and regulatory changes in Ireland have created incentives for mortgage lenders and borrowers to agree long-term alternative repayment arrangements.
We are closely monitoring market developments on restructured or refinanced loans that could be subject to a securitisation transaction or added to mortgage cover pools. We expect lenders to use a wider range of restructuring techniques in future, reflecting economic stabilisation and legal changes. These may include maturity extensions, principal balance forgiveness, payment in kind, and debt-to-equity transactions.
Seventy per cent of the restructured or refinanced exposure in Spain is classified as either substandard or doubtful by lenders. This supports our view that these assets are typically linked to weaker borrowers with potentially adverse credit history. Nevertheless, restructured loans are expected to have established a track record of payment under the restructured obligations. This is because any lender who has formalised a restructuring plan to a troubled borrower should have concluded that the changes would restore its financial or business viability.
The credit analysis of any of these portfolios within the context of a securitisation transaction would therefore have to be supported with a detailed, loan-by-loan dataset that describes the nature of restructuring terms, borrower circumstances before and after each restructuring, and the payment track record since origination date. We would also take into account redefault rates experienced by the lender following similar restructurings.
We would complement our quantitative analysis on restructured or refinanced loans with an assessment of the lender or portfolio buyer's strategy regarding restructurings and refinancings, and its ability to service such assets until their full repayment.