While the COVID-19 pandemic is having a broad impact upon global structured finance markets, the magnitude of the impact varies by industry, geography, and rating. For U.S. asset-backed commercial paper (ABCP) sector, the credit quality of the issuances remains stable, based on the percentage of fully supported transactions; structured finance asset sector exposure for the partially supported transactions; high investment-grade ratings on banks and non-bank institutions providing liquidity support to the U.S. ABCP programs; and extensive experience of bank and non-bank sponsors.

The U.S. government's $2.3 trillion stimulus package and the Fed's establishment of various facilities (such as the Commercial Paper Funding Facility (CPFF), Prime Dealer Credit Facility, Money Market Mutual Fund Liquidity Facility, and the new Repo facility) will continue to have a favorable impact on liquidity and credit in the U.S. ABCP markets. This was reflected by tightening spreads between the end of March/early April and the first week of March. For example, in the case of overnight paper, spreads tightened by approximately 100–150 basis points (bps) during this period, with tenors lengthening to weekly or one–three months versus the majority of paper rolling overnight during the same period. In comparison, spreads for highly rated ABCP are typically close to LIBOR (ranging between -5 bps and +10 bps).

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 around midyear, and we are using this assumption in assessing the economic and credit implications. In our view, 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.

The utilization of ABCP facilities increased during March due to a relatively inaccessible term market, and we continue to see new seller activity in the ABCP programs, although at a slower pace. Per the Fed data, ABCP outstanding increased to $271.0 billion on April 1 from $250.8 billion at the end of February. While most sponsors were able to issue ABCP during March--albeit at higher pricing and shorter tenors--there were some draws under liquidity facilities. In addition, most sponsors indicated the high pricing of the CPFF. On March 27, 2020, S&P Global Ratings rated GTA Funding LLC, a new ABCP program with multiple 'A-1+' issuances (see "GTA Funding LLC," published on RatingsDirect).

COVID-19 Effect On U.S. Structured Finance Bears Watching

Asset sensitivity of structured finance sectors to COVID-19

While the overall credit outlooks for structured finance in light of COVID-19 have turned somewhat cautious, we note that the ultimate impact is still uncertain, and likely to affect some sectors more than the others. Risk of payment holidays for consumer, mortgage, and small to medium enterprise debt could interrupt cash flow, but structural mechanisms should insulate investors from shortfalls unless the interruptions endure. Areas of greater focus include collateralized loan obligations (CLO), commercial mortgage backed securities (CMBS) with high exposure to retail or hotels, U.S. subprime auto asset-backed securities (ABS), U.S. non-QM RMBS, aircraft ABS, small business or SME related ABS, dealer floorplan ABS, corporate securitizations and certain other esoteric asset classes.

Table 1

Asset sensitivity in U.S. ABCP programs to structured finance sectors

For U.S. ABCP, sector fundamentals and rating trends are stable, while the collateral performance is expected to be somewhat weaker (see table 1) based on macroeconomic factors. Our stable view is based on the percentage of fully supported transactions, asset sector exposure for the partially supported transactions, high investment-grade ratings on banks and non-bank institutions providing liquidity support to the U.S. ABCP programs, and extensive experience of bank and non-bank sponsors.

Weakening asset performance may result, in part, from changing macroeconomic factors, such as a decline in GDP and an increase in unemployment, which ultimately affects some obligors' ability to satisfy payment obligations due to reduced income. The actual impact will ultimately vary for each sector and between originators. The impact will also vary between individual transactions, reflecting the pool-specific asset quality and structural features. Furthermore, there may be operational challenges due to servicing assets and collection processes on the securitized assets.

Table 2 shows that of the 48 ABCP programs rated by S&P Global Ratings as of Nov. 30, 2019, net investment was $221.6 billion. Of this amount, $188.4 billion, or 85 % of ABCP, is fully supported by liquidity, either in the form of fully supported transactions funded in the partially supported programs, or issued by fully supported programs. Table 2 highlights the sector exposure for U.S. ABCP programs.

Table 2

Partially supported assets make up $33.2 billion, or 15% of total ABCP outstanding. Partially supported assets are well diversified, with the three-largest sectors being autos at 7.55%, including subprime autos at 1.5%; student loans at 2.2%; and credit cards at 1.4%. While the collateral performance trends are somewhat weaker for U.S. ABS, we currently expect stable rating trends in each of these sectors, with the exception of subprime auto loans. Subprime autos may have a greater negative performance impact and may have the greatest risk in the non-investment-grade ABS classes; however, the overall exposure in the ABCP programs is less than 2%. In addition, the enhancement is commensurate with an 'A' or higher rating (see "The Potential Effects of COVID-19 on U.S. Auto Loan ABS," published March 26, 2020, and "Assessing The Credit Effects of COVID-19 On U.S. And Canadian Credit Card ABS," published March 25, 2020).

