To offset the economic impact of the COVID-19 outbreak, in recent months noncontractual payment holidays have been offered to borrowers as part of forbearance initiatives led by governments or lenders. In this report, we explain our data requirements related to noncontractual payment holidays for residential mortgage-backed securities (RMBS), asset-backed securities (ABS), and structured credit transactions backed by small and medium-sized enterprise (SME) receivables issued in Europe, the Middle East, or Africa.
What are noncontractual payment holidays?
Noncontractual payment holidays are agreed bilaterally between lenders and borrowers after the loan was provided and do not form part of the loan contract. They serve as a temporary forbearance measure for households and SMEs in response to an exogenous shock that affects a borrowers' ability to pay. Their intention is to relieve short-term pressure on a borrower and lower overall default risk.
Payment holidays have become a common servicing strategy during the response to COVID-19. However, some servicers routinely use payment holidays to offer forbearance to borrowers in distress. Therefore, a borrower's payment schedule could be affected by noncontractual payment holidays granted for different reasons.
From a cash flow perspective, the impact of payment holidays is equal to that of delinquencies. A shortfall occurs relative to the contractual expectation for interest and principal collections (for loans that are not interest-only). The consequence is that structured finance transactions backed by pools of consumer or SME receivables will have lower collections when payment holidays are granted.
The general, but not universal, policy response is not to classify COVID-19 related payment holidays as being in arrears. Consequently, loans given COVID-19 related payment holidays may not be factored in when calculating performance triggers, such as switching between pro rata and sequential paydown or a reserve fund step-down. This means that these structural liquidity mechanisms, which are intended to protect against spikes in nonpayment by underlying borrowers, may become less effective.
What resolution strategies exist for COVID-19 related payment holidays?
Resolution strategies remain unclear at this stage. The most likely exit strategies are to increase monthly installments to pay off amounts accrued under the payment holiday's terms, to require full pay-off once the holiday period expires over an agreed time frame, to offer a loan term extension, or to use a combination of any of these. A write-off of unpaid amounts is currently seen as an unlikely outcome.
What information do you expect to receive in relation to COVID-19 related payment holidays?
We would expect the overall exposure, by number and in monetary terms, to COVID-19 related payment holidays to be available in investor reports (broken down by receivables, security, and borrower types, for example). We would expect this to include the roll rates of borrowers with COVID-19 related payment holidays into delinquency buckets and updated payment schedules reflecting the impact from the agreed exit strategies.
The data points we would generally expect to see on a loan-by-loan basis, when we receive loan-level data, are detailed in the list below.
| Data Expected In Loan-Level Reporting For COVID-19 Related Payment Holidays | |
|---|---|
| Field | Description |
| COVID-19 payment holiday outstanding (Y/N) | Binary field indicating if a COVID-19 related payment holiday is in place. |
| COVID-19 payment holiday start date (dd-mm-yyyy) | The date when a COVID-19 related payment holiday was first granted. |
| Was there a payment holiday in place prior to COVID-19 payment holiday (Y/N) | Binary field indicating if there was a payment holiday in place with the borrower for a reason other than COVID-19 related stress. |
| COVID-19 payment holiday original length (numeric) | The original length in months of the COVID-19 related payment holiday. |
| COVID-19 payment holiday total length (numeric) | The current total length of the agreed COVID-19 related payment holiday in months. |
| COVID-19 payment holiday remaining length (numeric) | The current remaining length in months of the COVID-19 related payment holiday. |
| Exit strategy (text) | The agreed exit strategy such as a term extension (with unchanged installments), increased installments (and the corresponding period), or the COVID-19 related payment holiday. |
| Is interest accrued on unpaid interest (Y/N) | Binary field indicating if interest continues to accrue on unpaid interest during the COVID-19 related payment holiday. |
| Is interest accrued on unpaid principal (Y/N) | Binary field indicating if interest continues to accrue on unpaid principal during the COVID-19 related payment holiday. |
| Which amounts are paid in priority if the borrower(s) have a COVID-19 payment holiday, an unrelated payment holiday, and/or an arrears balance (arrears/COVID-19 payment holiday/non-COVID-19 payment holiday/split) | In situations where the borrower(s) have unpaid amounts due under different arrangements, for example a COVID-19 related payment holiday, an unrelated payment holiday, or arrears, which amounts are paid first when the borrower resumes payment: the arrears, the payment holiday, or split. |
What is your analytical approach for noncontractual payment holidays?
When there is the potential for payment holidays to be granted after a loan's inception, we may apply an additional stress in our cash flow analysis, where relevant. In those instances, our modeling delays a proportion of scheduled interest and principal receipts based on an estimate of the proportion of a pool that opts to take a payment holiday and the likely duration of the holiday. We make these estimates using factors that may include, but are not limited to, relevant legislative frameworks, collateral credit quality, servicers' policies, and available servicer data on payment holidays granted. For more details on how we analyze European RMBS transactions, see "Global Methodology And Assumptions: Assessing Pools Of Residential Loans," published Jan. 25, 2019.
How are you addressing COVID-19 as an evolving situation?
As part of the rating process for both new and existing transactions, we are in contact with originators, servicers, and market participants to comprehend the risks introduced to structured finance ratings by the COVID-19 outbreak.
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.
We may also update our data and reporting requirements for COVID-19 related payment holidays.
Related Research
- Economic Research: Government Job Support Will Stem European Housing Market Price Falls, May 15, 2020
- Residential Mortgage Market Outlooks Updated For 13 European Jurisdictions Following Revised Economic Forecasts, May 1, 2020
- S&P Global Ratings Is Assessing The Impact Of COVID-19 On Mortgage Market Outlooks For Global RMBS, April 17, 2020
- European ABS And RMBS: Assessing The Credit Effects Of COVID-19, March 30, 2020
- Coronavirus Impact: Key Takeaways From Our Articles, March 27, 2020
- COVID-19: The Steepening Cost To The Eurozone And U.K. Economies, March 26, 2020
- Will Mortgage Payment Suspensions Related To COVID-19 Affect European RMBS?, March 13, 2020
- Data Requirements For Rating EMEA RMBS Transactions, Jan. 8, 2019
- Data Requirements For Rating EMEA ABS Transactions, Jan. 8, 2019
- How We Rate And Monitor EMEA Structured Finance Transactions, March 24, 2016
This report does not constitute a rating action.
| Primary Credit Analyst: | Alastair Bigley, London 44 (0) 207 176 3245; Alastair.Bigley@spglobal.com |
| Secondary Contacts: | Feliciano P Pereira, CFA, London + 44 20 7176 7021; feliciano.pereira@spglobal.com |
| Volker Laeger, Frankfurt (49) 69-33-999-302; volker.laeger@spglobal.com | |
| Abhijit A Pawar, London (44) 20-7176-3774; abhijit.pawar@spglobal.com |
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