June 2024 Edition
Welcome to Global Credit Insights. Every month, we bring you the top research insights from Morningstar DBRS, the leading provider of credit ratings and thought leadership on corporate and sovereign entities, financial institutions, and project and structured finance transactions.
Rating more than 4,000 issuers and 60,000 securities, Morningstar DBRS is one of the top four credit rating agencies in the world. To learn more, visit dbrs.morningstar.com.
Growing Footprint of Private Credit in Europe
This commentary looks at private lending through the lens of European Structured Credit and the various drivers of private credit expansion in Europe, the opportunities and risks for investors, and explores the similarities between private credit funds and the typical structured finance-like set up observed in Collateralised Loan Obligations (CLOs).
The commentary presents the view that unprecedented growth of private credit lending witnessed in recent years will likely lead to the expansion of Middle-Market (MM) CLOs in Europe, something that has become a norm in the U.S. However, the path for MM CLOs in Europe is still uncertain. While the current environment presents challenges, the private credit sector in Europe remains poised for growth, with opportunities for innovation on the horizon.
Conduit Trends – Mid-2024
We continue to see factors that suggest conduit transactions are signaling some credit migration. The stated loan-to-value (LTV) ratio has reversed its recent course and started to become modestly more aggressive. Other metrics such as debt service coverage ratios (DSCRs), pool diversity, and the spread of the issuer’s implied cap rate to interest rate continue to witness a noticeable decline.
This commentary reflects data collected from the Annex A data tapes on 58 conduit transactions that closed from November 2021 through May 2024. To aggregate the metrics, we used our commercial mortgage-backed securities (CMBS) Insight model. Unsurprisingly, there was an inflection point in May 2022, which corresponds to the U.S. Fed’s second rate hike of 2022 and the start of its aggressive, almost monthly, rate hikes to combat inflation.
Mexico’s Elections: Sheinbaum’s Commitment to Continuity Will Be Tested
Mexico’s June 2 elections produced a landslide victory for Claudia Sheinbaum's Morena Party and its coalition Sigamos Haciendo Historia. The coalition also looks positioned to gain supermajorities in the lower house and potentially the Senate, as well as several more governorships at the state level. As a result, President-elect Sheinbaum will have substantial power to pass legislation at the national level and coordinate policy with subnational governments.
Sheinbaum will assume the presidency on October 1 with a favorable electoral landscape but daunting policy challenges. A key question is whether she will be willing and able to recalibrate the policy agenda in a way that addresses the country’s economic, structural, and security challenges without unsettling the internal political cohesion of the AMLO coalition.
India Parliamentary Elections: Modi Wins Third Term but Loses Single Party Majority
The incumbent Bharatiya Janata Party (BJP) of the National Democratic Alliance (NDA), led by Prime Minister Narendra Modi, won the elections for a third successive term. However, the BJP government lost the single-party majority (272 seats) it has enjoyed through the 2014 and 2019 elections.
We expect policy continuity with macro stabilization likely to remain at the forefront. One could expect a continued focus on infrastructure rollout; however, reliance on other parties could slow the pace of fiscal consolidation and structural reforms. While the 2024 election results could temper the NDA’s policy ambitions, we expect the underlying improvements in India’s credit profile (BBB (low), Positive Trend) to continue. Key to watch would be the upcoming budget, most likely due in mid-July.
France: Snap Legislative Elections Reduce Policy Predictability
Following the results of European parliamentary elections, French President Macron announced snap national legislative elections to be held on June 30 for the first round and on July 7 for the second round. In a strained geopolitical context, this brings heightened political uncertainty and the risk of less policy predictability to France (rated AA (high), Stable). Elections and the accompanying implications coincide with a time of significant importance for France’s fiscal trajectory.
We would view negatively from a credit perspective delays in repairing the medium-term fiscal outlook relative to current expectations. In our view, the capacity of France to swiftly reduce its deficit will require a clear and fiscally committed majority at the National Assembly, an outcome which currently appears uncertain.
Italy: The Stability of Prime Minister Meloni’s Government Reinforced by the Results of the European Elections
Prime Minister Giorgia Meloni's Brothers of Italy (FdI) won the European elections in Italy, cementing its leadership and reinforcing the stability of the incumbent right-wing government. The results of the European election do not on their own have significant credit implications for Italy (rated BBB (high), Stable trend). However, they emphasize the right-wing government's window of stability to implement its political agenda. We do not expect the government to deviate significantly from its current pragmatic approach on its fiscal and economic strategy.
We expect the government to remain committed to the implementation of its revised National Recovery and Resilience Plan. In this direction, despite the delays on actual expenditures, Morningstar DBRS continues to view Italy’s NRRP as an opportunity to raise its GDP potential.
Nike Versus Adidas: Who Will Be Crowned Euro 2024 Champion?
The 2024 UEFA European Football Championship (Euro 2024) takes place in Germany from June 14 to July 14, with 51 matches being contested to crown a European champion. Euro 2024 is expected to be one of the most-watched global events of the year, with viewership peaking for the final. Euro 2024 kit sponsorship provides brands with a lucrative opportunity to build brand awareness and thus grow their sales volumes. Of course, brands that sponsor teams who progress to the final stages of the tournament stand to benefit more. That said, regardless of the annual sponsorship values and which team progresses and/or wins Euro 2024, we believe that it will likely not have a material impact on the credit risk profiles of these companies.
U.S. RMBS Frontline Perspectives
In the most recent May RMBS investor statements, overall DQs dipped MOM in aggregate across the major U.S. RMBS asset classes. On the other hand, prepayments speeds continued to drift a little higher MOM overall as seasonal trends from the spring home buying season provide a little boost to baseline housing turnover.
• Mortgage rates holding in range as home prices edge up
• The few recent macro data points reflect moderated activity
• May issuance volumes surge to highest of the year