Our forecast is for Latin American structured finance issuance to reach $24 billion in 2022. This is flat with last year's total and reflects our projection for single-digit percent GDP growth in the region's major markets.

Brazil will continue to account for the bulk of structured finance issuance in the region, followed by the cross-border market. We expect significant activity in Brazil across all asset classes, driven by the entrance of new originators, a positive regulatory environment for securitizations, and the strength of new platforms that cater to individual investors.

Structured finance ratings performance was stable in 2021, as the sharp drop in negative rating actions versus 2020 demonstrated. This reflected the region's economic recovery and improved collateral performance. In 2022, inflation and political uncertainty present downside risks to collateral performance and operations. As a result, we believe the risk adjustments we made to our base-case expectations at the beginning of the pandemic remain appropriate, particularly in the securitizations backed by credits to consumers or SMEs. The Omicron variant is an additional consideration that we will incorporate into our analysis, particularly when we evaluate the liquidity positions of rated transactions in the context of potential new mobility restrictions.

In the infographic below, we highlight the major risk factors (based on the five principles that we review during the rating process) that we have identified across the region. We elaborate on these risk factors elsewhere in this article.

Brazil: Despite Challenges, The Securitization Ecosystem Is Poised For Continuous Positive Development

New issuance in Brazil totaled about $21 billion last year, and we expect a similar amount in 2022 given our expectations for macroeconomic and political challenges. Corporate entities' ongoing refinancing needs and the expansion of existing businesses of both new originators and traditional ones will drive issuance this year. We anticipate that CRAs and CRIs backed by corporate exposures or repackaged corporate securities (ABS synthetics) will constitute about 40%-50% of total issuance, as has been the case historically. Securitzations of consumer loans--both secured and unsecured--as well as trade receivables will likely remain trending assets this year. We also expect real estate securitizations through CMBS and RMBS to remain active after a record year in 2021.

There are some reasons for caution in 2022, particularly increasing base interest rates, persistently high inflation and unemployment rates, and a degree of political risk due to the presidential elections at the end of the year. Collateral performance for certain asset classes--such as unsecured consumer loans, corporate loans, and trade receivables--will likely face some volatility. The expected low economic growth, inflation pressure, and already high household leverage could result in increased delinquencies for consumer loan pools. In addition, nontraditional originators--such as startups and fintechs--that expanded their businesses quickly when funding costs were low will have to deal with high base interest rates.

CRAs and CRIs backed by corporate exposures are still in demand

The issuance of CRIs and CRAs is expected to remain the most active asset class in 2022, as companies typically address their funding and refinancing needs through these instruments. ABS synthetics offer corporate entities access to cheaper debt, and they constitute a relatively new funding source, as individual investors are now able to acquire these securities. We continue to expect performance on this asset class to mirror that of the underlying entity's corporate obligor. We also believe this debt type will remain a popular funding option for both traditional and new corporate issuers.

Consumer-backed securitization: New originators, new challenges, old economic cycles

Through 2021, performance figures for ABS consumer--including unsecured loans, auto loans, and credit cards--largely reflected post-pandemic recovery. For example, auto loans had more stable delinquency figures, and the secondary vehicles market has remained active as new vehicle prices continue to increase. Transactions backed by pools of credit card receivables and payroll deductible loans have remained fairly stable in recent years, the former largely driven by the importance of credit cards during the pandemic given the heightened need for remote purchases. However, macroeconomic conditions will likely present challenges for individual obligors, such as by increasing pressure over already tight household budgets through persistently high inflation. Unsecured consumer loans pools will likely face greater volatility due to the riskier nature of the underlying asset class.

Nonetheless, unsecured loans are also one of the main potential new origination sources, given the lack of credit availability to a significant part of the population with little to no banking relationships or history. One of the main drivers in new consumer ABS securitizations in recent years, fintechs and new originators continue to carry certain operational risks, largely due to their still-limited operational track record and often weak balance sheets. As several rated transactions have some level of operational risk cap, we see limited potential for upgrades in the near term.

