S&P predicts harder times ahead for European structured products

European structured products will come under ratings pressure in 2007, but there will be only a limited number of downgrades, according to rating agency Standard & Poor's (S&P).

Residential mortgage-backed securities (RMBS) have benefited from the rise in house prices over the past few years, the agency said. But the slowing house market means RMBSs are less likely to be upgraded, and some products could "run into some performance difficulty", especially if delinquency levels rise, said S&P. But it added that widespread downgrades remained "unlikely", as even borrowers in difficult financial circumstances tended to keep up mortgage repayments.

Similarly, although credit card delinquencies had risen as a result of higher rates of personal debt and bankruptcy, asset-backed securities (ABS) based on credit card and auto assets are unlikely to suffer. Excess spread and structural protections are enough to stop the products suffering, the agency said.

And in the collateralised debt obligation (CDO) market, default rates are likely to rise this year, although they will remain below long-term averages, S&P predicted. But the agency said existing CDO-squared products could be at risk.

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