OREANDA-NEWS. Macroeconomic pressures on Brazil will continue to stress CMBS, Fitch Ratings says. Credit-linked CMBS will fall faster in 2016 than in 2015 while other CMBS sectors will also suffer. We expect most Fitch-rated RMBS deals to be stable amid the declining residential market as most borrowers benefitted from a rise in inflation and trusts have significant seasoning.

Fitch's Brazilian structured finance ratings have seen significant downgrades. In 2013 and 2014 downgrades doubled upgrades for all Brazilian structured finance was 2:1. That ratio ballooned to 7:1 during 2015. In January of 2015, 17% of the portfolio had a negative outlook. A year later that jumped to 31%.

Credit-linked CMBS are likely to suffer most as the recession continues and macroeconomic factors weaken. These transactions were hurt by corporate downgrades in 2015 that outpaced upgrades by 4.4:1. CMBS deals linked to homebuilders and agriculture businesses were fared worst. In 2016 Fitch expects downgrades to outnumber upgrades by 10:1 and the impact to broaden to other business sectors.

The mall CMBS subsector will also likely weaken as rising unemployment and declining household income continue to suppress consumer spending. In this environment, malls are struggling to raise rents on tenants and vacancies are rising. This has a negative effect on debt service coverage ratios (DSCRs), but we expect them to remain within initial Fitch assumptions in most cases. Further, Fitch-rated mall transactions offer DSCR buffers that are sufficient to withstand stressed scenarios for prolonged periods.

Fitch expects the Brazilian residential market to decline further in 2016. Offer prices (in real terms) for residential units in large Brazilian cities began to drop in 2014. In 2015 prices fell by approximately 10%, after adjusting for inflation. We expect declines in 2016 and 2017 to remain within our current base case assumptions (15-20% below current levels).

Fitch-rated RMBS deals secured by mortgages with fixed-rate instalments had very low default rates throughout this decline. Their borrowers got some relief when inflation eroded the cost of their mortgage payments. Consumer inflation measured by IPCA was 10.67% in 2015 and 6.41% in 2014, according to the Brazilian Institute of Geography and Statistics. These RMBS deals also have high seasoning levels (the number of months since the loans have been originated), so that average current loan-to-value (LTV) and debt-to-income levels are moderate. We therefore expect only moderate increases in default rates on these transactions and stable ratings.

Some Fitch-rated RMBS trusts are secured by mortgages with inflation-adjusted payments. While they are demonstrating higher default rates, much of the impact on those transactions will be mitigated by their high credit enhancement levels, conservative structures with strong credit enhancement and default triggers, and relatively low average LTV ratios of approximately 50%.