Trade receivables will likely remain a popular option for SMEs

After high performance volatility in 2020, transactions backed by pools of trade receivables recovered strongly in 2021, with most rated transactions returning to pre-pandemic levels of delinquency or better. This is a result of stricter origination standards combined with persistently strong performance in certain sectors of the economy, such as food retail. As other economic sectors recover and ramp-up production and sales, we expect demand for financing of SMEs to increase and for trade receivables securitizations to remain one of the main funding sources. However, high inflation and increasing base interest rates will pressure production costs and liquidity for most small businesses, and they could hamper obligors' ability to make payments under the trade agreements.

We continue to view the trade receivables industry very cautiously, as sellers and obligors typically face continuous liquidity pressure. Also, as the market becomes more sophisticated, consultants are looking to diversify their product offerings, and several have started operating with corporate loans to small obligors on top of trade receivables. This is an example of why we believe the operational risks associated with this industry are elevated. Moreover, the service intensity of the portfolios is typically very high, and the diversification of products adds complexity to a dynamic pool of credits.

One exception to the typical trade receivables universe is the receivables originated from credit card payment intermediaries, such as merchant acquirers. That industry has boomed in recent years, and with the implementation of a recently revised framework and new transaction participants, it's likely the number of securitizations will continue to increase. However, these changes are recent, and new participants' operational track records are still limited. We will continue to monitor the performance of such transactions as well as evaluate if the new participants will partially mitigate operational risks.

Conditions for CRIs backed by commercial properties improved in 2021, but will the trend continue this year?

Despite the impact of the pandemic on the revenue generation capacity of retailers and--as a consequence--shopping malls, CMBS transactions continued to perform adequately in 2021. While demand for prime office space and malls showed signs of fast recovery, and demand for last-mile warehouses continued to benefit from the growth of online retailers, nonprime properties faced some difficulties recovering from high delinquencies and high vacancy rates. Nonetheless, CMBS issuance was strong in 2021, boosted by the expansion of the real estate investment funds. We still see significant potential for new issuance in 2022 as retail businesses continue to recover and remote work is slowly phased out--even if a portion of the labor force remains working from home.

Inflation and growing household leverage are red flags for RMBS, but industry fundamentals remain positive

Demand for RMBS transactions has also increased as individual and professional investors seek exposure to the residential real estate industry. Obligors have benefited from low-cost financing of new homes, while the expanding fintech home equity origination increased the number of loans backed by properties under more favorable conditions than other available channels. As base rates continue to increase, it's likely that traditional credit availability to individuals will diminish, which could drive demand for home equity loans.

We continue to closely monitor the performance of inflation-linked loans and financings (typically used for home equity loans), as high inflation rates can affect both the outstanding balance and the monthly payments for households that are already facing increased leverage. Nonetheless, for traditional non-inflation-linked residential financings, we expect performance to remain somewhat stable, as the cost of fixed-rate loans will continue to provide incentives to obligors to remain current.

For Cross-Border, We Anticipate More Tailor-Made Transactions Will Tap The Markets

Cross-border issuance was focused on tailor-made transactions that reflected available market opportunities. We also expect the participation of multilateral entities in new issuance to continue, providing support to the transactions as guarantors or through other types of support. In recent years, repackaged securities that fund infrastructure projects have been the most popular assets. Given Latin America's significant infrastructure needs, this could continue this year. The credit quality of the underlying assets that back repackaged securities remains the major credit factor in this asset class.

Mexico: New Issuance Volume Will Remain Stagnant

We expect new issuance to remain stable in 2022, with a similar volume to 2021's $1.3 billion. In our view commercial ABS will continue dominating in terms of the number of deals, and these will mainly be equipment-backed transactions from nonbank financial institutions (NBFIs). RMBS should account for the greatest issuance amount, as we believe there could be several deals placed by Fovissste for about the equivalent of $500 million-$600 million, with some other possible transactions by a few private entities. We don't expect Infonavit or retail banks to securitize in 2022.

