Fitch Puts Positive Spin on Structured Finance Market for 2011

A little good news for some corners of the commercial and residential real estate markets.  Fitch Ratings sees a stable scenario for the structured finance sector in the U.S. for 2011.

“With  the  economic  recovery slowly underway, U.S. structured finance will begin  to fully implement its ‘lessons learned’ and turn the corner towards stability next year, according to Fitch Ratings in its 2011 Outlook report.

From  a  new  issuance  perspective, 2011 will bring an increased amount of transactions that continue to employ a ‘back-to-basics’ approach, according to  Kevin  Duignan,  Group  Managing  Director  and head of U.S. structured finance  for  Fitch.

“New  structured  finance  deals  will  see continued improvement  in  loan  quality  and will be issued by higher credit quality sponsors employing less complex structures,” Duignan said in a Fitch news release.

The  sector best-positioned for positive performance next year is U.S. asset-backed securities (ABS), with  delinquency  and  loss  metrics  better  than they have been in years across  several  asset  classes.

“With  ABS  exhibiting  impressive rating stability  in  the  face of substantial recessionary headwinds, the outlook for the sector looks even better,” said Duignan.

The  picture, however,  gets  murkier  when  delving into mortgages. The inventory of specially  serviced  U.S.  CMBS  loans  remains  high,  though  the rate of transfers  has slowing.

Additionally, “liquidity is returning to the market which should help improve rating stability for CMBS in 2011,” said Duignan.

In  the U.S., residential mortgage backed securities (RMBS),  property  prices  are rebounding in many markets.  However, affidavit  issues  surrounding  judicial  foreclosure  processes  figure to increase   an  already-huge  shadow  inventory  of  distressed  and  unsold properties.

According to Duignan, “The foreclosure issues will cast further a pall on a housing recovery that was slow out of the gate to begin with.”

Lastly,  for one of the most negatively impacted sectors, the worst appears to  be  finally  over  for  U.S.  Structured  Credit.

“The picture for collateralized loan obligations (CLO) appears brightest in 2011,” said Duignan, given the declining default rates observed  in  the  high-yield sector.

However, structured finance collateralized debt obligations (CDO) with exposure to collateralized mortgage backed securities (CMBS) may see some marginal downgrades in 2011 due to pressure in  the  underlying CMBS sector, the Fitch executive said.

“Bank trust-preferred securities (TruPS) CDOs will continue to face, albeit slowing, deferrals and defaults,” Duignan said.  

Source:  RealEstateChannel


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