Latin America remains in quarantine in response the COVID-19 outbreak. Containment measures across the region continue to rely on lockdowns that limit movement and restrict business activity to essential services. Welfare support in the region is not robust, and therefore the impact of a prolonged lockdown on consumers could be severe. In addition, in Argentina and Mexico, any policy response to support business has been limited. Therefore, small and medium enterprises (SMEs) in those countries face very challenging conditions.
- In Latin America, the COVID-19-related shutdown is in full swing, and economic activity has decreased accordingly.
- Since our last report, we've identified an additional risk factor for Latin American securitizations: an increased concentration in transactions supported by trade receivables.
- Several entities have proposed amendments to rated transactions' terms and conditions, which we are reviewing carefully.
Below are the eight key COVID-19-related risk factors that we've identified for Latin American securitizations. We added one of them--an increased concentration in transactions supported by trade receivables--since our last update.
Liquidity. We continue to monitor the liquidity of structured finance transactions very closely, with special attention to payment reserves, expected debt service (including expenses) during the next three to six months, deferability clauses, and events of default. So far, we believe that performance in March was close to pre-COVID-19 expectations. However, based on feedback from servicers, we expect collateral performance to weaken in April and May.
Persistent deterioration of collateral performance. The pandemic has let to sharp revisions in our economic growth and unemployment forecasts for the region. As a result, we are determining if this will lead to long-term deterioration of collateral performance. This could result in a revision of our base-case loss assumptions across ABS and our foreclosure frequency assumptions in RMBS.
Government or servicer-relief programs. Due to the sudden stop in economic activity, some governments and servicers have rolled out programs to ease the financial impact on consumers and SMEs:
- The Central Bank of Argentina has mandated that credit card issuers provide cardholders with a plan to extend the payment of outstanding balances to nine months, with a three-month grace period. This does not include regional credit cards, which are not subject to regulation.
- In Brazil, large banks have announced some relief programs for specific borrowers, but there's no industrywide program. Originators are working with clients on a case-by-case basis, renegotiating with clients that seek relief before becoming delinquent. Collection of overdue accounts continues at the same pace, with some potential flexibility to renegotiate the ones with positive payment histories, but recoveries show signs of weakening. The government has provided additional support to individuals that already have some source of income from social programs or informal workers. Similarly, large banks have announced relief programs for SMEs, while small originators and fintechs opted to look at renegotiations and relief on a case-by-case basis. There have already been a large number of renegotiation requests, but companies will likely only be receptive to doing so with clients with the best profiles.
- In Mexico, some servicers have already called for noteholder assemblies, through which they will propose implementing relief programs for securitized portfolios. The programs could include temporarily deferring a given number of rents for the next months, which include delaying those payments toward the end of the contract, or offering discounts. While favorable for borrowers, we believe these measures could compromise the transactions' liquidity and capacity to meet monthly interest payments. We are also evaluating the reach of the relief program that INFONAVIT has announced.
Closed stores of servicers using a buy-here/pay-here collection process. Some servicers in Argentina, Brazil, and the Caribbean make collections in their stores. If the lockdown is prolonged, such servicers could face a sudden drop in payments received. We are monitoring whether they will be able to move their collection process online and assessing the potential short-term impact. To date, we have placed our ratings on 14 transactions in Argentina and CFG Investments Ltd.'s Series 2019-1 Class A and B notes on CreditWatch with negative implications.
Store closures in shopping malls backing rated CMBS transactions. The government-ordered shutdowns of non-essential commerce, including shopping malls, are significantly limiting tenants' ability to pay rent. To date, we have placed our ratings on two mall-backed transactions in Brazil on CreditWatch negative. These CreditWatch placements reflect the potentially damaging effect of the disruption of tenants' activities on their cash flows and mall rent payments. It also reflected uncertainties about the duration of the disruption and the potential recovery of tenants' financial health, which could lead to greater liquidity pressure on operations in the short term.
