Fitch says APAC structured finance outlooks mainly stable; negative in specific sectors

Wednesday, 24 November 2010 00:01 -     - {{hitsCtrl.values.hits}}

Fitch Ratings on Monday said most structured finance ratings in the Asia-Pacific region have a Stable Outlook. There are specific sectors where the agency continues to have Negative Outlooks on ratings.

“Despite the global financial crisis, over 80% of Fitch-rated structured finance (SF) ratings in Asia-Pacific remain Stable, meaning that the agency does not expect these ratings to change over the medium term,” said Alison Ho, Senior Director and Head of Performance Analytics within Fitch’s Asia-Pacific Structured Finance team. “The economic environment for CMBS in Japan and Australia continues to be a cause for concern, as evidenced by the high percentage of Negative Outlooks in that asset class in those regions,” adds Ho.

Approximately three-quarters of Outlooks on Fitch-rated Japanese SF ratings are Stable. The remaining Outlooks in this region are Negative, meaning that if current trends continue for a further 18-24 months, more downgrades may result. This is due to on-going concerns about the state of the Japanese commercial real estate sector. Property values remain under stress and rents in certain sectors have continued to fall. However, there are signs that liquidity in this market is starting to recover, with 165 properties sold in 2010 (as of end-September) — compared with 122 in the whole of 2009. Fitch is also of the opinion that the rate at which underlying loans default has peaked. More information on this was provided in a comment published on 18 October 2010 -- “Japanese CMBS Underlying Loan Defaults Reaching a Peak”.

Due to the structure of Japanese CMBS transactions, two tranches have a Positive outlook, as all loans backing the transactions in question have defaulted, and all proceeds are now being applied sequentially. It is also important to note that nearly one quarter of all Fitch-rated Japanese SF ratings do not have outlooks assigned as they are currently rated at ‘CCC’ or below.

Around 80% of Fitch-rated SF tranches backed by assets in Australia and New Zealand have Stable outlooks. Junior classes from Australian prime RMBS on Negative Outlooks — due to the counterparty risk associated with lenders’ mortgage insurance providers — account for the bulk of the remaining tranches and also the bulk of the remainder of Negative Outlooks in the Asia-Pacific. A number of non-conforming RMBS in both Australia and New Zealand also carry Negative Outlooks due to the weakness in the New Zealand economy and expected increased stress due to potential interest rate increases in Australia. All tranches in one Fitch-rated Australian CMBS remain on Negative Outlook, due to persistent concerns about the ability of loans maturing in December 2010 to refinance on schedule amid the current commercial property environment, rather than the performance of the underlying properties. One Australian non-conforming RMBS tranche has a Positive Outlook.

Most tranches of CDOs backed by Asian assets have a Stable Outlook. Less than half of the CDOs rated in the Asia-Pacific region have outlooks assigned due to the low ratings of the majority of synthetic arbitrage CDOs that reference global assets. Of those tranches that do have outlooks assigned, three quarters are on Stable Outlook, one has a Positive Outlook assigned and the rest have Negative Outlooks.

In the remainder of the Asia-Pacific, 98% of ratings have Stable Outlooks.

Downgrades in Asia-Pacific SF during Q310 were the highest since Q409, as further declines in Japanese commercial real estate values resulted in 28 downgrades during the quarter. As a result of these downgrades the upgrade:downgrade ratio for the region fell to its lowest since Q309.

As in Q210, three-quarters of the Japanese CMBS downgrades were to junior classes which are now at non-investment grade ratings. Market rents and values of properties backing affected transactions have continued to decline, resulting in lower expected recoveries which typically impacts more on lower rated classes of notes. Four ratings from two outstanding Japanese CMBS transactions were downgraded to ‘D’ during the quarter, as losses were crystallised.

Upgrades during the quarter were concentrated in one Australian non-conforming RMBS transaction which was restructured, resulting in the reimbursement of all note charge-offs.

The ratings of over 180 publicly rated APAC SF tranches were affirmed during the quarter.

Individual press releases relating to specific rating actions can be found on Fitch’s website at