Oct. 21, 2020

Antonio Farina Winston ChangAndrew South James M ManziGlobal Structured Finance:

Credit Concerns Loom On COVID-19 Resurgence

Contents

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S&P Global Ratings acknowledges a high degree of uncertainty about the evolution of the coronavirus pandemic. The current consensus among health experts is that COVID-19 will remain a threat until a vaccine or effective treatment becomes widely available, which could be around mid-2021. We are using this assumption in assessing the economic and credit implications associated with the pandemic (see our research here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.

Slide

Key Takeaways 3

COVID-19’s Global Spread 4

Economic Conditions 5

Rating Actions 7

The Base-Case Scenario 8

ABS 9

CLOs 10

CMBS 12

RMBS 13

Latin America 15

Related Research 16

http://www.spglobal.com/ratings

Key Takeaways

– Economic activity rebounded strongly in the third quarter, though momentum has begun to fade and recovery will take time. Top global risks include extended containment measures and transition to post-COVID-19 policies as well as corporate solvency risk and new highs in government debt.

– As of Oct. 2, 2020, we have taken rating actions on 2,320 structured finance tranches globally due to the effects of the COVID-19 pandemic and the decline in oil and gas prices. Based on our current global economic forecasts, we expect the bulk of the cumulative negative rating actions to affect tranches rated 'BBB' and below.

– Following a period of rising delinquencies and/or extensions, the performance of prime auto ABS collateral around the globe appears to have improved during the past few months.

– The credit quality of loan portfolios backing CLOs is now stabilizing, although there have been widespread downgrades on speculative-grade tranches in U.S. transactions.

– Distress in the retail and lodging sectors has led to CMBS downgrades on both sides of the Atlantic. We continue to monitor the office and multifamily sectors for any potential signs of distress.

– Arrears rates in RMBS pools have recently improved, although some borrowers have benefitted from payment holidays and job support schemes, which are now coming to an end.

Daily COVID-19 New Cases, 7-Day Avg. Daily COVID-19 Death, 7-Day Avg.

COVID-19’s Global Spread | European New Cases Now At The Same Level As In The U.S.

4

Source: European Centre for Disease Prevention and Control. Data as of Oct. 1, 2020.

Source: European Centre for Disease Prevention and Control. Data as of Oct. 1, 2020.

0

50

100

150

200

250

300

350

400

Mar Apr May Jun Jul Aug Sep Oct

000s

EU Rest of Europe U.S.

Rest of Americas Rest of world

0

1

2

3

4

5

6

7

8

Mar Apr May Jun Jul Aug Sep Oct

000s

EU Rest of Europe U.S.

Rest of Americas Rest of world

Economic Conditions | Fiscal Policy Is The Key To Recovery

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– Many key economies fared better than expected in the third quarter as households stepped up spending in the U.S. and Europe, and the Chinese government ramped up infrastructure spending.

– Challenges are mostly fiscal and include protecting those hardest hit, keeping viable firms afloat, and facilitating necessary structural changes.

– It will take several more quarters before regaining pre-COVID-19 levels of activity. Even then, the path of economic output is likely to be lower than before the crisis.

– The balance of risks remains on the downside, reflecting insufficient support for the nexus of SMEs, the labor market, and premature fiscal tightening. Sources: S&P Global Economics and Oxford Economics. A Double-Digit Rebound Has Begun, But It’s

No Time To Celebrate, Oct. 6, 2020.

Global GDP Growth Forecasts, 2019-2022

(10)

(8)

(6)

(4)

(2)

0

2

4

6

8

U.S. Eurozone U.K. China Japan Australia Brazil

%

2019

2020

2021

2022

https://www.capitaliq.com/CIQDotNet/CreditResearch/SPResearch.aspx?DocumentId=46085635&From=SNP_CRS

Economic Conditions | Incorporating Economic And Business Expectations Into Our Analysis

6

– Since the onset of the pandemic, we have revised certain ABS and RMBS base-case assumptions across sectors and jurisdictions.

– We have introduced additional liquidity sensitivity analysis to reflect the risk due to support measures, which include payment suspension.

