The persistent negative rating drift in place between the fourth quarter of 2021 and third quarter of 2023 continues to recede. The upward shift is mainly due to reduced rating pressure on CRE/CMBS and secured NPL transactions.

Losses to senior noteholders of the Elizabeth Finance 2018 CMBS resulting from the sale price of the properties securing the Maroon loan was an idiosyncratic outcome. It may not be a unique outlier but will not trigger wider market turbulence.

Lower than expected indemnity proceeds and long indemnity processes have led to recovery shortfalls in most Italian NPL transactions so far.

A sustained period of higher interest rates will present a challenge for many borrowers worldwide, as economies adapt to a new era of comparatively tight monetary policy amid a recovery in growth and enduring inflation.

Italian NPL collections of EUR 185m in April 2024 were 13% down month-on-month and below the average of April collections in the last two years. The most seasoned transactions show a significant decline in DPOs and notes sales.

The new structured finance methodology is specific to residential mortgage-backed securities, mainly in Europe. Scope is calling for comments until the 1st of July 2024.

Q1 Italian NPL volumes were the lowest since 2021, 19% below the 2022/2023 average, while March 2024 collections were 36% below the average of the past two years even though there were more transactions (44) than in the two previous years (41 and 43).

Scope Ratings requests comments on its Covered Bond Rating Methodology by 27 June 2024. The proposed changes to the methodology are not expected to have an impact on outstanding covered bond ratings assigned by Scope.

With our negative CRE outlook persisting and the collateral values of CRE loans volatile, covenant breaches are also driving up NPLs. Regulators are seeking to address value volatility, but Pfandbriefe are shielded because of cover-pool eligibility caps.

EU supervisors remain concerned that banks’ real-estate exposure is vulnerable, and US contagion risk is an issue. But while German banks’ CRE portfolios are unlikely to have endangered the safe-haven status of Pfandbriefe, office exposure is a worry.