The COVID-19 outbreak in Latin America has been gradual, and major countries in the region were among the last to be hit. However, most of them are now in the local transmission stage, according to the World Health Organization. Measures across the region include lockdowns that restrict business activities to essential services. Welfare support in the region is not robust, and therefore, the impact of a prolonged lockdown on consumers and small and medium enterprises (SMEs) could be severe.

We are watching the liquidity of these transactions very closely, with special attention on payment reserves, expected debt service (including expenses) during the next three to six months, deferability clauses, and events of default. In addition, we are monitoring what could be a more persistent deterioration of collateral performance. We have identified seven key risk factors for securitizations in Latin America related to the COVID-19 outbreak:

Low level of liquidity reserves.  We are monitoring transactions that have less than three months of available liquidity and limited collateral enhancement cushions or dual waterfalls.

Government or servicer relief programs.  Due to the sudden stop in economic activity, some governments and servicers might roll-out relief programs to ease the financial impact on consumers. We believe that transactions backed by credit cards, unsecured consumer loans, student loans, mortgages, or SMEs could be exposed.

Closed stores of servicers using a buy-here/pay-here collection process.  It's a common practice for some servicers in Argentina, Brazil, and the Caribbean to make collections in their stores. If the lockdown in some countries is prolonged, such servicers could face a sudden drop. We are monitoring whether they will be able to convert their collection process to online and the potential impact in the short term.

Closing of stores in shopping malls backing our CMBS transactions.  The government-ordered temporary shutdowns of non-essential commerce include shopping malls, significantly limiting tenants' ability to pay rent. Therefore, it's very likely that relief will have to be provided to mall tenants. Although most structures benefit from liquidity reserves, we are monitoring the effects of the shutdown and the recovery of mall tenants' cash flow.

Impact of potential obligor, counterparty, and sovereign downgrades.  In addition, some nonbank financial institutions could face a difficult year, which could have implications in our views regarding disruption risk. Corporate repacks that have exposure to corporate issuers in the cyclical transportation and commodities sectors in Brazil could also suffer negative rating actions.

Effect of social distancing on the cash flow for transactions linked to transportation.  Weaker activity in the transport industry might affect companies' capacity to repay their financings in the case of ABS equipment deals. Also, future flow transactions could face reduced cash flows from lower volumes of transported passengers. We see exposure for this type of transactions mostly in Mexico, but also in Brazil through corporate repacks via CRAs.

Persistent deterioration of collateral performance.  Across Latin America, higher unemployment rates and deterioration of informal labor income could limit consumers' capacity to pay their debt in a timely fashion, while a weaker macroeconomic environment could affect SMEs, which are typical obligors in securitizations backed by equipment leasing in Mexico and trade receivables in Brazil.

Our Assumptions

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.

Like other regions around the globe, the reduction in consumer discretionary spending in Latin America could hurt the credit quality of transactions across a wide array of sectors, including 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 endure. In addition, speculative-grade tranches in structured finance might experience heightened downgrade risk given forecasts for recession 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. If the virus spreads more quickly, it could force governments to adopt even more decisive measures that might further undermine growth and business conditions. Amid such uncertainties, new structured finance transactions could be on hold for an undetermined period of time as investors focus on reassessing their portfolios and monitoring the performance of the various asset classes. We'll reassess our new issuance forecast accordingly.

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