Last year, there were 16 Mexican structured finance transactions totaling $1.3 billion. New issuance picked up through the year, especially in the fourth quarter. By contrast, 2020 had nine deals worth $1.2 billion. The number of deals almost recovered to the levels in 2019 (19 deals) and 2018 (18). In addition, the average spread on floating-rate transactions dropped slightly to 2.5% from 2.6% in 2020.

Among the areas of opportunity, we believe fintechs could gain relevance in the market, particularly those that have tapped the securitization markets in other countries and have recently started operations in Mexico. We believe these entities could leverage their experience abroad.

We project economic activity in Mexico will increase 2.8% in 2022 following a 5.8% expansion in 2021. In our view, several challenges remain for structured finance transactions, such as a relatively weak labor market, high inflation rates, and sluggish economic recovery as a result of an unfavorable investment outlook. On the other hand, factors that could benefit structured finance issuance include:

• Increasing interest rates, which could prompt originators to return to the markets;
• A sub-attended segment from private banks to fund NBFIs and SMEs;
• Relatively stable collateral performance; and
• Structured finance instruments' attractive yields.

In 2021, the number of downgrades decreased significantly but still reflected the effects of the pandemic

Last year, credit stability persisted among structured finance transactions. We affirmed 60 ratings, lowered nine, and raised two. The number of downgrades dropped from 12 in 2020, mainly reflected the pandemic's effects, and were primarily in CMBS, future flows, and a few RMBS deals.

In terms of ratings performance, we do not envision significant rating actions this year due to available credit enhancement and our view that in the current economic environment, collateral performance will not deteriorate materially.

Higher credit enhancement has mitigated ABS performance pressures

This year, we anticipate credit stability in commercial ABS transactions, most of which are backed by equipment loans and leases. In our view, there remains a considerable gap between the observed performance of the deals and our base-case loss (BCL) assumptions to the extent the economy continues to recover.

In addition to macroeconomic risks, which we continue to capture in our base-case loss estimates for these deals, we have identified higher credit risk on the deals we recently rated, as reflected in the originators' historical static loss results for their total pools. As a result, our BCL median rose to 6.6% from 5.6% previously.

In contrast, in terms of performance, our average observed loss figure went down significantly to 1.5% from approximately 3% one year ago. This mainly reflects sector stability combined with our rated portfolio now consisting of fairly recent transactions that have limited seasoning and no to few defaults to date. We believe performance on these transactions will remain stable over 2022. However, high inflation levels, a sluggish economic recovery, and reduced economic activity could again put pressure on the performance of the securitized pools.

In 2022, the majority of our rated portfolio will remain in their revolving periods. This could pose higher risk than in last year's portfolio because the deals' overcollateralization ratios will not increase in the near term. However, we believe their credit enhancement continues to support the current ratings.

Operational risk remains a key risk factor for the sector. We haven't observed any major deterioration in servicers' operational capabilities in the past 24 months. However, the economy could put pressure on their financial positions and, ultimately, their servicing processes, which could lead to negative rating actions. For the deals we've recently rated, we believe the key risk factors remain limited funding sources, weak internal controls, and weak corporate governance.

RMBS: Credit enhancement has outweighed the performance deterioration on government agencies' deals; stability persists in NBFI transactions

Last year, there was a deterioration in the performance of government agency Infonavit's transactions, reflecting increasing unemployment levels in Mexico. Deterioration was less severe in the deals originated by Fovissste, which reflects the greater stability of the public-sector employees as opposed to those in the private sector.

Overall, we anticipate that the credit quality of Mexican RMBS will be stable in 2022. This incorporates our view that some deals from Infonavit, especially those with target overcollateralization structures, could activate their early-amortization triggers related to the performance of the portfolios. In such cases, the payment structure would shift to full-turbo from pro-rata and would cease the interest payments to the mezzanine classes.

From a cash-flow analysis perspective, this could rapidly deleverage the portfolios and increase their overcollateralization. Nonperfoming loans (NPLs) on Infonavit's deals closed 2021 at about 16.4%. We expect NPLs on Infonavit's transactions to continue increasing but at a slower pace than last year due to better unemployment rates and modest economic recovery. We forecast NPLs could reach 18%-20% by year-end 2022.

