On Monday S&P revised its rating outlook on Genworth to negative from stable. In a report released yesterday, the ratings agency addressed the current and potential issues the outlook change could have on its ratings on Australian and New Zealand structured finance transactions.
About 88 per cent of RMBS transactions in Australia and New Zealand are exposed to lenders mortgage insurance (LMI). Genworth insures about 25 per cent of the loans that underlie Australian RMBS deals.
“Any deterioration in the financial strength of LMI insurers could affect RMBS ratings,” S&P said.
“Our ratings on subordinated notes would be most vulnerable. However, most ratings on currently outstanding senior ranking notes have moderate to low sensitivity to LMI provider downgrades because they have extra credit enhancement in the form of subordination.
“As a result, not only do these notes usually have ratings that are higher than the financial strength ratings on relevant insurers, but they also often have extra credit enhancement that provides a buffer for them to withstand certain levels of LMI provider downgrades.”
According to S&P, rapid portfolio amortisation has raised credit support as a percentage of outstanding balance. The agency explained that a general net improvement in the creditworthiness of the housing-loan portfolios that underlie RMBS has strengthened its ratings on most senior tranches and made them better able to withstand a potential downgrade of the LMI providers.
“The improvement in credit quality is due to a general deleveraging by borrowers during a period of lower mortgage rates and greater seasoning of the portfolio.”
A relatively strong LMI claims-payout record has also helped support ratings stability, the group said.
“The longer a transaction is outstanding, however, the longer it is exposed to economic cycles and related stresses.”
S&P noted that current macroeconomic conditions are relatively benign: “We do not anticipate any rise in claims adjustments. We monitor this risk through regular reviews of originators' claims-adjustment assessments.”
The revised outlook for Genworth comes after the LMI giant this month lost an exclusive agreement with Macquarie Bank, its second biggest customer.
The company has also advised that the current supply and service contract with its third largest customer is due to expire on 20 November 2017 and that this customer may, or may not, issue a request for proposal prior to that time.
[Related: Genworth loses another major contract]