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 Officer Group.
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 resilient.
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