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Canadian Structured Finance 2022 Year in Review and 2023 Outlook

DBRS Limited (DBRS Morningstar) released its annual “Canadian Structured Finance: 2022 Year in Review and 2023 Outlook” industry study, which discusses the performance of, key trends in, and outlook for Canadian term asset-backed securities (term ABS), asset-backed commercial paper (ABCP), and covered bonds.

Some of the highlights include:

-- New issuance activity and credit performance in the Canadian structured finance market were resilient in 2022 amid a challenging macroeconomic environment of rapidly rising interest rates and increased economic uncertainty.

-- Canadian structured finance transactions performed well in 2022, supported by low unemployment levels, wage increases, and savings, which contributed to keeping delinquency rates low and below pre-pandemic levels.

-- New term ABS, ABCP, and covered bond issuance reached $157.8 billion in 2022, with all three types of notes exceeding 2021 levels.

-- Covered bond issuance reached a record level of $97.2 billion (Canadian-dollar equivalent), below the 2020 issuance of $124.4 billion, when a large number of covered bonds were issued to be used as eligible collateral in the Bank of Canada's term repo operations with the purpose of raising liquidity.

-- New term ABS, ABCP, and private deals combined ended 2022 also at a record $60.6 billion, up from $39.5 billion in 2021.

-- In total, the term ABS market saw 15 new credit card deals amounting to $19.2 billion, two auto loans, one auto lease, one home equity line of credit, one residential mortgage, and one CMBS deal. Total new term ABS issuance was $22.4 billion in 2022, which compares with $13.2 billion in 2021.

-- New issuance in ABCP increased to $32.2 billion in 2022, up from $22.4 billion in 2021, which includes extensions to existing programs, limit increases, and new programs added to the conduits. Auto and equipment financing dominated new ABCP issuance at 48%, followed by residential mortgages at 35%.

-- The total outstanding securitization amount increased by 35.0% to $98.8 billion in 2022 from $73.1 billion in 2021.

-- Securitizations of consumer obligations continue to dominate the market with 81% of total outstanding notes backed by auto loans, auto leases, credit cards, secured and unsecured lines of credit, consumer loans, and residential mortgages.

-- The outlook for 2023 is balanced. On one hand, credit performance of the underlying collateral in Canadian structured finance transactions is generally highly correlated with employment. As higher interest rates work their way through the economy and demand weakens, the expected increase in the level of unemployment will put downward pressure on the credit performance of Canadian securitizations. In addition, as the increase in the cost of living continues to deplete savings and strain consumer finances, delinquencies are likely to trend higher in 2023.

-- On the other hand, DBRS Morningstar expects these downside risks to credit performance to be partially mitigated by the mostly prime nature of obligors included in the securitized pools, consumers tightening their belts, savings/net worth accumulated through the pandemic, and the residential mortgage stress test that requires borrowers to be qualified at the greater of the minimum qualifying rate or the contractual rate plus 2%.

-- DBRS Morningstar expects investors' interest in environment, social, and governance (ESG) factors to continue to grow and markets to move toward greater transparency and better disclosures regarding ESG risks and their impact. During 2022, none of those factors were considered a significant driver of any rating action taken on the Canadian structured finance ratings outstanding Commercial Mortgage-Backed Securities.

DBRS Morningstar provides a more detailed discussion of these trends and asset performance in the study and in the accompanying presentation slides.