Changes approved by the Brazilian Social Security National Council (Conselho Nacional de Previdencia Social, CNPS) to the pensioner deductible loan regulation in response to the economic impacts of the coronavirus pandemic are expected to be Credit Neutral for Fitch’s rated portfolio of pension deductible loan (PDL) securitizations, says Fitch Ratings.

Proposed changes, which seek to increase availability of credit in the economy, consider (i) increasing the maximum credit limit to 1.6x (from 1.4x) of the obligor’s monthly income for PDL loans originated through credit-cards; (ii) loans originated up to Dec. 31, 2020, will be allowed to include up to a three month grace period, and this grace period will not count towards the maximum loan term of 84 months allowed by CNPS. Additionally, changes would increase new pensioners/retirees access to credit lines by allowing them to contract the first PDL loans 30 days after the pension benefit is approved by INSS while the current requirement is 90 days.

Fitch rated PDL-backed securitizations that are still in the revolving period benefit from eligibility criteria which requires that a loan’s first installment to be paid before it can be transferred to the issuing vehicle, mitigating, in Fitch’s opinion, the transaction’s exposure to first payment default risk. Therefore, newly originated loans which consider a grace period will not be transferred to the securitization until the first installment has been paid, protecting rated transactions from the risk of loans that never start paying, including fraudulent ones. Additionally, regardless of the loan term, Fitch-rated transactions only consider the loan payments due before the maturity of the rated notes for overcollateralisation (OC) calculation – albeit the transaction is entitled to the whole of loan – protecting the transaction from increases in origination terms during revolving periods.

In regards to credit-card payroll loans transactions, which some borrowers have in addition to traditional PDLs, these structures are backed by designated credit-card accounts and they benefit from all collections from such accounts. In Fitch’ rating analysis, the agency assumes that payment on cards will occur at minimum contractual rate, therefore the potential increase in credit card bills would not lead Fitch to review its assumptions. Nevertheless, Fitch has observed during surveillance that cardholders often make payments above the minimum required. Higher credit limits – even with the same minimum monthly payment – may be marginally positive to transactions, as they can benefit from excess collections.

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