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COVID-19 Update: Latin America Structured Finance Collateral Performance

The Americas is the region most affected by the COVID-19 pandemic globally. In Latin America, worsening pandemic conditions have extended stringent lockdowns in some countries and slowed the relaxation of containment measures in others. In response, S&P Global Ratings reduced its growth expectations for Latin America's largest economies--Brazil, Mexico, and Argentina. We also lowered our 2020 GDP forecast the region by about 2 percentage points for a contraction of approximately 7.5%, and now expect growth of about 4.0% in 2021 (see "Latin American Economies Are Last In And Last Out Of The Pandemic," published June 30, 2020). As a result, we increased our base-case loss assumptions across most structured finance asset classes in the region, though our assumptions for base-case foreclosure frequency for residential mortgage-backed securities (RMBS) are unchanged because they already incorporate a degree of stress.

We believe conditions will remain challenging in Latin America in the months ahead. Past due loans increased across the region and collections declined (particularly in April and May), and although delinquencies remain below our base-case loss assumptions across the region, they have increased. We also believe the improvements in June, which include some collections returning to pre-COVID-19 levels, reflect the liquidity support some obligors received via government- and originator-sponsored mortgage and loan payment holidays across the region. However, the lack of robust welfare support will likely worsen the lockdown's impact on consumers, and Mexico's limited policy response to support businesses could create very challenging conditions for small and medium enterprises (SMEs). As of July 3, we have taken 67 negative rating actions, including 26 downgrades, on Latin American structured finance transactions due to the pandemic (see chart 1). We will continue to monitor ongoing developments in the region and take rating actions as we deem appropriate.

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Below are summaries of the pandemic's impact on asset-backed securities (ABS), collateralized loan obligations (CLOs), commercial mortgage-backed securities (CMBS), and RMBS transactions in Brazil, Mexico, and Argentina.

Brazil

ABS commercial
  • The portfolios were significantly affected by the closure of commerce and industries. At the peak of the COVID-19 social distancing measures in April and May, we observed a significant increase in delinquencies in multiseller fundos de investimento em direitos creditórios (FIDCs; credit receivables-backed funds) due to weaker asset performance, portfolio concentration, and increased cash positions. There were no perceivable performance change in agribusiness transactions.
  • Recovery was almost as equally fast, with most transactions already showing delinquency metrics that are 10%-30% lower than the peak levels.
  • The liquidation ratio (daily collections versus expected collections) increased for most transactions to 75%-95% in June from approximately 40% in April and May.
  • We expect performance to remain volatile due to more flexible accounting standards, which were established in response to the pandemic.

Chart 2

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Chart 3

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ABS consumer
  • No perceivable deterioration in portfolio performance yet, given the long-term maturity of the assets (up to five years).
  • About 10%-30% of unsecured personal and student loan obligors requested postponements for some monthly payments, but only a limited number were granted. We expect delinquencies to increase over the next few months but remain within our stress case scenarios.
  • Payroll deductible loan transactions were not affected, since they are mostly related to pension payments.
  • Credit card transactions showed no perceivable change in performance, likely because they benefit from significant credit enhancement. Also, pools assigned to FIDCs typically perform better than the originators' pools, given some seasoning.
  • Some volatility is expected if unemployment rates remain high for a prolonged period of time.
CMBS
  • Shopping mall tenants received at least two months of payment relief--and up to six months in some cases. Stores reopened in June with limited operating hours and are still affected by consumer's willingness (or unwillingness) to leave home.
  • Vacancy and rent rates are not affected at this point, but some volatility is expected.
CLOs
  • Agribusiness portfolios not affected.
  • Reperforming taxes and secured loans portfolios are experiencing volatility. Payment flow decreased about 30% in April, but it recovered in May and June to less than 15%.
  • Secured loans saw postponement requests in excess of 50% of total contracts in a given transaction, but actual postponements were somewhat lower (and also demanded additional collateral).
  • No liquidity pressures, since all transactions have cash positions well above the minimum requirements and the credit enhancement levels are also well above the minimum.

Mexico

RMBS
  • Nonperforming loans (NPLs) increased slightly during the first months of the pandemic to 8.2% in May from 7.8% in February.
  • Collections fell 20% on average in April and May relative to the pre-pandemic 12-month average. Nonbank financial institutions (NBFIs) suffered the largest collections decline, at 36%, on average.
  • We note that the January 2020 increase in Instituto del Fondo Nacional de la Vivienda para los Trabajadores (Infonavit) NPLs was due to a change in accounting standards and is not COVID-19 related.

Chart 4

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Chart 5

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ABS equipment
  • Cumulative NPLs increased slightly to 2% in May, but they remain below our base-case loss (BCL) median of 5.6%.
  • In June, we raised our BCL assumptions for all the equipment ABS deals we rate by 20% to reflect our view that losses could increase amid current economic conditions.
  • Collections recovered slightly in May after dropping approximately 21% in April relative to the 12-month average before the pandemic.

Chart 6

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Chart 7

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Argentina

RMBS
  • Collections are slightly below pre-pandemic levels and 90-plus-day delinquencies are at 1%, on average. The Unidades de Valor Adquisitivo (UVA) value will remain frozen until the end of September. This benefits all credits in the portfolio.

Chart 9

image

ABS consumer
  • Regional credit card collections bottomed in April when they declined 5%-15%, but according to originators they have been showing strong recovery since May. The improvement reflects most issuers' fast response and focus on high-quality obligors for regional credit cards, which are mainly used for the purchase of basic goods. Delinquencies over 180 days are at 1% on average. No payment holidays in place.
  • Payroll (personal loans) collections not have not been affected and 90-plus-day delinquencies are at 1.3%, on average, reflecting the portfolios' consisting mostly of personal loans to government employees and retirees. No payment holidays are in place.

S&P Global Ratings acknowledges a high degree of uncertainty about the evolution of the coronavirus pandemic. The consensus among health experts is that the pandemic may now be at, or near, its peak in some regions but will remain a threat until a vaccine or effective treatment is widely available, which may not occur until the second half of 2021. We are using this assumption in assessing the economic and credit implications associated with the pandemic (see our research here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.

This report does not constitute a rating action.

Primary Credit Analyst:Jose Coballasi, Mexico City (52) 55-5081-4414;
jose.coballasi@spglobal.com
Secondary Contacts:Leandro C Albuquerque, Sao Paulo +55 (11) 3039-9729;
leandro.albuquerque@spglobal.com
Facundo Chiarello, Buenos Aires +54 (11) 4891-2134;
facundo.chiarello@spglobal.com
Marcus Fernandes, Sao Paulo (55) 11-3039-9743;
marcus.fernandes@spglobal.com
Antonio Zellek, CFA, Mexico City +52 (55) 5081-4484;
antonio.zellek@spglobal.com

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