Moody's - Pandemic-related Payment Moratoriums Add Risks to Global Securitizations

•            Delayed payments from moratoriums support borrowers but erode transaction cash flows

•            Transaction features help mitigate the negative impacts of cash flow disruptions

Payment moratoriums, both publicly and privately initiated, will ease payment obligations on struggling borrowers across assets that back structured finance transactions around the globe, but will also introduce some risks for the securitizations.  According to a new report from Moody's Investors Service, the degree to which delayed payments will affect transaction cash flows depends on the length of the delay and the economic distress, as well as transaction characteristics.

Since the onset of the coronavirus-related economic contraction consumer and commercial lenders worldwide have offered a variety of payment moratoriums to provide relief to borrowers facing financial strains. Government action mandated some moratorium programs, while private lenders developed and initiated others. These programs help limit losses to lenders on loans to borrowers who would have otherwise defaulted only as a result of temporary financial hardships beyond the borrowers' control.

“The delay in payments from borrowers receiving moratoriums, however, increases the risk of interest and principal shortfalls, could lower recoveries on defaulted assets from delays in asset disposition, and heightens maturity risk from lengthened repayment terms,” says Moody's Vice President Peter McNally. “However, most transactions have structural features that help mitigate the negative effects of delayed collections.”

A range of mechanisms are present in most securitizations to help soften the negative impact for bondholders. These include reserve funds and liquidity facilities, performance-based trigger mechanisms, the availability of principal to meet shortfalls in interest, and servicer advancing requirements