Fitch: Another Tough Year for Most U.S. Structured Finance Sectors

by: Research Recap

Though the U.S. economy is on a slow path to recovery, collateral performance will continue to be weak for all U.S. structured finance sectors next year, Fitch Ratings says in its 2010 outlook report.

Despite modestly weakening collateral performance, ABS ratings are expected to remain largely stable. Elsewhere, downgrades will likely continue in the RMBS, CMBS and CDO sectors, though at a slower pace.

U.S. Asset-Backed Securities

With unemployment to reach fresh highs by the middle of next year, collateral performance will continue to decline as chargeoffs escalate for credit card ABS. But by and large, U.S. ABS ratings will continue to be stable for both credit card and auto ABS.

Fitch’s ABS projections for 2010 are as follows:

  • Unemployment: 10.5% by mid-2010;
  • Credit card chargeoffs: 12%;
  • Annualized auto net losses: between 2% and 2.25%.

U.S. Commercial Mortgage-Backed Securities

Protracted illiquidity and refinance risk remain Fitch’s chief concerns for CMBS in 2010. Commercial real estate will also continue to lag the broader economy, with operating cash flows expected to decline across all property types over the next 18-24 months.

Losses will remain elevated for recent vintage CMBS, though ratings should remain stable since Fitch’s 3Q’09 prospective ratings review factored in steeper future performance declines over the next 18-24 months. Fitch is reviewing pre-2006 vintage CMBS and expects downgrades for these older vintages into 2010.

Fitch’s CMBS projections for 2010 are as follows:

  • Loan delinquencies: 6% by 1Q’10; 12% by end of 2012-
  • Pre-2006 vintage downgrades likely for bonds rated lower than ‘AAA’
  • Property performance: Declining for all property types

U.S. Residential Mortgage-Backed Securities

While temporary government support programs are providing some relief, it will not be enough to stem rising delinquencies and losses for RMBS in 2010.

Downgrades for RMBS will continue to outnumber upgrades, though they will not be as severe as in prior years. Another silver lining is the high recovery rates that Fitch is projecting for prime and Alt-A RMBS that have been downgraded to distressed levels (as highlighted below).

Fitch’s RMBS projections for 2010 are as follows:

  • National home prices: down an additional 10%
  • Modification re-defaults: 50% for Prime; 65-75% on Alt-A and subprims
  • Recovery rates for distressed prime RMBS: 95%
  • Recovery rates for distressed Alt-A RMBS: 80%
  • Recovery rates for distressed subprime RMBS: 50%

U.S. Collateralized Debt Obligations

Asset performance will continue to deteriorate for all major U.S. CDO sectors in 2010. While recently reviewed CDO notes that have retained high investment-grade ratings maintain sufficient cushion, lower rated classes will generally be more susceptible to negative rating actions.

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