Tag Archives: Fitch Ratings

Fitch: Euro Governments Borrowing To Drop by 9% in 2011

Fitch Ratings says in a statement that gross government borrowing for the EU15 countries will fall by 9.2% this year, to EUR 1.866 billion versus EUR 2.050 billion in 2010. Fitch expects that the run-off of government-guaranteed bank debt will start to eliminate a source of competition for sovereign debt, potentially easing sovereign financing conditions.

“Fitch expects net borrowing by central governments across Europe to fall sharply in 2011 as governments implement budget cuts.”

Douglas Renwick


In 2010 European governments had the largest borrowing requirement for decades. In a new report, Fitch notes that 2011 euro area gross borrowing is down 13% year-on-year to EUR 1.607 billion, or 16.5% of GDP.

In absolute terms, it is largest in France (EUR 386 bn), Italy (EUR 381 bn) and Germany (EUR 292 bn).

As a share of GDP, it is largest in Greece (25%), Italy (23%), Portugal (23%) Belgium (21%), France (18%) and Ireland (17%).

Overall, gross borrowing has fallen y-o-y for most European governments.

Denmark, Greece, and Portugal are the exceptions.

“Fitch expects net borrowing by central governments across Europe to fall sharply in 2011 as governments implement budget cuts,” Douglas Renwick, Director of Fitch’s Sovereign team, says in a statement.

“The dramatic rise in short-term debt issuance by EU15 countries seen in 2009 has also started to unwind, with short-term debt falling 11.2% year-on-year as of December 2010. As a result, medium and long-term debt maturities are up 13% year-on-year in 2011, partly reflecting higher public debt stocks,” Robert Shearman adds.  Shearman is co-author of the report and member of Fitch’s Sovereign team.

Although the marginal cost of funding increased for ‘peripheral’ euro area governments (Greece, Ireland, Italy, Portugal and Spain), yields declined for the EU15 as a whole, on an annual average y-o-y basis, to 3.5% in 2010 from 3.7% in 2009.

The report notes that by maintaining the average duration of their debt, peripheral countries are slowing the feed-through of higher yields to their effective rate of interest.

Fitch expects that the run-off of government-guaranteed bank debt (EUR 242 billion in 2011) will start to eliminate a source of competition for sovereign debt, potentially easing sovereign financing conditions.

(Note: Fitch defines gross borrowing as net borrowing plus redemptions on medium and long-term debt plus the stock of short-term debt at the end of the previous year, which will need to be rolled over at least once during the current year).

Here’s a copy of the report, entitled “European Government Borrowing: Steps in the Right Direction”

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Fitch Place The Entire US Mortgage Industry Under Negative Outlook

Fitch Ratings has Thursday assigned a negative outlook for the entire US Residential Mortgage Servicer ratings sector on increased concerns surrounding alleged procedural defects in the judicial foreclosure process. The industry-wide issue will cause all servicers to be under increased scrutiny from a wide range of state and federal regulators, state attorneys general, and GSE‘s. All servicers will be affected, even those fully in compliance with all foreclosure rules and regulations.

Risks to servicers include cost to research and remediate any errors, additional fees and resources, potential penalties and reputational risk.”

Diane Pendley


This is due to the increased amount of time and manpower it will take to properly address the much higher level of oversight and inquiries that are received, as well as the anticipated additional court delays. ‘Risks to servicers include cost to research and remediate any errors, additional fees and resources, potential penalties and reputational risk,’ said Diane Pendley, Managing Director and head of U.S. RMBS Operational Risk for Fitch.

This industry-wide issue will cause all servicers to be under increased scrutiny from a wide range of state and federal regulators, state attorneys general, and GSE’s. All servicers will be

Fitch’s Rating Outlooks indicate the likely direction of any rating change over a one- to two-year period and may be Positive, Negative, Stable or, occasionally, Evolving.

Fitch has received responses to its recent survey from all of its rated servicers regarding the servicers’ specific internal procedures used to verify and execute foreclosure affidavits.

All servicers have indicated that they are taking this matter seriously and have reviewed or are in the process of reviewing their internal procedures used to verify and execute foreclosure affidavits.

Approximately one-third of Fitch’s rated servicers have completed their reviews of foreclosure processes and the accuracy of their foreclosure affidavits. These servicers do not believe they will need to take any corrective action or make any changes to their current processes at this time.

Some servicers have estimated that they will be able to complete their review within the next several weeks, while others are still unable to give a specific estimate of how long it may take to complete their reviews.

However, ‘all servicers appear to be working towards quantifying and defining their position on foreclosures,’ said Pendley. Therefore, Fitch expects all servicers will have substantially completed their internal reviews by the end of the fourth quarter.

Based on the research that the servicers have completed to date on these issues, all servicers generally maintain the factual accuracy of their affidavits.

However, some have found their procedures for reviewing, signing and notarizing foreclosure documents may require changes and corrective actions. Some servicers have announced publicly that they have halted certain foreclosure and liquidation actions until their reviews are completed.

