But the central bank rate-hiking cycle and high levels of uncertainty took a heavy toll on asset classes very reliant on portfolio collateral valuations. “Italian non-performing loan transactions backed by illiquid real estate saw the strongest downside ratings pressure, while instruments backed by operating commercial real estate also saw negative ratings drift, primarily driven by increased refinancing risks exacerbated by structural changes in demand for property types like office.”, said Antonio Casado, Head of Structured Finance Monitoring.

Figure 1: Asset-class outlooks 

A positive outlook indicates upside rating factors on our outstanding rated universe, or improved rating stability in the case of AAA rated tranches. A negative outlook indicates downside risks. Source: Scope

Our general structured finance outlook is underpinned by expectations for a continued soft landing. Differentiation between asset classes reflects their degree of exposure to economic risks as well as the rating impacts of asset-class-specific securitisation features.

Consumer and SME loan portfolios amortise and build up credit enhancement much more quickly than mortgage portfolios under normal conditions, for example. Corporate ABS instruments exhibit significantly longer risk horizons than SME ABS transactions because the latter tend to feature long or extended re-investment periods and, occasionally, pro-rata amortising senior tranches.

“The performance of unsecured NPLs, real-estate-owned assets and secured reperforming loans is closely linked to economic conditions and is most vulnerable to recession risk,” Casado cautioned. “CRE types such as office are particularly exposed, due to persistently tight refinancing conditions and challenges related to changes in demand patterns. Italian secured NPL instruments remain the most vulnerable, burdened by distressed valuations, illiquid and inefficient auction processes and the cost of carry of relatively high operating expenses.”

The aftermath of the Covid crisis has demonstrated that the performance of securitisations has hinged partly on the willingness and ability of governments to provide economic life support. But large fiscal deficits in countries such as Italy and the fact that nominal government debt as a percentage of gross domestic product has still not reverted to pre-pandemic levels for the largest European economies suggest that this ability may erode over time.

Consequently, high investment-grade ratings assigned by Scope do not give credit to potential government interventions as a response to the next crisis. This is primarily reflected in our underlying distressed portfolio default-rate assumptions.

Scope’s monitoring review and outlook covers the main structured finance asset classes rate by Scope – consumer, SME and corporate ABS, RMBS, CRE instruments, and non-performing loan ABS – and summarises the factors underpinning our annual transaction monitoring between October 2020 and October 2024.

Download the structured finance monitoring report and 2025 rating outlook.