Payment moratoria amid the coronavirus pandemic apply widely to collateral across structured finance markets in Europe and will stave off some defaults, but will only delay them for other borrowers who suffer prolonged financial hardship or were previously struggling financially, Moody's Investors Service said in a report this week.
‘The more stringent a jurisdiction's eligibility criteria, the more moratorium levels will correlate with defaults, given that the profiles of eligible borrowers are weaker,’ said Antonio Tena, VP-Senior Analyst at Moody's. ‘This correlation is especially useful given that moratoria mask delinquency and default data. Transactions from two countries with the same take-up rate do not share the same level of risk if one country's moratoria is subject to strict eligibility criteria while the other's allows self-certification.’
While some jurisdictions have a high level of information consistently available to the public and investors that facilitates monitoring, others provide only opaque, or even no information on take-up rates for coronavirus-related payment moratoria.
For instance, only a few deals currently show this information in Spain, while the information is already available in 30% of German auto asset-backed securities (ABS) and in more than 50% of UK deals.
Take-up levels vary by asset class and region. Residential mortgage-backed securities (RMBS) have the highest take-up rates among all consumer debt-backed securitisations we rate, led by UK transactions.
CMBS loans
Formal payment moratorium programmes do not apply to commercial mortgages, but lenders and borrowers are negotiating covenant waivers, loan extensions, deferred interest, amortisation payments and other relief measures bilaterally. Although few borrowers receive full payment moratoria from their lender, a material portion of loans receive covenant breach waivers.
Many commercial mortgages borrowers are having difficulty making debt payments, and thus looking for relief, because a large portion of tenants are not paying rent, even if they are able. In some cases, tenants are trying to negotiate lower rents, even if they have done well through this crisis.
Senior lenders are less likely to enforce the loan at this stage or at least until market conditions improve and unlikely to seek/rely on valuation and take enforcement actions on the loan because of loan-to-value (LTV) covenant breaches. However, mezzanine lenders have greater incentive to act and exercise their rights. They do not rely on enforcing on the properties at depressed prices but can enforce their security at the borrower level.
