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Moody's Updates Outlook for Emerging Markets CDOs to Negative
15:30
Collateral Performance Outlook revised to Negative from Stable
Paris, December 15, 2008 -- When Moody's Investors Service published its "2008 Mid-Year Outlooks for Global CDOs/Derivatives" in September 2008, its central macroeconomic scenario was assuming strong growth in emerging countries (see Moody's Global Financial Risk Perspectives, "Navigating the Fog: Update on Moody's Macro Stress Scenarios for 2008-09", July 2008). The vast majority of sovereign credits were then showing a stable outlook, with less than 2% of the issuers placed under review for possible downgrade or associated with a negative outlook. Consequently, Moody's outlook on Emerging Markets CDO indicated a predominantly stable collateral performance and limited CDO rating implications, barring any excessive concentration in riskier credits.
Since then, the financial crisis has started to affect the prospects for emerging market economies, and Moody's has published updated macroeconomic scenarios where emerging markets growth prospects have been revised downwards (see Moody's Global Financial Risk Perspectives, "Global Macro-risk Scenarios 2009-2010: From Global Integration to Global Dis-integration ?", December 2008).
Moody's central scenario for 2009-2010 of "Global Healing" now generally expects emerging economies to grow below potential. The proportion of sovereign issuers on review for downgrade or with a negative outlook has increased to above 6% from less than 2% three months ago (see Moody's Special Comment "Moody's Rating Actions, Reviews and Outlooks: Quarterly Update -- Third Quarter 2008", October 2008). Beyond its impact on the performance of sovereign issuers, the global financial crisis has increased the pressure on internal banking systems, which will have in turn further negative impact on the performance of emerging markets corporates. As a result, CDO collateral pools with significant concentration of emerging markets, be it through corporate or sovereign issuers, are expected to experience credit quality deterioration.
Based on these considerations, Moody's has revised its Emerging Markets CDOs collateral performance outlook to Negative from Stable, and expects rating implications to be Negative on Emerging Markets CDOs tranches. The extent of the rating changes on Emerging Markets CDOs tranches will depend on each individual portfolio composition, the evolution of the global macroeconomic environment and on its impact on emerging market sovereign and corporate issuers.
From a shorter-term perspective, Moody's Global Sovereign Group published a Special Comment titled "Rating Sovereigns During a Global 'Sudden Stop' in International Funding" (Nov 2008), where it highlighted that, in Moody's opinion, the current funding dearth experienced by emerging markets countries is of a temporary nature, with most countries being able to endure it thanks to adequate reserves, access to non-market funding and/or sufficient integration to the world economy.
However, Moody's Global Sovereign Group identified a list of "High Vigilance Countries," i.e. countries that appear vulnerable to the current crisis and are more likely to face rating pressures. Among these are Hungary, Croatia, Romania, Bulgaria, Korea, Kazakhstan, Turkey, Ukraine, South Africa, Pakistan, and the Baltic countries. The Sovereign Group has already started taking isolated rating actions, e.g. on Ecuador, Pakistan, Jamaica, Hungary, Estonia, Latvia, and Lithuania.
Moody's currently rates 29 CDOs exposed mainly to emerging market risk, 17 of which have significant exposure (i.e. more than 5% of pool) to these "High Vigilance" countries. However, except for a couple of transactions that have a large exposure to these countries (i.e. typically over 20% of the pool), we do not expect the rating actions that may be taken in the coming weeks with respect to these "High Vigilance" sovereign issuers to have a significant rating impact on the ratings of these CDO tranches.