– In CLOs, forecasts of macroeconomic data are generally accounted for in the underlying obligor’s credit ratings.

– In CMBS, forecasts of macroeconomic data are considered primarily through the calibration of the property type specific cap rates.

Sources: S&P Global Ratings.

Increase In RMBS Base-Case Assumptions. Selected Countries

0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5%

Australia

New Zealand

Netherlands

Austria

Denmark

Finland

Germany

Sweden

Belgium

France

U.K.

Ireland

Norway

Portugal

Spain

U.S.

Previous foreclosure frequency Increase in foreclosure frequency

Rated Tranches That Have Experienced A Rating Action Related To COVID-19 As Of Oct. 2, 2020

Rating Actions | So Far, Most Rating Actions Are In North American CMBS, CLOs, And RMBS

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CWN--CreditWatch negative. CLO--Collateralized loan obligation. RMBS--Residential mortgage-backed securities. VRDO--Variable rate demand obligation. ABS--Asset-backed securities. CMBS--Commercial mortgage-backed securities. TOB--Tender option bond. NNN--Triple net lease ABS. Corp. Sec.--Corporate securitizations. Source: S&P Global Ratings.

The Base-Case Scenario | Expected Rating Actions Limited To Speculative-Grade Classes

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– Based on our current global economic forecasts, we expect the bulk of cumulative negative rating actions to affect traches rated 'BBB' and below.

– Areas of focus include CLOs, CMBS, certain ABS, some RMBS, and some Latin American structured finance sectors.

– These results are consistent with the results of the analysis that we undertook in May to estimate the impact of the pandemic (see: “COVID-19 Is Testing The Resilience Of Global Structured Finance,” published on May 18, 2020).

Expected Cumulative Performance Under A Base-Case Scenario

North America Europe Latin America Australia Japan Greater China

ABS

Credit cards and other consumer unsecured Moderate Low

Moderate Very low Very low Very low

Secured consumer (auto) Moderate Low

Whole business / corp. securitization Moderate Moderate

Other commercial ABS Moderate Moderate

RMBS Moderate Moderate Moderate Low Very low Very low

ABCP Very low Very low

Covered Bonds Very low

CLO Elevated Elevated

CMBS Elevated Elevated

Expected outcomes

Scenario Downgrades SG

Downgrades low IG

Defaults SG Downgrades high IG

Defaults low IG

Defaults high IG

Very low

Low X

Moderate X X

Elevated X X X X

High X X X X X

Very high X X X X X X

No ratings

IG--Investment grade. SG--Speculative grade. Source: S&P Global Ratings.

https://www.standardandpoors.com/pt_LA/delegate/getPDF?articleId=2439710&type=COMMENTS&subType=

U.S. Prime Auto Loan Extensions, Losses, Delinquencies Auto ABS 0-30 Day Arrears Rate Index

ABS | Prime Auto Extensions And Delinquencies Are Stable Or Improving

0.570.59

0.67

0.55

0.5

0.39

0.25

0.4 0.410.38 0.35

0.33

0.32

0.36

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0

1

2

3

4

5

6

7

Feb March April May June July August

%%

Prime ext (left scale) Prime losses (right scale)

Prime 60 day DQ (right scale)

9

0

1

2

3

Mar

-17

Jun

-17

Sep

-17

De

c-1

7

Mar

-18

Jun

-18

Sep

-18

De

c-1

8

Mar

-19

Jun

-19

Sep

-19

De

c-1

9

Mar

-20

Jun

-20

%

Germany U.K. Overall index

Source: S&P Global Ratings. Source: S&P Global Ratings.

CLOs | Tranche Downgrades Have Been Most Widespread On U.S. Speculative-Grade Tranches

0 10 20 30 40 50 60

AAA

AA

A

BBB

BB

B

CCC/CC

%

U.S. Europe

10

– Since March 1, we have lowered about 12% of our U.S. CLO ratings, compared with only 2% in European transactions.

– Most downgrades have been at the speculative-grade rating levels.