While some transactions in the trade receivables and consumer "other" sector may be vulnerable to the economic downturn, given the relatively low exposure levels and loss coverage multiples, it is currently not an area of concern. Moreover, the structured finance sectors we deem to have a greater focus on due to COVID-19 are either not funded in U.S. ABCP programs, or are fully supported by liquidity.

The weighted average loss coverage multiple provided by credit enhancement as of November 2019 shows ample coverage for various partially supported assets (see table 3). The loss coverage multiple is even higher if we consider the 8%–10% of fungible program-wide credit enhancement for the partially supported programs. The losses we assumed are based on the loss horizon considered under the respective liquidity agreements. Our base-case loss assumptions for all the partially supported transactions are above the current loss performance and reflect our view of expected performance during multiple economic scenarios specific to the ABS sector. We continue to surveil monthly performance on all of the partially supported transactions against our base-case loss assumptions and will continue to monitor any weakness in the collateral over time.

Table 3

COVID-19's Effect On Financial Institution Ratings A More Important Factor In U.S. ABCP

The second, and more important, factor in determining the COVID-19 impact on U.S. ABCP is the ratings on financial institutions, which are the primary source of liquidity backing the ABCP programs. The bank sponsors and non-bank institutions providing liquidity are highly rated entities, and a one-notch movement on the long-term rating may not necessarily lead to a change in the short-term rating based on our linking methodology (see "Methodology For Linking Long-Term And Short-Term Ratings," April 7, 2017).

Banks providing liquidity to ABCP programs rated by S&P Global Ratings are diversified geographically, with the top three regions being North America (U.S. and Canada), Europe, and Asia (Japan) (see table 4).

Table 4

For financial institutions in North America, the impact from COVID-19 will depend in large part on the duration and severity of the pandemic, as well as how long the economy remains in lockdown mode (see "Credit Conditions North America: Unprecedented Uncertainty Slams Credit," published March 31, 2020). We believe the extraordinary actions from the Federal Reserve and the support provided from the federal government to individuals and businesses help support banks' liquidity, asset quality, and earnings, and banks enter this period from a position of strength. However, we still expect them to see sharp rises in loan modifications and nonperforming assets, lower earnings, and other challenges.

For Europe's diverse financial markets, the banks' overall balance-sheet strength has been a key support of creditworthiness in the midst of profitability challenges. In the near term, tighter funding conditions are unlikely to cause widespread problems for banks we rate—markets remain open for strong names, and central banks have expanded their term lending facilities and eased the related terms. Most of our outlooks on the 100-largest European banks are stable, but the outlook bias is now clearly negative and the coronavirus' escalation to a pandemic has already led our economists to make several negative revisions to their economic forecasts for 2020 and 2021. For now, we think most banks can handle the shock in 2020, assuming a temporary economic contraction with a U-shaped recovery from the third quarter, and governments' action plans to support borrowers (see "COVID-19 Countermeasures May Contain Damage To Europe's Financial Institutions For Now," published March 13, 2020), but risks are heavily slanted to the downside and the outlook bias could well become more negative.

As with other central banks, the bank of Japan has enhanced its stimulus package to bring stability to its markets. While the current BICRA is stable for Japan, persistent low profitability could weaken the stability of Japan's banking system (see chart 1) (see "Japan Banking Outlook 2020: Buckle Down For Major Turbulence," published Jan. 21, 2020, and "For Asia-Pacific Banks, COVID-19 Crisis Could Add US$300 Billion To Credit Costs," published April 5, 2020).

Appendix

Related Research

• For Asia-Pacific Banks, COVID-19 Crisis Could Add US$300 Billion To Credit Costs, April 5, 2020
• Credit Conditions North America: Unprecedented Uncertainty Slams Credit, March 31, 2020
• It's Game Over For The Record U.S. Run; The Timing Of A Restart Remains Uncertain, March 27, 2020
• GTA Funding LLC, March 27, 2020
• The Potential Effects Of COVID-19 On U.S. Auto Loan ABS, March 26, 2020
• Assessing The Credit Effects of COVID-19 On U.S. And Canadian Credit Card ABS, March 25, 2020
• Assessing The Coronavirus-Related Damage To The Global Economy And Credit Quality, March 24, 2020
• Stress Scenarios Show How U.S. Bank Ratings Could Change Amid Pandemic-Induced Financial Uncertainty, March 24, 2020
• The Global Recession Is Likely To Push The U.S. Default Rate To 10%, March 19, 2020
• The Fed's Crisis Actions Will Further Bolster Liquidity For U.S. Banks, But Earnings And Asset Quality Are Set To Worsen Substantially, March 18, 2020
• COVID-19 Macroeconomic Update: The Global Recession Is Here And Now, March 17, 2020
• COVID-19 Credit Update: The Sudden Economic Stop Will Bring Intense Credit Pressure, March 17, 2020
• COVID-19 Countermeasures May Contain Damage To Europe's Financial Institutions For Now, March 13, 2020
• Japan Banking Outlook 2020: Buckle Down For Major Turbulence, Jan. 21, 2020