KBRA Releases Research ? 2024 European Structured Finance Sector Outlook: Turbulence Ahead
KBRA Europe releases its 2024 European Structured Finance Sector Outlook, examining key trends from 2024 and providing forecasts for the year ahead.
Will 2024 bring us an economic soft landing or a hard one? Will interest rates remain high, or will an economic slowdown cause central banks to begin cutting rates? Many key elements are improving each day, with inflation rates slowing and unemployment remaining low, but many other signals suggest a slowdown ahead. Next year looks to be a bumpy ride as central bankers and governments navigate the coming turbulence. For European securitisation markets, continued collateral performance deterioration is likely in 2024 as borrowers in some sectors begin to feel the impact of current conditions. On the other side, the funding environment has changed to bolster securitisation issuance, with the European Central Bank and Bank of England stepping back from bank funding support. In this report, KBRA details its outlook for European securitisation markets in 2024?including performance trends, new issuance forecasts, and sector-specific commentary?and we examine rating trends from 2023.
Key Takeaways
Collateral performance is poised for further deterioration in 2024, with delinquencies expected to increase in particular sectors such as reperforming loans (RPL) as well as nonconforming and buy-to-let (BTL) RMBS. ABS sectors such as credit cards and consumer loans will also face challenges. Refinancings are likely to test CMBS and collateralised loan obligation (CLO) markets.
The year ahead may see tempered inflation but also increased insolvencies and delinquencies as the lagged effects of cost inflation and rate rises impact businesses and consumers. Geopolitical tensions remain elevated and could disrupt markets next year.
Issuance is expected to increase in 2024, with newly circulated transactions to outpace retained transactions for the first time since 2019. As central banks cut back on support programmes, a return to capital markets for secured funding will find appeal.
Year-to-date (YTD) as of 20 November, there were more upgrades than downgrades in KBRA-rated transactions, but downgrades were higher than in the prior year. The upgrades generally stemmed from note amortisation and low actual defaults, while most of the negative rating migration occurred in the mortgage-backed sectors, owing to collateral performance degradation. The negative ratings activity was largely among junior classes, which continue to be susceptible to negative rating drift due to the prevailing interest rates and macroeconomic environment.
About KBRA
KBRA is a full-service credit rating agency registered in the U.S., the EU and the UK, and is designated to provide structured finance ratings in Canada. KBRA's ratings can be used by investors for regulatory capital purposes in multiple jurisdictions.