Strong asset and property value trends, a tight labor market and continued recovery in economic activity will support asset performance for most U.S. structured finance sectors in 2022. At the same time, secular trends accelerated by the pandemic will continue to cause sectors dependent on travel and retail to lag in recovery, and expired payment relief programs could pressure vulnerable borrowers.
Fitch expects Structured Finance ratings will benefit from the strong asset performance, continued deleveraging and robust structural support.
Key areas to watch in 2022
Macro fundamentals and virus dynamics will drive asset performance
Employment and consumer sentiment will be a major factor for consumer related asset classes, as it will drive the ability of borrowers to pay. Low interest rates will continue to support asset performance, but any tightening in policy and sustained higher inflation could act as a drag on loan repayment and affordability. Asset performance will continue to be challenged in some sectors, particularly those still affected by the pandemic, namely commercial real estate and aircraft.
End of debt relief will result in additional pressure on asset performance
Expired forbearance and payment holidays in all sectors will put pressure on some borrowers’ ability to meet their obligations. The impact of the full withdrawal of pandemic support measures is still uncertain and could increase delinquencies and repossessions, leading to negative credit implications, particularly for lower credit quality borrowers. Loan modifications or other restructuring measures are expected to rise as support measures fade.
Elevated asset prices to cool off in 2H2022, leading to slowdown in upgrades
Pandemic-induced increases in asset prices will continue to support asset values and loan performance in the near-term. However, we expect asset price growth to slow down relative to 2021 levels as demand moderates and supply-side capacity increases over time. This will lead to fewer upgrades in some asset classes that have benefited from stronger than anticipated asset value growth. Growing regulatory pressure to mitigate the affordability issues and promote homeownership could keep demand high and provide upward pressure to home prices. Auto supply will continue to be constrained by the ongoing microchip shortage and production challenges, which are expected to last beyond 2022.
Proposed Federal legislation to reduce US SF LIBOR disruption risk
Proposed federal legislation is expected to minimize disruption risk related to the transition away from LIBOR for a substantial portion of the floating-rate US structured finance market. Remaining uncertainties relate to the timing and final form of the law, associated rules and potential litigation.
Secular trends accelerated by the pandemic are affecting asset outlooks
Shifting consumer behavior, remote working, e-commerce, increased production of electric vehicles and acceleration of technology through digitalization are changing market fundamentals and affecting asset performance outlooks. Secular shifts in retail are already driving higher loss expectations, while an expected decline in office occupancy will affect property-level cash flows in some markets and could have ripple effects on other sectors.
ESG issues to have an increasing relevance for credit rating analysis
The measurement of climate-related risks continues to grow in importance within structured finance portfolios, reflecting notable shifts in environmental and social priorities in the US. Additionally, as governments and regulatory bodies push for progressive climate-centric frameworks, we anticipate growth in green collateral such as CRE, residential mortgages and EVs, that will be available for inclusion in transactions.
CMBS
Fitch expects asset performance for retail and office properties to stay relatively stable in 2022 as property net cash flows continue to evolve related to secular shifts in online purchasing and remote working, respectively. Hotels, multifamily and industrial performance are improving as key hotel metrics recover, while multifamily continues to be supported by strong home price growth and high demand.
We are cautious on properties that are experiencing unsustainable positive performance caused by pandemic-related demands. Transactions with concentrations in pre-pandemic underperformers, primarily malls, may be subject to further downgrades if worse than expected property valuations occur. However, we have conservative valuations on these properties, which are reflected in current ratings. The pandemic-related evolution of office valuations will be largely realized beyond 2022 as long-term leases continue to support the near-term outlook. We expect ratings to be stable with fewer downgrades than the past twelve months.
RMBS
RMBS will benefit from improving asset performance across all product types as home price growth and a tight labor market will continue to support performance. Borrowers who needed a forbearance during the pandemic continue to cure and return to cash flowing status with many either fully reinstating, on a repayment plan, or deferring the missed amounts.
Tight housing supply remains the primary factor driving U.S. home price growth and we expect this dynamic to continue into 2022. Despite an easing of pandemic restrictions and offices reopening, a hybrid working model is expected to become a permanent trend. Supply is also coming under pressure from purchase activity among institutional investors. Fitch believes affordability will start affecting home sales and prices in 2022, especially if mortgage rates increase. We expect prices to decelerate but continue to grow by 5-7% based on industry consensus forecasts.
CLOs
Fitch expects asset performance for CLO portfolios to remain steady in 2022, continuing positive momentum observed in 2021. Credit quality in US broadly syndicated loan and middle market CLOs has been strengthening since mid-2020, supported by upward rating migration on leveraged loan issuers and a good operating environment.
Labor shortages, inflation, supply chain disruption, and the roll-back of fiscal stimulus are the most visible headwinds for corporate issuers at the moment, but their impact will vary across the leveraged loan universe. While some corporate borrowers may see their profit margins compressed, this is unlikely to materially change default levels in 2022. LIBOR transition will need attention, but is not expected to become a credit concern.
ABS
ABS performance will remain relatively flat in core sectors, such as auto and credit cards. The current low interest rate environment exhibited in 2021 continues to support consumers and asset performance, and this coupled with the pace of recovery in the unemployment landscape will further drive overall trends. This should help offset charge-off rates at a controlled pace in the short term.
Performance will depend on further macroeconomic recovery, particularly as federal aid and temporary relief programs have ended. Subprime auto, retail cards and student loans will remain more susceptible to performance volatility given general weaker borrower profiles. Timeshare ABS may experience some challenges in 2022 as the decline in travel and tourism continues to recover from impacts of the pandemic, although metrics continue to improve. Aviation will continue to be challenged as global and domestic travel and tourism still lags from the pandemic.
