Dec 19 - Fitch Ratings says that stress tests it conducted
across a range of structured finance (SF) asset classes globally shows that
Fitch's ratings would be resilient in the face of further stress.
The tests suggest that the extent of macroeconomic stress that would be required
to result in severe multiple category downgrades to its 'AAAsf' ratings is very
remote. In many instances, the severe scenarios assessed would require the
occurrence of previously unprecedented events, including sustained unemployment
levels which far exceed historical levels. The agency has published a summary
report which draws out the key analysis and conclusions from the various
sector-level stress tests that were conducted throughout 2012.
Fitch also tested moderate scenarios to assess the extent of macroeconomic
stress that would be expected to cause significant downgrades to lower
investment-grade ratings ('BBBsf'). The scenarios identified were generally
considered unlikely, but in some cases were within the range of downside
outcomes that Fitch considers plausible. Fitch believes the stress tests
conducted show that its SF ratings are consistent with its rating definitions
for the rating categories assessed.
Inevitably there are different margins of safety across the portfolio with
certain consumer transactions generally showing more stability in the face of
stress. "In the consumer ABS sector, where asset performance has been very
strong in recent years and transactions pay down rapidly, it would need
extraordinary levels of stress to materially break the 'BBBsf' ratings," says
Heather Dyke, Senior Director in Fitch's EMEA SF Credit Officer Group. However,
consumer transactions are not alone in this resilience. For example, for both
European and US CMBS, the circumstances that would be expected to result in the
severe 'AAAsf' downgrades are considered to be extremely remote. "For US CMBS,
the cash flow decline that would be required exceeds any post-war historical
recessionary period," adds Alla Sirotic, Senior Director in Fitch's US SF Credit
The report also notes that across asset classes and regions, the rating
performance of peak period 2006/2007 vintages would be expected to be relatively
worse due to their more adverse initial credit profile, combined with a lower
credit enhancement cushion that has been eroded due to credit losses to date.
Conversely, many pre-2006 pre-crisis transactions that have performed well
through the recent crisis would be expected to continue to be particularly
The stress tests are intended to be forward looking and assess the degree of
deviation from current macroeconomic stress that would be necessary to see
substantial rating downgrades. The aim of the tests was to create a relatively
consistent output in terms of rating migration across the different asset
classes and, by doing so, to test the relative resilience of the existing
portfolio of structured finance ratings.
Stress tests have so far been completed over 14 asset classes including, as
noted, US and EMEA CMBS, US Auto ABS, Global CLOs, the main EMEA RMBS sectors
and Australian RMBS. The full list and a link to each stress test are provided
in the report.
Link to Fitch Ratings' Report: Global Structured Finance Stress Testing