Structured Finance (SF) asset performance continues to be weaker in 2024 relative to 2023 with a slowdown in economic and labor market growth, Fitch Ratings says. Nevertheless, Fitch expects arrears and defaults to remain low in absolute terms for most asset classes, supported by rate cuts, and ratings performance to remain strong across most SF sectors, with the exception of CMBS. Fitch’s latest Global Structured Finance Credit Forecast 2024 Q4 report summarizes asset performance forecasts and ratings trends for core SF sectors.
CMBS delinquencies are expected to rise more modestly through 2025, tempered by new issuance activity and slightly improved loan refinancing prospects, aided by rate cuts. However, maturity defaults will persist due to macroeconomic challenges and maturing loans with below-market mortgage rates. Office delinquencies are projected to surge past the post-GFC peak by 2025, driven by reduced liquidity and refinancing challenges for non-trophy assets with high capex and leasing costs.
Global SF upgrades outnumbered downgrades by almost 3x, 2,318 to 806 through mid-September, driven primarily by 1,506 upgrades in North American (NA) RMBS. This was attributable to improved borrower performance, ongoing paydowns, and the revised treatment of interest deferrals under the Global SF Rating Criteria earlier this year. Downgrades were highest in CMBS at 544, mostly NA CMBS rated ‘BBBsf’ or lower with office property and mall exposure.
Ratings remain well-positioned globally, with the vast majority of ratings having a Stable Outlook. Roughly 5% of SF ratings are on Outlook Negative, with the largest proportion (83%) in NA CMBS. The percentage of ratings on Outlook Positive is 6%, with roughly 82% of these ratings in NA RMBS, followed by 5% in NA ABS and 4% in EMEA ABS, reflecting continued credit enhancement build-up and deleveraging in those portfolios.
Since the last update in July, Fitch has revised its 2024 asset performance outlook for China Auto ABS to ‘deteriorating’ from ‘neutral’ on shifts in loan characteristics to higher loan-to-value and longer tenors following relaxation of regulation since April 2024. All other 2024 asset performance outlooks remain unchanged from the previous quarter. There are slightly more ‘deteriorating’ SF sector asset performance outlooks, 37, reflecting the impact of elevated rates, compared with 34 sectors with a 'neutral' asset performance outlook.
In EMEA, interest rate cuts, rising real wages, and easing credit conditions are anticipated to support RMBS, credit card and unsecured consumer loan performance, although elevated arrears likely to persist through the end of 2024.
Fitch projects rising unemployment in the U.S. in over the next two years, with a slight increase in U.S. RMBS mortgage arrears, particularly within the non-prime segment, as well as higher subprime auto loan delinquencies. Latin America shows improved economic growth and stable unemployment rates, which ease mortgage pressures.
Weakening GDP growth, rising unemployment and recent regulatory changes in China will likely result in deteriorating mortgage and auto loan performance. In Australia, delayed interest rate cuts until 2025, persistent inflation, potential higher unemployment, and declining property prices may lead to higher arrears and defaults, especially within high-risk borrower portfolios.
Fitch revised its 2024 U.S. leveraged loan (LL) default rate forecast up to 5.0%-5.5% from 3.5%-4.0%, but CLO rating cushions are expected to mitigate the effect of declining asset performance for most CLO notes on ratings. Fitch is projecting EMEA LL default rates of 4% this year, which could move higher refinancing if interest rates remain high.