The performance of European structured finance deals continues to improve, with the ratio of ratings upgrades to downgrades by Fitch Ratings exceeding 3:1 in the first quarter of the year. This is up from 2:1 for the whole of last year.
The positive trend began in the second half of last year, when upgrades exceeded downgrades for the first since 2003. "There has been a massive turnaround since 2003, which was the weakest and most volatile year so far for European structured finance ratings," said Andy Brewer, London-based co-author of Fitch's recent study of the sector.
European collateralized debt obligations saw the greatest improvement of all sectors in the first quarter, with 14 of the 16 ratings actions being positive. "CDOs in particular have benefited from a more benign credit environment," said Fitch's Shaun Baddeley, senior director. He noted for the whole of last year, 98% of the ratings on investment-grade CDOs were either maintained or improved.
In the mortgage-backed sector, upgrades of securitizations of commercial properties continued to increase, from eight in the fourth quarter to 10 in the latest period, with no downgrades. Most of the 2005 upgrades came from the Italian non-performing loan area, driven in particular by improving collections and recoveries and early prepayments.
Residential mortgage-backeds, on the other hand, did not maintain their stellar Q404 track record of 13 upgrades and no downgrades. Instead the sector had six downgrades and no upgrades. That said, all the rating actions were on a single deal with high exposure to Eastern Germany.
A series of upgrades in the equipment loan/lease sector in Q105 drove the positive 4:1 upgrade ratio in asset-backed securities, reflecting increased credit enhancement from amortization. Meanwhile, there were no rating actions in consumer or other commercial ABS.