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U.S. ABS 2023 Outlook

We enter 2023 amid a challenging and uncertain economic backdrop. Thanks in large part to aggressive federal stimulus measures during the Coronavirus Disease (COVID-19) pandemic, the U.S. economy had been humming along over the 18 months leading up to the spring of 2022 when the first quarterly decline in real GDP was reported following six consecutive quarters of growth. The Federal Reserve reversed course and pulled back from its accommodative monetary policy measures, with the first of seven successive interest rate increases occurring in March 2022. Nonetheless, DBRS Morningstar has a stable credit rating outlook across U.S. asset-backed securities (ABS).

• DBRS Morningstar expects to see some deterioration in underlying consumer ABS collateral performance amid this inflationary environment with rising costs of goods, particularly across subprime auto and consumer loans, but we believe structural mechanisms such as deleveraging and credit enhancement will help mitigate this expected decline in collateral performance.
• Across consumer ABS, we have stable rating outlooks for the auto loan, credit card receivable, consumer loan, residential property assessed clean energy (R-PACE), Federal Family Education Loan Program (FFELP) student loan, private student loan, refinanced (Refi) student loan, and timeshare sectors.
• On the commercial side of things, potential ongoing supply chain issues and inflationary pressures are among the chief concerns, with certain sectors likely to be more vulnerable to a recessionary environment, including transportation, housing, and retail-oriented industries. Meanwhile, other sectors, such as agricultural finance, litigation finance, structured settlement, and venture debt, are either more countercyclical or are less affected by broader macroeconomic conditions.
• Across commercial ABS, we have stable rating outlooks on the agricultural finance, auto fleet lease, aviation, cell tower, equipment lease, film/broadcasting royalty, litigation finance, marine container, commercial PACE (C-PACE), rental car, small business, structured settlement, venture debt, and whole business sectors.

“While consumers have displayed remarkable resiliency throughout the pandemic, much of that strength has been heavily supported by federal stimulus measures, which have since expired,” said Stephanie Mah, Senior Vice President, Structured Finance Research. Mah noted, “The current labor market remains strong, with subdued unemployment levels and rising wages. However, job growth prospects are expected to deteriorate, albeit with a lag, in response to rising interest rates, and wages will be further pressured by inflation.”