Canadian Structured Finance 2023 Year in Review and 2024 Outlook

DBRS Limited (Morningstar DBRS) released its annual industry study entitled “Canadian Structured Finance: 2023 Year in Review and 2024 Outlook,” which discusses the performance, key trends, and outlook in Canadian term asset-backed securities (term ABS), asset-backed commercial paper (ABCP), and covered bonds.

Key Highlights:

-- In 2023, the Canadian structured finance market performed well amid a challenging macroeconomic environment.

-- Canadian ABCP, term ABS, and covered bond issuance was strong in 2023, reaching $136.6 billion in aggregate.

-- The total outstanding amount of ABCP increased 41.1% since March 2022 to $47.2 billion as of December 2023 and will likely continue to grow further in 2024, as ABCP may fill part of the void that will be left by the discontinuation of the approximately $90 billion market of bankers' acceptances (BAs), following the cessation of the Canadian Dollar Offered Rate (CDOR) in June 2024.

-- The term ABS market saw steady growth as well, expanding by 7.4% during the year to $49.9 billion. Securitizations of credit card receivables by regular issuers continued to dominate the term ABS market, representing 77% of new volume in 2023.

-- Covered bond issuance continued to play a key role in the wholesale funding strategy of covered bond issuers. The total outstanding amount of covered bonds increased by 14.3% year-over-year to $276.8 billion (Canadian-dollar equivalent) as of December 2023.

-- At the end of 2023, new term ABS, ABCP, and private deals combined totalled $47.9 billion, down from the record $60.6 billion seen in 2022.

-- In total, the term ABS market saw 23 new deals amounting to $15.4 billion, including 14 credit card deals, two auto loan, two auto lease, one auto rental, one equipment finance, one HELOC, one residential mortgage, and one reverse mortgage deal.

-- New issuance in ABCP, including extensions to existing programs, limit increases, and new programs added to the conduits, reached $28.7 billion in 2023. Auto and equipment financing dominated new ABCP issuance at 75%.

-- The total outstanding securitization amount increased by 9.1% to $107.8 billion in 2023 from $98.8 billion in 2022.

-- Securitizations of consumer obligations continue to dominate the market with 82% of total outstanding notes backed by auto loans, auto leases, credit cards, secured and unsecured lines of credit, consumer loans, and residential mortgages.

-- The higher interest rates have been working their way through the economy, removing excess demand, lowering inflation to 2.9% as of January 2024 and slowing economic growth. A resilient labour market contributed to keep delinquencies and losses in consumer-related securitizations low throughout the year, despite a generally upward trend in delinquencies driven by the pressure from the higher cost of living and borrowing costs on consumers' finances. While the loss rate in securitization pools of unsecured receivables such as credit cards rose in tandem with the delinquency rate, losses in securitization pools of secured receivables were limited.

-- A weakening labour market, coupled with the ongoing financial pressures on consumer finances, may lead to higher delinquencies in 2024. However, high asset resale values are likely to continue to limit losses on defaulted secured receivables, supported by ongoing supply constraints in the housing market and normalizing used-vehicle prices at still historically elevated levels.

-- In general, downside risks to credit performance in securitization pools of secured and unsecured receivables will also be partially mitigated by the mostly prime nature of obligors included in the securitized pools.

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