We expect that deals from Fovissste will maintain solid credit enhancement metrics, as they continue to build overcollateralization due to their full-turbo amortization schemes. We believe they could close 2022 with NPLS of about 10% compared with 9% as of December 2021.

Despite the performance deterioration, we do not expect to take any negative rating actions on the government agencies' RMBS. This is mainly due to these deals' available credit enhancement, which continues withstand our stress scenarios for the current ratings. Nevertheless, we're keeping a close eye on unemployment and inflation metrics, as deterioration erode available household income and the performance on the portfolios.

Deals from Fideicomiso Hipotecario have had low default levels in their first months since issuance. While these deals do not yet have sufficient performance history, we believe that they will continue performing relatively solidly, in line with our expectations.

Transactions from NBFIs have continued showing mixed results: On one hand, most of the deals denominated in Mexican pesos have continued presenting solid performance, with stable defaults, collection levels, and overcollateralization metrics increasing as they deleverage. On the other hand, most of the transactions denominated in inflation-linked units (UDIs) haven't performed as well. These had severely deteriorated after the 20008-2009 crisis, and their credit enhancement continues to decrease as a result of higher-than-average defaults, negative excess spread, and low recoveries. We believe that these trends will persist over the year.

A Very Challenging Environment Persists In Argentina

This year, we expect increases in the number of participants and issuance amounts in Argentina. The growth pace will depend on the level of activity, unemployment, interest rates, and inflation. We forecast a GDP increase of 2.10%, unemployment of about 9.30%, a central bank policy interest rate close to 39%, and inflation of 47%. The negotiations between the Argentine government and the IMF highlight the challenging environment faced by market participants.

From the issuer side, credit demand remains steady, and we believe originators will continue monitoring their underwriting policies to avoid a rapid decline in the credit pools if macroeconomic conditions deteriorate. As in 2021, we expect there to be new issuers related to agribusiness, which is considered the engine for Argentina's economy. At the same time, there could be some new small nonfinancial institutions securitizing personal loans. Regarding frequent issuers, those that are related to consumer loans, payroll, and credit cards will probably increase the number of issuances if macroeconomic conditions remain stable.

From the investor side, the market is liquid, and there's still an appetite for securitized products--with a clear preference for dollar-linked or inflation-linked ones. The main concern remains the inflation rate and the associated erosion of purchase power, which could translate to higher loss rates.

Payroll loans have assured growth

The typical payroll loans, those that are deducted before salary is deposited in the account, will continue to have stable performance. This is because salary adjustments were in line with the inflation level, and no haircuts have been applied in the public sector. As the credit demand in this sector remains high, the origination volume is expected to grow. The main constraint on that will be financing sources.

Regional credit cards: Business expansion ahead

Regional credit card companies spent most of 2020 and 2021 cleaning up their portfolios and focusing on performing clients with an extensive track record. Therefore, portfolio growth was limited. The trend has since reversed, and origination is increasing with no deterioration in credit standards. In addition, these companies are expanding their businesses and developing their own virtual wallets, which are intended to build client loyalty and improve collections.

Future flows: Fuel prices will set the pace for tax collections

Outstanding deals are repaid with the collections from the fuel tax, which is adjusted for inflation on a quarterly basis. As fuel prices will continue increasing, nominal collections will follow the same trend. As a result, we do not foresee major changes compared to last year, and we believe securities will continue to be paid on a timely basis.

UVA Mortgage loans: Origination and performance will remain unchanged in 2022

Origination volume will remain low as long as inflation is high. We do not expect major changes in performance while salaries continue to adjust in line with inflation. However, a further deterioration in macroeconomic variables will likely result in a rapid increase in the number of defaults.

We expect expansion in personal loans with voluntary repayment

In 2021, origination for personal loans started to increase, and we expect the trend to persist this year if economic conditions are stable. Frequent issuers are expanding their client bases and loan amounts. New originators will continue to approach the capital market to get financing. Regarding performance, delinquency levels will remain high, and a sudden deterioration on key variables like unemployment, inflation, or activity level could increase the number of defaults.