– U.S. CLOs were already showing some signs of credit deterioration before the onset of the COVID-19 pandemic.

– Compared with European transactions, they generally have greater exposure to more troubled industry sectors.

Shows the proportion of outstanding CLO ratings that have been lowered between March 1 and Sept. 30, 2020. Source: S&P Global Ratings.

CLO Downgrade Rate, By Rating Category

CLO Exposure To ‘CCC’ Category Corporate Obligors

CLO Exposure To Corporate Obligors On CreditWatch Negative

CLOs | Portfolio Credit Quality Deteriorated Initially, But Is Now Stabilizing

0

2

4

6

8

10

12

14

Mar Apr May Jun Jul Aug Sep Oct

%

U.S. Europe

11

0

2

4

6

8

10

12

14

Mar Apr May Jun Jul Aug Sep Oct

%

U.S. Europe

Estimates based on portfolios from latest available trustee reports, with ratings updated. Source: S&P Global Ratings.

Estimates based on portfolios from latest available trustee reports, with ratings updated. Source: S&P Global Ratings.

– Active management of the underlying loan portfolios has helped mitigate the decline in credit quality.

– That said, the trading out of distressed collateral has led to some erosion of par in CLO transactions.

U.S. Delinquencies Spiked And Have Since Levelled Off

Europe Has Seen Several Downgrades Over The Last Few Months

CMBS | Retail And Lodging Remain In Focus

0

10

20

30

40

50

60

0123456789

10

Jan

-17

Apr

-17

Jul-

17

Oct

-17

Jan

-18

Apr

-18

Jul-

18

Oct

-18

Jan

-19

Apr

-19

Jul-

19

Oct

-19

Jan

-20

Apr

-20

Jul-

20

Delin

quen

t balan

ce (bil. $)

%

DQ balance DQ rate

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DQ--Delinquency. Source: S&P Global Ratings. Source: S&P Global Ratings.

– Retail and lodging are the sectors hardest hit by the pandemic, and it remains uncertain how pandemic-related changes may affect the office and multifamily sectors.

– As of Oct. 2, in the U.S. this has resulted in about 200 downgrades among just over 2,500 rated classes (i.e., ~8%).

– Meanwhile, our surveillance of European CMBS since the COVID-19 outbreak has resulted in rating actions on approximately 20% of the transactions we rate.

0123456789

10

Apr

3A

pr 1

0A

pr 1

7A

pr 2

4M

ay 1

May

8M

ay 1

5M

ay 2

2M

ay 2

9Ju

n 5

Jun

12

Jun

19

Jun

26

Jul 3

Jul 1

0Ju

l 17

Jul 2

4Ju

l31

Aug

7A

ug 1

4A

ug 2

1A

ug 2

8S

ep 4

Sep

11

Sep

18

Sep

25

Oct

1

Num

ber

of

tran

ches

Default Multi-notch downgradeDowngrade CreditWatch negative

U.S. RMBS 30+ Days Arrears Rate, By Subsector European RMBS Total Arrears Rate

RMBS | Mortgage Arrears Rates Appear To Be Recovering, But May Be Distorted By Forbearance

0

5

10

15

20

25

Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20

%

Non-QM Prime 2.0 Credit risk transfer

13

0

2

4

6

8

10

12

14

16

0

1

2

3

4

5

6

7

8

Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20

%%

U.K. prime U.K. buy-to-let

Italian Dutch

Spanish U.K. nonconforming (right scale)

Non-QM—Non-qualified mortgages. Source: S&P Global Ratings. U.K. buy-to-let includes transactions with nonconforming collateral. Based on RMBS outstanding from February to September 2020. Source: S&P Global Ratings.

– For mortgage loans backing RMBS, reported arrears rose at the height of lockdown-related disruption.

– However, arrears trends in some countries are likely distorted by payment holiday programs, masking the true underlying credit pressures. Even borrowers who did not take payment holidays may see greater stress as job support schemes wind down.

