Fitch Ratings Sees Brazil’s Consumer ABS Deteriorating in 2009

    US Dollar

    US Dollar Fitch Ratings says that it expects the performance of Brazil's outstanding consumer asset-backed securities (ABS) to continue deteriorating throughout this year. The American company has released a special report on Brazilian ABS performance deterioration and transaction structural inefficiencies.

    The report places particular focus on how the voluntary support of originators/servicers is masking true asset performance and how liquidity pressures on these institutions heightens the need to better understand the underlying assets' credit quality.

    This report follows up to Fitch's previous research reports on the concerns over Brazilian Consumer ABS, particularly asset transfers at substantial gain-on-sale and originator/servicer flexibility to manage portfolio performance with very low transparency.

    "Transaction-specific gain-on-sale levels and originator flexibility to manage pool performance are more important today than they were before while consumer credit delinquencies are on the rise and originator liquidity is tight," said Jayme Bartling, Fitch Senior Director and Head of Brazilian Structured Finance.

    "Transactions more dependent on the originator might start showing sudden spikes in delinquencies, as it is going to be harder to repurchase or substitute loans now, with this always being a risk in Brazilian Consumer ABS." Bartling added, "true enhancement levels of transactions in the market are being overstated by as much as 300% in specific cases, but by at least 70%-80% on average."

    In support of this view the report provides data on Fitch-rated transaction performance metrics with and without loan repurchases. The data evidences how repurchases can affect the overall risk perception of the underlying asset portfolio.

    While Fitch does not anticipate severe deterioration in consumer loan performance, delinquency and repurchase figures strongly illustrate that the sector is moving away from the "base case" scenario. This expectation is confirmed through delinquency data on consumer loans in the financial system.

    "Fitch recognizes repurchasing bad loans can be at times beneficial to the overall risk profile of the transaction. However, the way originators and servicers approach this can sometimes be characterized as against the nature of securitization," said Greg Kabance, Managing Director and Head of Latin America Structured Finance.

    According to Kabance, the repurchase of loans, or oftentimes just the delinquent loan installments, can increase the valuation of the collateral which can prevent a transaction from triggering and allow the release of excess cash to equity holders.

    The special report, Brazilian Consumer ABS – Fact or Fiction?, is now available on the Fitch web site at www.fitchratings.com.

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