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Announcement:

Moody's explains how high household debt in Asia Pacific affects structured finance deals

14 Jun 2018

Hong Kong, June 14, 2018 -- Moody's Investors Service says that high household debt levels in Australia (Aaa stable), New Zealand (Aaa stable) and Korea (Aa2 stable), and rising household debt levels in China (A1 stable), are credit negative for structured finance transactions from these countries.

"High and rising household debt levels increase the risk of delinquencies and defaults," says Marie Lam, a Moody's Associate Managing Director. "Nevertheless, the structured finance transactions that we rate in these countries show mitigating features that moderate such risk."

Moody's explains that the majority of debt in all four countries consists of mortgage debt, and that house prices in these markets have appreciated — in some cases rapidly — over the past five years or even longer.

A correction in home prices or an increase in interest rates could make it more difficult for borrowers to repay or refinance their loans. This situation poses risks to structured finance transactions such as residential mortgage-backed securities (RMBS) and covered bonds that are backed by mortgage loans, and transactions backed by other types of consumer loans, such as auto loan asset-backed securities (ABS) and credit card ABS.

Moody's analysis is contained in its just-released report titled "Structured finance — Australia, New Zealand, Korea and China: High household debt increases risk of delinquencies and defaults," and is co-authored by four Moody's vice presidents and senior analysts: Alena Chen, Robert Baldi, Joe Wong and Gracie Zhou.

Moody's points out that household debt levels in Australia, New Zealand and Korea are among the highest globally when measured as a proportion of GDP. In China, household debt as a percentage of GDP is much lower, but is growing at a rapid rate.

In the case of Australia in particular, Moody's report says that the high level of mortgage-related household debt in the country is negative for RMBS and covered bonds.

More than 70% of mortgages in Australia are floating rate loans, which means home loan borrowers are sensitive to interest rate movements. Risks for Australian RMBS and covered bonds are exacerbated by the share of riskier housing investment and interest-only loans in the transactions.

Nonetheless, Australian regulators have moved to address risks in the housing market; thereby mitigating the threat to RMBS and covered bonds.

For New Zealand, the country's high household debt levels are negative for covered bonds.

Rising house prices, particularly in Auckland, have fuelled a run up in household debt in New Zealand, with home buyers taking on bigger loans to purchase properties. Such a situation poses a risk to the New Zealand covered bond programs that Moody's rates.

Nevertheless, New Zealand covered bonds demonstrate a number of features that ease the threat, including mortgage loans in cover pools that show very low loan to value (LTV) ratios.

With Korea, Moody's says that high household debt levels are negative for covered bonds and credit card ABS, but mitigants exist.

A significant proportion of household debt in Korea is in mortgage loans. The high level of mortgage debt in Korea poses a risk to Korean covered bonds that Moody's rate.

Nonetheless, the majority of loans in Korean cover pools have a fixed-rate component, and this situation mitigates the risk posed by rising interest rates. Mortgages in cover pools also show on average low LTV ratios.

The level of credit card debt in Korea is relatively small and majority of the assets in the Korean credit card ABS rated by Moody's are credit purchase receivables with high payment rates, which are less risky than cash advance receivables.

China's rising mortgage debt levels could have negative repercussions for auto ABS. When interest rates increase, the affordability of mortgages in China will decline, which could in turn hinder the ability of borrowers to repay other debt, including auto loans backing the auto ABS deals that Moody's rates.

The auto loans backing ABS deals that Moody's rate in China show low LTV ratios and short tenors on average; mitigating risk. China also demonstrates a high household savings rate, which further offsets risks.

Subscribers can access the report at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1123315

For PRC only: Neither MCO nor any of its majority-owned affiliates is a qualified credit rating agency within the PRC. Any rating assigned by MCO or any of its majority-owned affiliates: (1) does not constitute a rating as required under any relevant PRC laws or regulations; (2) cannot be included in any registration statement, offering circular, prospectus or any other documents submitted to the PRC regulatory authorities; and (3) cannot be used within the PRC for any regulatory purpose or for any other purpose which is not permitted under relevant PRC laws or regulations. For the purposes of this paragraph, "PRC" refers to the mainland of the People's Republic of China, excluding Hong Kong, Macau and Taiwan.

NOTE TO JOURNALISTS ONLY: For more information, please call one of our global press information hotlines: New York +1-212-553-0376, London +44-20-7772-5456, Tokyo +813-5408-4110, Hong Kong +852-3758-1350, Sydney +61-2-9270-8141, Mexico City 001-888-779-5833, São Paulo 0800-891-2518, or Buenos Aires 0800-666-3506. You can also email us at mediarelations@moodys.com or visit our web site at www.moodys.com.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

Joe Wong
Vice President - Senior Analyst
Structured Finance Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Marie Lam
Associate Managing Director
Structured Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

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