Many servicers have also stated that they will be resuming the foreclosure and liquidation actions in identified jurisdictions as they complete their reviews and determine that their processes are adequate and any needed corrective actions have been taken.

Fitch has requested its rated servicers to provide estimates on the volumes and timeframes for submitting corrected affidavits when it is found to be necessary and as this information becomes available. However, the servicer’s ability to resolve each corrective action at the local court level will create a wide variety of remedial steps and associated timeframes. ‘Final resolution of the foreclosure affidavit concerns and the multiple resulting investigations, along with assigned ownership rights prior to initiating foreclosure actions, may not occur until well into 2011 and possibly beyond,’ said Pendley.

Fitch has discussed with its rated servicers their ability to track and segregate the additional costs associated with taking any corrective actions.

If corrective actions are needed because of a servicer error, any increased costs should be borne by the servicers and not passed through to the trusts.

These increased costs may include legal costs to correct and file new or amended foreclosure documents and the increased carrying costs for the extended foreclosure and liquidation timelines.

Fitch may place an individual servicer’s ratings on Rating Watch Negative and/or downgrade the ratings if the servicer does not diligently and timely review its processes and take immediate corrective action to remediate any foreclosure action or documentation failures.

Fitch may take similar actions on a servicer’s ratings if the impact of the additional costs that must be borne by the servicer significantly affects its financial condition. Until those conclusions are reached, the Negative Outlook on the sector impacts all U.S. RMBS servicers.

An increase in loss severities on liquidated loans from expected trend lines or any downgrades to servicer ratings may result in negative rating actions on related RMBS classes.

As a direct by-product of the recent foreclosure issues, Fitch currently expects any negative rating actions on RMBS tranches to be limited largely to non-investment grade classes and tranches that currently have a Negative Rating Outlook. Additionally, Fitch does not envision RMBS downgrades to exceed a single rating category in most cases.

(Source: Credit Suisse)

Here’s a copy of the full report: Rating U.S. Residential Mortgage Servicers

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Evolving Use of Leverage and Derivatives

Many US closed-end funds (CEFs) continue to utilize traditional forms of cash-funded leverage such as bank loans, debt or preferred stock in order to enhance yields and returns for their common shareholders.

“Fitch expects that use of cash-funded leverage and derivatives by CEFs will continue to evolve and, as such, will remain an important consideration for investors in CEFs, affecting their return and risk profiles.”

Fitch Ratings


Additionally, CEFs may also utilize various types of derivatives to meet their investment objectives, either for purposes of hedging or as means to more efficiently achieve return and leverage targets, according to a special report published by Fitch Ratings, Monday.

As of July 30, 2010, 416 leveraged CEFs in the U.S. had issued $55.4 billion of cash-funded leverage against $180.4 billion in assets under management, according to the statement.

Additionally, 71 Fitch-rated CEFs had utilized $4.7 billion in notional of derivatives as an alternative to cash-funded leverage (termed “economic leverage”) and, to a lesser extent, for hedging purposes.

While leverage strategies enhance equity returns in favorable markets with rising asset returns and positively-sloped yield curves, leverage may also amplify the downside risk to debt, preferred stock and common stock investors in less favorable markets.

The report, entitled “Closed-End Funds: Evolving Use of Leverage and Derivative” discusses the extent to which different forms of leverage and derivatives are utilized by US CEFs, contrasts derivatives used for hedging purposes from those used for economic leverage purposes, highlights the Securities and Exchange Commission‘s (SEC) current and evolving regulatory treatment of derivatives, and summarizes Fitch’s treatment of derivatives when rating CEF debt and preferred stock issues.

“Current regulatory requirements for derivatives vary, however, and may not appropriately capture the potential for increased off-balance sheet leverage in excess of that allowed for more traditional forms of cash-funded borrowings,” the rating agency says.

Recognizing the evolution of derivatives usage by investment companies (including CEFs), both the SEC and American Bar Association continue to examine the issue to determine appropriate methods of measuring and reporting derivatives activity by applying a risk-based approach.

“Fitch believes that derivatives can be an effective tool for CEFs to manage existing risks and/or take on new risk exposures, provided that the marginal risk contribution is appropriately identified and measured.”

Further, Fitch expects that use of cash-funded leverage and derivatives by CEFs will continue to evolve and, as such, will remain an important consideration for investors in CEFs, affecting their return and risk profiles.”

“Regardless of the form that fund leverage takes (cash or derivatives), Fitch seeks to account for the risk to fund investors.”

For derivatives, Fitch seeks to recognize any additional economic leverage by ‘grossing up’ the CEF balance sheet, while also taking into account potential differences in the price volatility of the reference assets, the agency says.

“Conversely, hedges are viewed as a reduction in the overall risk profile of CEFs, to the extent the hedge is well-matched.”

The special report entitled “Closed-End Funds: Evolving Use of Leverage and Derivatives” was published on Sept. 27, 2010 and is available at http://www.fitchratings.com.

Additional research: Closed-End Fund Debt and Preferred Stock Rating Criteria

Example of use, Direct Market Access (DMA):

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