The weakening global economic outlook is weighing on the expected asset performance of structured finance vehicles, says Fitch Ratings.
In a report Wednesday, the rating agency said it’s revised the asset performance outlook down for 13 sub sectors of the global structured finance universe — downgrading 10 sectors to “deteriorating” from “neutral,” and taking three sectors to “neutral” from “improving.”
As a result, 44% of its rating outlooks are now “deteriorating,” up from 33% at the start of the year.
The eroding outlook is being driven by “rising energy prices, mounting inflationary pressures and weakening labour markets,” Fitch said — with weaker borrowers proving to be especially vulnerable.
“In Europe, we revised our asset performance outlooks for the European auto, credit card, and unsecured consumer loan sectors to ‘deteriorating,’” it noted. “This reflects our expectation that the weakening performance in recent quarters will persist through end-2026 as borrowers feel the effects of a challenging macroeconomic environment.”
The outlook for commercial mortgage-backed securities in the non-industrial European sector was also revised down, the report said, as higher energy prices and inflation are expected to result in higher interest rates.
Other sectors downgraded to deteriorating include certain U.S. and Australian residential mortgage-backed securities (RMBS), while the outlooks for asset-backed securities and RMBS sectors in Latin America were cut to “neutral” from “improving.”
Despite the growing pressure on asset performance, the ratings for global structured finance have, so far, proven resilient to the increasingly challenging macroeconomic environment, Fitch said.
In the first quarter, “ratings performance remained robust across most [structured finance] sectors,” it said, with global upgrades handily outpacing downgrades.
Only 4% of global structured finance ratings had a negative rating outlook at the start of the second quarter, Fitch said. U.S. CMBS accounted for the vast majority (85.2%) of those negative outlooks.
“This reflects a continued asset performance and valuation deterioration, particularly among lower-tier office properties, and the expected weakening of property-level net cash flow… due to slower revenue growth and rising expenses,” the report said.