Low oil prices a plus for securitization and covered bonds, but with risks

The outlook is largely positive for global securitization and covered bond performance if oil prices continue to hover around $50 per barrel, though some sectors and regions could be susceptible to performance declines over time, according to Fitch Ratings in a new report.

With oil prices falling more than 50% since the middle of last year, lower gas prices and heating oil costs have made it easier for households to make debt service payments. “Consumers will benefit from lower oil and gas related expenses, which should translate into a mild improvement in arrears on their financial obligations,” said Kevin Duignan, managing director. “In particular, consumer assets like credit cards, auto loans, and residential mortgages will benefit.” That said, this benefit may be diluted in some regions by the impact of currency movements upon oil import prices.

Conversely, some asset types and regions could see a modest negative impact from lower oil prices. “Commercial and residential mortgage assets in securitizations with high exposure to Texas and Alberta, and covered bond collateral pools with exposure to parts of Norway, for example, would be negatively impacted by continued low oil prices,” said George Masek, senior director. “Unemployment is likely to increase in areas that rely heavily on the oil-industry, which could translate into modestly higher delinquencies and losses in transactions with high exposure to these areas.”

Over time, Fitch does not expect significant rating movement on structured finance and covered bond ratings in either direction exclusively in relation to low oil prices. Their positive influence alone on collateral performance would not be enough to lead to rating upgrades. Additionally, Fitch expects only a small number of idiosyncratic downgrades of deals with sizeable concentrations of oil-exposed collateral, or those with ratings linkage to oil-exposed transaction parties.

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