Canadian Structured Finance 2024 Year in Review and 2025 Outlook

DBRS Limited (Morningstar DBRS) released its annual industry study titled "Canadian Structured Finance: 2024 Year in Review and 2025 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:

-- 2024 was a good year for the Canadian securitization market, marked by strong new issuance volume and resilient collateral performance.

-- Canadian ABCP, term ABS, and covered bond issuance reached $101.6 billion in aggregate.

-- Growth in the ABCP market picked up the pace following the cessation of the CDOR in June 2024, which spurred interest in this type of instrument from both investors and issuers. The total outstanding amount of ABCP increased by 64% since March 2022 to $55.0 billion as of December 2024. ABCP will likely continue to grow further in 2025, as it continues to fill part of the void left by the approximately $90 billion market of banker's acceptances.

-- The term ABS market, on the contrary, shrank by 7.4% during the year to $46.2 billion, as scheduled maturities in credit card term ABS notes outpaced new issuance.

-- The covered bond programs continue to play a key role in the long-term funding activities of covered bond issuers, as they provide them with cost-effective access to domestic and international markets. However, after two years of record market issuance levels, covered bond issuance slowed down in 2024, attributed in part to lower scheduled maturities. Total issuance reached $41.8 billion in 2024.

-- The total outstanding securitization amount increased by 4.1% to $112.3 billion in 2024 from $107.8 billion in 2023.

-- Amid a challenging macroeconomic environment, the Canadian structured finance market was resilient and performed well in 2024, barring equipment finance transactions with exposure to trucking financing, which saw larger delinquencies and credit losses.

-- The impact from the U.S. trade policy on Canadian exports and business investments could be significant and could push the Canadian economy into a recession, raise unemployment, and drive up the cost of goods for consumers. Potential layoffs and the rise in consumer prices would add financial pressure to already strained consumers, which would lead to higher delinquencies and potential losses in securitized pools of consumer-related obligations.

-- In general, downside risks to credit performance in securitization pools will be partially mitigated by the mostly prime nature of obligors included in the securitized pools, who demonstrate a strong record of repaying their debts on a timely basis, robust levels of credit enhancement available in the transactions that can withstand a deterioration in macroeconomic activity, and stress levels that are commensurate with the rating assigned.

We provide a more detailed discussion of these trends and asset performance in the study and in the accompanying presentation slides.