A report by Moody’s Investors Service into the effects of coronavirus on European consumer securitisations has found that, due to the stalling of the housing market, rising unemployment and reduced household incomes, asset-backed securities (ABS) and residential mortgage-backed securities (RMBS) performance will weaken.
The expected contraction in GDP following the weakening of RMBS performance from a strong base will translate into house price deterioration.
This in turn will place borrowers in particularly sensitive sectors, such as non-conforming and re-performing, under greater financial stress.
Consumer ABS will be the first area to experience performance deterioration, while unsecured lending, such as credit card receivables and unsecured consumer loans, will be the most heavily affected by elements such as increasing unemployment and reduced household incomes.
Disruptions will also adversely affect auto manufacturers and are credit negative for auto-ABS.
Moody’s reported that government support measures, such as mortgage payment holidays, would serve as temporary mitigants for both household finances and the wider economy, and would partly support securitisation asset performance.
However, this is only in the short-term; ultimately, cash flows within deals will decrease, potentially exposing some mezzanine and junior tranches to liquidity disruptions.
Delinquency-based transaction triggers will also lose their effectiveness.
All of the rating agency’s collateral forecasts for European consumer securitisations have been changed from largely stable to negative.
Rodrigo Conde, AVP-analyst at Moody’s, said: “The degree of weakening in deal performance will depend on the sharpness and length of the recession and transactions’ exposure to borrowers with increased likelihood of disrupted incomes, such as self-employed and contract workers.”
