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Surging Inflation and Rising Interest Rates Will Weaken Canadian Auto ABS Collateral Performance, But Certain Strengths Persist

Surging inflation and rising interest rates are expected to weaken the performance of the Canadian auto asset-backed securities (ABS) sector. The rising cost of living will continue to pressure household finances as consumers struggle to maintain their standard of living. Contributing to the cost of living is the high cost of gasoline. And rising interest rates are increasing the burden of debt on borrowers, further eroding household finances. The various areas of financial constraint within Canadian households have a direct impact on the performance of auto ABS.

However, a number of factors will support the sector’s performance, including transactions that predominately feature fixed-rate receivables, which give borrowers more time to adjust to increasing interest rates; transaction pools primarily backed by prime borrowers who, all things being equal, are better able to withstand surging inflation and rising interest rates; a return to low unemployment rates; high household savings rates; sustained wage inflation over the short term; and elevated used vehicle prices, which help maintain high recovery rates on auto assets.