Everyone across the insurance sector is re-thinking their operations right now. More home-based working, fewer events, less travel and online meetings are a going to be a big part of that. There will be a shift, probably quite a profound one, in the way that many service sectors work in the future. For those who wish to keep a close eye on the UK economy, and other markets, DBRS Morningstar is a useful source of info – here’s the latest news, with links to the latest economic data and projected impact by country;
The current Coronavirus Disease (COVID-19) pandemic sweeping the globe is causing a great deal of economic and market disruption. At DBRS Morningstar, we are monitoring this very fluid and fast changing situation with regular commentary from our various rating groups. We have launched a dedicated microsite on dbrsmorningstar.comthat highlights our coverage on the topic.
The reaction to the spread of the coronavirus has presented DBRS Morningstar with challenges in conducting our business, as many parts of our rating process usually entail in-person meetings and onsite visits. In Europe, where the coronavirus has taken hold of the continent, European countries, in particular, Italy, face immediate challenges.
According to our sovereign analysts, a short-term shock of moderate depth will most likely be manageable and should be followed by an economic rebound and a re-stated
commitment to fiscal consolidation. However, if signals emerge that suggest a deeper and more prolonged slump, there could be negative implications.
Our sovereign ratings team is monitoring this situation, and recently commented on the situation in Italy in greater detail here.
Spain has also had a large upsurge in cases, and according to our sovereign team, the Spanish economy, unlike most of its European peers, is benefitting from positive growth momentum, which is a positive credit factor. The country is therefore entering this period of high uncertainty on a more solid economic footing than other eurozone countries. However, the high share of temporary contracts (26% of total workers and one of the highest in the euro area) might amplify the negative effect on households and consumer demand.
Given the importance of small and medium-size enterprises in Spain, measures to ease the financial stress that the private sector might face in coming weeks will be critical in containing the impact.
The full report on Spain can be found here.
DBRS Morningstar’s financial institutions group has published commentaries on both European and US banks, where the impact of the coronavirus on consumers and businesses, the disruption in financial markets, and also the collapse of oil prices have created a negative environment for European and US banks. The European commentary can be found here.
We are also regularly commenting on the coronavirus’s impact on securitisation across both the US and Europe. Our commercial mortgage-backed securities (CMBS) team recently published a commentary on the UK hotel sector, where the impact has been more immediate.
We rate several transactions with exposures to the UK hotel market and summarise the potential economic impact of the coronavirus on that market here.
Helios Note Extract;
Helios Impact Potentially Mitigated by Strategy Change
The portfolio securing Helios (European Loan Conduit 37) DAC consists of 49 limited-service hotels that are largely managed by Atlas and operate under franchise agreements with IHG and Hilton. The portfolio largely operates as Holiday Inn Express and is located across England, Wales, and Scotland. Five of the hotels are located within Greater London (25% of MV), six hotels are located in Scotland (10% of MV), and two are in South Wales (1% of MV). The remainder of the portfolio is in England, primarily located in city centres or near infrastructure hubs, such as motorway junctions, or airports.
Cushman & Wakefield estimated the portfolio’s total market value (MV) to be GBP 546.9
million (net of standard asset sale purchaser’s costs, which vary between English and Scottish jurisdictions) or GBP 91,577 per room based on the portfolio’s 5,972 rooms.
Historically, the portfolio has been performing well, and has benefitted from recent capital expenditure between 2016 and 2018 which was largely spent towards refurbishing guest rooms.
Some of the funds were used to transform meeting and event space into further guestrooms, reducing their exposure to MICE revenue. This strategy could prove to be a good move in light of the short-term impact COVID-19 could have on MICE-related hotel revenues. If regional, city, or town quarantines are implemented, those hotels classified as limited service without diversified income could see their revenues fall whilst such quarantines are in place. At issuance, the debt service coverage ratio (DSCR) was 2.0x and DBRS Morningstar estimates that across the portfolio, occupancy would have to drop to below 50% from the reported 82% in order to maintain debt service.
Further to all of this, DBRS Morningstar will be hosting a webinar on the topic on Thursday, 19 March, with contribution from the European financial institutions, sovereign and structured finance teams, details of which can be found here.
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