Overview
- We expect the Russia-Ukraine conflict to have a limited direct impact on the structured finance transactions we rate globally.
- U.S. aircraft ABS is an exception because approximately 48% of the transactions we rate in the sector have direct exposure to Russia or Ukraine.
- We will continue to monitor the transactions for any potential indirect impact from the conflict, such as macroeconomic effects and capital market volatility.
NEW YORK (S&P Global Ratings) March 3, 2022--S&P Global Ratings acknowledges a high degree of uncertainty about the extent, outcome, and consequences of the military conflict between Russia and Ukraine. Irrespective of the duration of military hostilities, sanctions and related political risks are likely to remain in place for some time. The potential effects could include dislocated commodities markets (notably for oil and gas) supply chain disruptions, inflationary pressures, weaker growth, and capital market volatility. As the situation evolves, we will update our assumptions and estimates accordingly. Still, in the short term, we expect a limited direct impact on the structured finance securities we rate globally. (See our macroeconomic and credit updates: Russia-Ukraine Macro, Market, & Credit Risks).
Within U.S. structured finance, one area where we do see a potential direct impact is aircraft asset-backed securities (ABS). Of the 25 outstanding commercial aircraft lease ABS transactions we rate, 12 are currently exposed to 15 airlines domiciled in either Russia or Ukraine. The exposure in individual portfolios, based on reported adjusted base values, ranges from approximately 3% to 21%, with one to seven aircraft in related portfolios. (For more detail, see "S&P Global Ratings Reviews Aircraft ABS Exposure To Russian And Ukrainian Airlines," published Feb. 28, 2022.)
For U.S. collateralized loan obligations (CLOs), we expect diversification to mitigate any negative consequences that may result from the Russia-Ukraine conflict's impact on a particular industry, such as commodities. Similarly, our current outlook for the real estate sectors--U.S. commercial mortgage-backed securities (CMBS) and residential mortgage-backed securities (RMBS)--is more dependent on domestic trends. For ABS and other structured finance securities, we are monitoring for any knock-on effects from the conflict.
In European structured finance, there are two main contagion mechanisms: underlying credit quality and counterparty risk. Although European financial institutions are on the front line in terms of sanctions, the implications are most significant for banks in Russia, Belarus, and Ukraine, and limited for those domiciled elsewhere. A handful of international banks we rate do have meaningful Russian or Ukrainian exposure through local subsidiaries, but the materiality and, thus, counterparty risk remain modest. At this stage, we don't expect systemwide changes to our credit ratings on financial institutions globally and, thus, expect stable counterparty ratings in structured finance transactions.
Few of the European structured finance transactions we rate have direct exposure to collateral in the conflict region. Collateral-related pressures could, therefore, only come to bear through second-round effects, such as lower economic growth and higher inflation hurting consumers' ability to service debt backing European ABS and RMBS transactions. However, we don't see this as a material risk in the short term.
Although European CLOs benefit from sector diversification in the underlying corporate loan portfolios, emerging risks or credit deterioration could ultimately hurt performance. For instance, disruptions within the chemicals industry could negatively affect CLOs: The industry represents the third-largest sector exposure in the European CLOs we rate, and Russia supplies a high proportion of EU imports for certain chemicals.
In Asia-Pacific and Latin America, we are also monitoring structured finance securities for any indirect effects, such as lower economic growth.
We will continue to monitor the Russia-Ukraine conflict and the credit impact on structured finance transactions globally. We may reassess our views as the situation evolves.
Related Research
- S&P Global Ratings Reviews Aircraft ABS Exposure To Russian And Ukrainian Airlines, Feb. 28, 2022
- The Macro And Credit Effects Of Russia's Invasion Of Ukraine, Feb. 25, 2022
This report does not constitute a rating action.
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