"Deteriorating credit fundamentals and the onset of a recession in the US have caused consumers to cutback on spending, with credit access for both financial institutions and households significantly constrained," says Glenn Costello, Managing Director and US SF Risk Officer at Fitch. "This is against the backdrop of continued home price declines across the US, but especially in sub-prime concentrated areas like California and Florida. Recent vintage sub-prime and Alt-A RMBS transactions represented a large proportion of downgrades in the quarter, with revised surveillance criteria being adopted. Credit and liquidity issues have also spread to the US CMBS sector with increased downgrades resulting from rising defaults and heightened expected losses on assets in special servicing, resulting largely from limited refinancing options".
The backdrop is similar in EMEA markets, especially in the UK and Spain.
"The UK has now seen a decline in residential property prices of over 15% from peak to current trough and this is feeding through to higher loss severities on defaulted loans in RMBS transactions, particularly in the non-conforming sector which saw the bulk of RMBS downgrades during the quarter. Spanish RMBS and SME CDO transactions also saw heightened downgrade rating actions - especially amongst high loan to value and specialist lender RMBS and SME CDOs with particular exposures to real estate and construction, where recession in Spain has hit especially hard," says Stuart Jennings, Managing Director and EMEA SF Risk Officer at Fitch. "The general decline in commercial property values is the main reason behind downgrade rating actions in EMEA CMBS. Many downgrades were concentrated amongst City of London office transactions, where reported value declines have been in excess of 30% in some cases. While rental income remains fairly stable, more loans are expected to face financial difficulty as the recession deepens."
In the global CDO sector, the conclusion of the rating review following implementation of Fitch's revised corporate CDO criteria saw a large number of downgrades amongst investment grade corporate CDOs as Rating Watches were resolved during the quarter. Following the application of the new criteria to Fitch's portfolio of corporate CDOs, the cluster of credit events in September and October had a muted impact on ratings. 97% of 'AAA' corporate CDO tranches remained 'AAA' following the credit events. Of the ratings in the 'AA' category, 73% remained in the 'AA' category, only 12% were downgraded beyond 'A' and all remained investment grade.
"CDO rating actions formed the vast majority of the negative rating actions seen in the APAC region during the quarter. Elsewhere rating actions were also seen amongst Australian RMBS - mostly due to resolution of rating watches following changes to the financial strength ratings of two mortgage insurance companies. The CMBS sector also saw downgrades to some Japanese and Australian transactions for transaction-specific reasons, including the failure to replace Lehman Brothers as a counterparty in two cases," says Alison Ho, Director and head of SF surveillance in the APAC region.