RMBS | European Borrowers Have Taken Payment Holidays, Temporarily Supporting Performance

0% 10% 20% 30% 40%

U.K. nonconforming

U.K. BTL

U.K. prime

Portugal

Italy

Ireland

Spain

France

Netherlands

14

– Mortgage borrowers’ take up of payment holidays varied significantly between European countries and lenders, due to different eligibility criteria and application processes.

– Most RMBS transactions could cover several periods of bond payments, even with substantially reduced collections.

– As payment holiday and job support schemes wind down, credit pressures could rise among mortgage borrowers.

BTL--Buy-to-let. Responses may be based on assets backing transactions not rated by S&P Global Ratings. Source: RMBS servicers, S&P Global Ratings.

Peak Take Up Of Payment Holidays In European RMBS

60+ Days Delinquencies Are Decreasing In Brazilian Commercial ABS…

… And Losses In Mexican ABS Remain Well Below Our Median Base Case

Latin America | Holding Up Despite The Turbulence

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Source: S&P Global Ratings. BCL—Base-case loss. Source: S&P Global Ratings.

– Collateral performance has improved, but the economic environment in the region remains challenging.

– Further weakening in GDP growth and collateral performance could lead to negative rating actions.

0%

5%

10%

15%

20%

25%

FIDC Empírica Goal One Sifra Star FIDC

FIDC Multissetorial One7 LP

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

Average ABS equipment losses BCL median

Related Research

– A Double-Digit Rebound Has Begun, But It’s No Time To Celebrate, Oct. 6, 2020

– Global Credit Conditions Point To K-Shaped Recovery, Oct. 6, 2020

– COVID-19 Activity In Global Structured Finance As Of Sept. 18, 2020, Sept. 24, 2020

– U.S. And Canada Structured Finance Surveillance Chart Book, Aug. 20, 2020

– China Securitization Performance Watch 2Q 2020: The Worst May Have Passed, Aug. 11, 2020

– COVID-19 Update: Latin America Structured Finance Collateral Performance, Aug. 6, 2020

– Global Securitization 2020 Issuance Forecast Trimmed By A Quarter, Now At $830B, July 21, 2020

– EMEA Structured Finance Surveillance Chart Book, June 29, 2020

– COVID-19 Is Testing The Resilience Of Global Structured Finance, May 18, 2020

16

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Analytical Contacts

17

Winston ChangHead of Analytics & Research –Structured Finance

+ 1-212-438-8123

winston.chang@spglobal.com

Antonio Farina

Senior Director, Covered Bonds

+34- 91-788-7226

antonio.farina@spglobal.com

James M Manzi

Structured Finance Research

+ 1-434-529-2858

james.manzi@spglobal.com

Andrew SouthHead of Structured Finance Research - EMEA

+44-20-7176-3712

andrew.south@spglobal.com

mailto:winston.chang@spglobal.commailto:antonio.farina@spglobal.commailto:james.manzi@spglobal.commailto:andrew.south@spglobal.com

18

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Global Structured Finance: �Credit Concerns Loom On COVID-19 ResurgenceContentsKey TakeawaysCOVID-19’s Global Spread | European New Cases Now At The Same Level As In The U.S.Economic Conditions | Fiscal Policy Is The Key To Recovery Economic Conditions | Incorporating Economic And Business Expectations Into Our Analysis Rating Actions | So Far, Most Rating Actions Are In North American CMBS, CLOs, And RMBSThe Base-Case Scenario | Expected Rating Actions Limited To Speculative-Grade ClassesABS | Prime Auto Extensions And Delinquencies Are Stable Or ImprovingCLOs | Tranche Downgrades Have Been Most Widespread On U.S. Speculative-Grade TranchesCLOs | Portfolio Credit Quality Deteriorated Initially, But Is Now StabilizingCMBS | Retail And Lodging Remain In FocusRMBS | Mortgage Arrears Rates Appear To Be Recovering, But May Be Distorted By ForbearanceRMBS | European Borrowers Have Taken Payment Holidays, Temporarily Supporting PerformanceLatin America | Holding Up Despite The TurbulenceRelated ResearchAnalytical ContactsSlide Number 18