Failure to Raise the U.S. Debt Ceiling Expected to Have a Minimal Effect on Structured Finance

In this commentary, DBRS Morningstar discusses the potential consequences of Congress failing to lift the debt ceiling in a timely manner and how such a scenario would affect U.S. Structured Finance. While DBRS Morningstar expects a failure to raise the debt ceiling to have a minimal effect on U.S. Structured Finance ratings over the short term, there are both potential direct and indirect implications across asset-backed securities, commercial mortgage-backed securities, residential mortgage-backed securities, and structured credit.

Key highlights include:

-- Directly, there are a couple of instances where the U.S. government or federal agency is the primary source of cashflows, whereas indirectly there are transactions where the U.S. government or federal agency insures some of the risk.
-- Alternatively, underlying collateral performance in consumer-related securitizations could be negatively affected if the U.S. government delays expected benefits and funds. If the Treasury decides to prioritize debt payments to avoid a default, disbursements involving Social Security, government paid salaries, Medicare, Defense, and other federal agencies could be affected, rendering potential negative repercussions across structured finance asset classes that have exposure to select agencies or the U.S. consumer.
-- In some cases, however, where there is exposure to such federal agencies, our structured finance ratings are not expected to be directly affected.

“In the event of a disruption in federal program benefits or salaries, the U.S. consumer’s ability to make timely payments on outstanding debts would likely become impaired,” said Stephanie Mah, Senior Vice President, Structured Finance Research. “The severity of the impact would depend on which payments are delayed and the duration of the impasse,” notes Mah. In the highly unlikely event that the U.S. defaults on its debt obligations, the overall functioning of the capital markets could be impaired, with lending activities grinding to a halt and credit spreads widening across the spectrum, but more sharply for lower quality obligors.