The role of rating agencies in the European structured finance market has changed, according to panellists at a Fitch-hosted conference in London last Friday (21 January). The conference also focused on the outlook for the sector during the year ahead.

Will Davies, svp at PIMCO Europe and a panellist at the conference, commented on how recent counterparty criteria issues are likely to be addressed in 2011. "Although the criteria changes are important, investors do have more important issues to contend with at present. Additionally, investors are now conducting their own ratings analysis and, although important, ratings serve as a second or third opinion."

While counterparty criteria updates don't affect PIMCO, he congratulated the firms that have acted quickly to adapt to the changes. He added: "Many firms have experienced analysts to respond to such changes in the marketplace."

But Steve Gandy, head of securitisation at Santander, highlighted the impact on the market more broadly. "For Santander and other issuers, the concern is how investors are evaluating their transactions. Counterparty and regulation issues discourage less resourced investors from investing. That tends to put a damper on the market."

Looking at the role of the rating agencies in 2011, Ganesh Rajendra, head of asset- and mortgage-backed strategy at RBS, noted an interesting turn in rating changes from 2008. "From the middle of 2009, rating methodologies moved towards non-credit issues making changes in the way of criteria. This is where the rating agencies have shifted the goal posts."

He continued: "To obtain a triple-A rating is much more expensive now and therefore it will become a rarity going forward. Rating-sensitive investor bases have shrunk dramatically because of this, which makes the role of ratings complementary and not a driving force."

Gandy agreed that the cost to issuers' spreads on the underlying assets can outweigh the costs for the triple-A tag. "To achieve a triple-A rating is not imperative if our investors don't need it. The cost of a triple-A doesn't always add up - in which case, it's not worth it. What we need to do is drive down the cost of securitisation, so that it's in line with the asset prices."

Meanwhile, Rajendra said he expected CMBS to be the most affected asset class in 2011 - suffering from restructuring issues. However, overall he believes that credit trends will improve, whether the market suffers from a double-dip recession or not.

Indeed, Fitch expects GDP growth in the UK, Germany and France in 2011 to lead to improved performance of structured finance transactions in the EU's three largest economies. Corporate delinquencies and unemployment should stabilise and start to fall, while house prices are anticipated to either flatten or drop marginally. The agency's overall outlook for the sector in 2011 is stable.

However, Fitch expects that structured finance deals in weaker eurozone countries, including Spain, will have a tough 2011 - albeit probably less so than in 2010. "House prices will continue to fall in Spain throughout the year, while the impact of increased unemployment and falling GDP will be seen as state benefits and other temporary support expires," says Marjan van der Weijden, head of Fitch's European structured finance team. "These difficult conditions are reflected by more than 20% of Spanish tranches having a negative outlook."

The agency expects RMBS defaults and delinquencies to remain artificially low throughout Europe because of lender forbearance. Additionally, a large number of collateral and transaction outlooks are stable due to the expected slowing rate of house price declines. However, Spanish and Irish RMBS will continue to be the hardest hit, and consequently their collateral and transaction outlooks remain negative.

Although the agency has warned of the upcoming refinancing needs of both CMBS and CLOs for two years, it does expect to see the market working towards a solution this year. As the market moves closer to its peak refinancing years of 2013-2014, a large proportion of transaction outlooks are negative.

Meanwhile, the performance of consumer ABS is stabilising in line with unemployment, Fitch reports. But the impact of increasing unemployment in Spain during 2010 will be felt this year as people's savings and benefits run out.

Italian mixed leasing transactions will also come under pressure from a protracted economic recovery, but to a lesser extent. Continued deleveraging should increase rating stability in these transactions, Fitch concludes.

LB