Impact of potential obligor, counterparty, and sovereign downgrades. Some nonbank financial institutions could also face a difficult year, which could affect our views regarding disruption risk. Corporate repacks that have exposure to corporate issuers in the cyclical transportation and commodities sectors in Brazil could also face negative rating actions. To date, we have taken rating actions on deals linked to the credit quality of Ecuador and Mexico. In particular, we lowered our ratings on the Ecuador Social Bond S.A. R.L. and Poinsettia Finance Ltd., which mirrors the rating on Petroleos Mexicanos (PEMEX). We also placed the ratings on four corporate repacks in Brazil on CreditWatch negative.
Increased concentration in transactions supported by trade receivables in Brazil. Goal One Empirical Credit Rights Investment Fund and the Gávea Sul Multisectoral Credit Rights Investment Fund LP materially reduced the volume of new operations, increasing the risk of concentration. Because both transactions operate with fewer originators than other multi-transferable and multi-saluting FIDCs do, we believe they could be more exposed to sudden loss spikes in the coming months.
Effect of social distancing on the cash flow for transactions linked to transportation. In the case of ABS equipment deals, reduced passenger volume might affect transportation companies' capacity to repay their financings. Also, future flow transactions could face reduced cash flows. Exposure for this type of transaction is mostly in Mexico but also in Brazil through corporate repacks via CRAs.
Distressed Exchanges And Similar Restructurings
To date, several entities have called for debtholder meetings to propose amendments to rated transactions' terms and conditions. We are reviewing all proposals carefully. This reflects that entities in distress might see to restructure their obligations, offering less than originally promised. Investors or counterparties would fare worse if there were a conventional default, so they're often motivated to accept these restructurings. In our analysis, we treat such offers and buybacks as a de facto restructuring and equivalent to a default.
To consider an exchange offer as tantamount to a default, we look for two conditions to be met:
- The offer, in our view, implies the investor will receive less value than the original securities promised; and
- The offer, in our view, is distressed rather than purely opportunistic.
Upon completion of an exchange that we consider distressed, we lower our ratings on the affected issues to 'D'. We do so even if the investors accepted the offer and there was no legal default. When we later assign a new post-exchange rating, our focus returns to the risk of conventional default.
S&P Global Ratings acknowledges a high degree of uncertainty about the rate of spread and peak of the coronavirus outbreak. Some government authorities estimate the pandemic will peak about midyear, and we are using this assumption in assessing the economic and credit implications. We believe the measures adopted to contain COVID-19 have pushed the global economy into recession (see our macroeconomic and credit updates here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.
As in other regions, the reduction in consumer discretionary spending in Latin America could hurt the credit quality of transactions across a wide array of sectors, especially those with high exposure to consumption, cyclical transportation, tourism, retail properties, oil, and SME-related asset-backed securities. Many government- and private-sector-sponsored measures for easing cash-flow strain on individuals or SMEs affecting mortgage, consumer, and SME debt could interrupt cash flow. However, structural mechanisms should insulate investors from shortfalls unless the interruptions persist. In addition, speculative-grade tranches in structured finance might have heightened downgrade risk given recession forecasts and liquidity constraints.
In Latin America, the efforts to contain COVID-19 have exacerbated the weak economic growth prospects for the key markets that we follow. Amid such uncertainties, new structured finance transactions are mostly on hold as investors focus on reassessing their portfolios and monitoring the performance of the various asset classes.
This report does not constitute a rating action.
|Primary Credit Analysts:||Jose Coballasi, Mexico City (52) 55-5081-4414;|
|Leandro C Albuquerque, Sao Paulo +55 (11) 3039-9729;|
|Facundo Chiarello, Buenos Aires +54 (11) 4891-2134;|
|Marcus Fernandes, Sao Paulo (55) 11-3039-9743;|
|Antonio Zellek, CFA, Mexico City +52 (55) 5081-4484;|
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