India Ratings and Research (Ind-Ra) has published the revised COVID-19 rating sensitivity assumptions for asset-backed and residential mortgage-backed securitisation transactions. The agency had sought feedback from market participants on the suggested assessment methodology and proposed preliminary COVID-19 stress assumptions for default rate, recovery rate, recovery delay and collection efficiency for each asset class. Ind-Ra shall assign ratings to new securitisation transactions while also reviewing the existing ones such that the transaction contours withstand the COVID-19 rating sensitivities.
The report summarises the key aspects of
Ind-Ra’s rating review and reflects analyst’s views on the impact of the
pandemic on different asset classes. It gives an indication to investors about the
agency’s approach to evaluating transaction ratings during this phase. As the
agency develops better clarity on the expected size and duration of reductions
in transactions' net cash flows, it will evaluate the degree of adjustments to
be made to base-case as appropriate.
Ind-Ra expects an asset quality impact period of one to three quarters post moratorium in loan pools and thus a lower-than-expected loan pool performance in FY21. While the majority of the transactions have sufficient credit enhancements (CE) available, the newly rated transactions and pools of microfinance loan and unsecured business loans are vulnerable to the risks playing out.
Ind-Ra expects that the extended debt moratorium shall be made available to the rated pass through certificate (PTC) transactions until the September 2020 pay-out month, and is continuing to receive confirmation of moratorium amendments for its rated transactions. However, in cases where the moratorium is not available, the agency will take an immediate negative rating action if there is a significant dip into CE. Also, transactions significantly dipping into CE for PTCs’ interest pay-outs may see a negative rating action. The effective five-month moratorium (April to August 2020 collections) available to PTC transactions would help in the recovery of underlying borrower’s cash flow situation. To an extent, it would also lead to the deferment of delinquency recognition that is getting built in the underlying loans. Unpredictability in collection efficiencies may play out as the borrower behaviour towards loan repayments may undergo changes due to the long moratorium period.
Pandemic-related liquidity support from regulator and government support measures may positively impact the underlying loan pool quality. Ind-Ra however expects such impact to hinge on the effective execution of these measures and the benefits percolating to the borrowers.
The report on revised sensitivity assumptions is freely available for download from our website www.indiaratings.co.in.
Additional information is available at www.indiaratings.co.in.
Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.