APAC structured deals' vulnerability to coronavirus fallout is high in India, low in Japan and moderate elsewhere

The hit to economic growth from the coronavirus outbreak will have knock-on effects for Asia Pacific structured finance deals, according to Moody’s Investors Service. Asset-backed securities (ABS) in India are most vulnerable due to close links to the credit quality of the sponsor.

“The credit quality of Indian asset-backed securities is closely linked to that of the sponsor, and any sponsor bankruptcy will have an immediate impact on cash collections as loan payments are usually collected in-person and in cash,” said Marie Lam, an associate managing director in Moody’s Structured Finance Group.

“Deals in China, Australia and Korea are moderately vulnerable as the economic disruptions will likely weaken the asset quality of consumer loans, although most transactions contain some mitigating features,” added Lam.

Moody’s revised 2020 baseline forecasts assumes that global efforts to arrest the spread of the virus and, perhaps, warmer weather in the Northern Hemisphere in the spring and summer will allow economic activity to pick up in the second half of the year.

Under this baseline scenario, Moody’s expects auto loan ABS asset quality will weaken in China, with delinquency rates increasing in the first half of 2020 and possibly beyond. However, strong portfolio characteristics and structural protections will mitigate the impact on credit quality.

In Australia, loans to small-and-medium businesses and self-employed borrowers will pose the most risk, given likely material disruptions to business operations, employment prospects and cash flow. Coordinated policy measures should help mitigate the impact, as will in the case of residential mortgage backed securities (RMBS) the build-up of subordination.

In Korea, credit card ABS asset quality will deteriorate due to disruptions to business activity and the job market, although exposure to regions with the most coronavirus is limited.

Deals in Japan are least exposed, as labor shortages will keep unemployment low.

The degree of uncertainty around Moody's forecasts is unusually high, and far more severe scenarios are possible. Its downside scenario assumes a significant increase in cases and public fear that the virus will not be contained in the first half of 2020, leading to extensive and prolonged restrictions on travel, quarantines, and multi-regional closures of schools, factories and businesses, along with a prolonged slump in commodity prices. In this scenario, economic growth will likely fall by more than Moody’s baseline forecasts.

Re-disseminated by The Asian Banker

Diary of Activities
Finance China 2020
28 August 2020 | China
Finance Vietnam 2020
10 September 2020 | Vietnam
MEA International Finance Convention 2020
16 September 2020 | UAE
Wealth & Society Conference - Middle East 2020
16 September 2020 | UAE
Wealth & Society Conference 2020
24 September 2020 | United Kingdom