Fitch Ratings says that the deteriorating global macro-economic conditions are likely to affect the performance of many European structured finance sectors. However, the agency notes that it expects the majority of negative rating migration to be limited to the more junior classes of notes.

"Rising unemployment, falling house prices and decreasing access to finance are expected to have a marked impact on the ability of consumers to service and refinance their secured and unsecured debt, even if headline interest rates have fallen from their peaks," says Philip Walsh, Managing Director in Fitch's European Structured Finance team. "Falling asset values - from residential properties to auto residual values - will not only have a marked impact on consumers' propensity to default, but will also push up the extent of losses in the event of default across the board."

However, Walsh adds, "The subordination in most structural finance transactions is designed to absorb negative performance beyond the transaction base cases, and to protect the higher rated tranches. Consequently, any downward ratings actions will occur first at the most junior levels and only in cases of severe underperformance is this likely to extend to high investment grade notes."

In a report the agency notes that for European corporate and commercial property exposures, the same factors apply - limited access to funding; lower asset values; lower profitability; reduced ability to service debt and/or rent obligations; lower recovery rates and likely longer periods to recovery. Few, if any, sectors of the European structured finance market will be immune from these influences. As the downturn bites deeper into the economy, more corporate defaults can be expected, bringing further downgrades to corporate CDOs and introducing challenges to CMBS cash flow performance as tenant defaults rise.

The rapidly changing landscape is impacting, not just underlying assets' performance and transaction ratings, but has also resulted in a series of negative rating actions for the world's major banks over the course of the credit crisis. This introduces a further source of challenges to European structured finance performance, given extensive exposure in the sector to counterparty risks via hedge instruments, guaranteed investment contracts and other counterparty exposures.