Following a tumultuous and in many ways unprecedented 2020, next year is expected to represent a time of stabilization, at least in the realm of structured finance. Fitch Ratings says U.S. and Canadian structured finance asset and ratings performance is expected to stabilize in 2021 for most sectors “as the U.S. economy recovers from the shock of the coronavirus pandemic.”
A few asset classes are predicted to see worsening asset performance, leading to negative rating pressure as government support schemes and payment relief programs decline and consumers and businesses continue to be challenged by elevated unemployment and accelerated secular shifts within certain sectors. “Robust initial credit enhancement and the deleveraging of seasoned transactions are also key support factors in the rating outlook,” according to Fitch.
Looking at CMBS, Fitch says the “stable” rating outlook considers a mixed asset performance outlook. That translated into a stable outlook for multifamily properties, an improving outlook for hotels as property net cash flows recover from severe contractions, and worsening outlook for retail and office asset performance due to accelerating store closures and tenant bankruptcies for retail and negative rent growth and increasing cap rates for office.
For RMBS, the stable rating outlook considers a stable asset performance outlook and positive home price growth in 2021. Fitch expects additional stimulus to be passed; otherwise, forbearance plan extensions are likely and could keep delinquency rates elevated.
For CLOs, the stable rating outlook reflects robust credit protection and structural mitigants to a worsening asset performance outlook, one that acknowledges “a difficult operating environment for certain leveraged loan issuers due to the pandemic.”
For ABS, Fitch’s stable rating outlook considers a mixed performance outlook with stable performance outlook for prime auto, prime credit card and equipment lease, and worsening asset performance for subprime auto, retail credit card and student loan consumer credits. Similarly, Fitch sees the asset performance outlook for timeshare, aircraft and rental car worsening “as these sectors will continue to be pressured due to low travel demand.”
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