Covid-19 will likely cause a paradigm shift for key credit risk components and drivers of the global structured finance market, altering the risk profile of many asset classes, Moody’s, a leading credit rating institution, said in a recent report.
Low long-term growth prospects are expected to undermine performance as the permanent scars from the severe Covid-19 shock will hurt collateral performance for structured finance transactions, according to the report.
Those scars include a long-lasting slowdown in growth in many countries, even lower productivity and an increase in long-term unemployment, according to the report.
The report also considered low interest rates as a high risk for countries as investors hunt for yields.
It added that although very low interest rates will help collateral performance amid weak economic growth across structured finance sectors, which will also benefit from favourable lending conditions, if low interest rates and weak risk differentiation among investors lead to a hunt for yields, the credit quality of new securitised debt will weaken, with riskier assets included in collateral pools.
Government intervention, such as payment or bankruptcy moratoriums, state-guaranteed emergency loans or other types of state aid, particularly in strategically important sectors, will be more likely in the future, according to the report.
It added that the increased potential for government intervention alters the risk profile of structured finance transactions in most asset classes via immediately beneficial effects, but it comes at the long-term cost of weakening debt affordability and increasing refinancing risk, a few years from now.
Given that Covid-19 has disrupted supply chains globally, the report expected that some corporate securitisations with high exposure to global export and/or global supply chains, such as small and medium-sized enterprise (SME) asset-backed securities (ABS) and equipment ABS will be affected negatively.
However, the disruption will benefit some commercial mortgage-backed securities (CMBS) and nonperforming loan (NPL) securitisations backed by commercial real estate in the logistics sector.
That said, the overall impact will be limited to a narrow range of asset classes and a subset of transactions, according to the report.
On the other hand, the report called for an accelerated adoption of disruptive technologies and new business practices for structured finance, including increasing use of e-commerce and eservicing, and further reinforcing pre-Covid-19 credit trends across structured finance asset classes.
“These trends will increase operational efficiency and transparency, but also heighten operational and cyber risks across the board, while eroding the credit quality of CMBS tied to the office sector and traditional retail in particular,” said the report.