U.S. Tariffs Will Weaken Canadian Auto and Equipment ABS Collateral Performance, but Certain Strengths Persist

U.S. tariffs are likely to have both a negative and positive effect on Canadian auto and equipment asset-backed securities (ABS). The lower demand in industries that are highly exposed to the U.S. market and potential job losses will likely weigh on performance for both equipment and auto ABS transactions. Conversely, we expect that, because of supply chain disruption and higher input prices, used collateral values will receive a lot of support in both consumer auto and equipment ABS, bolstering transaction performance in these asset classes.

Key highlights include the following:
-- Weaker employment will negatively affect consumer finances and will be a headwind for auto ABS performance.
-- Weaker export and consumer demand will affect business profitability, making it harder for businesses to service their debts, which will affect performance for equipment ABS transactions.
-- For both auto and equipment ABS, the imposition of tariffs will most likely boost used vehicle and equipment values.

"If tariffs lead to major and widespread disruptions across industries, and if businesses respond to reduced demand by reducing employee hours or outright layoffs, most consumer and corporate ABS sectors, including auto and equipment, will be negatively affected," said Simba Murahwi, Vice President, Canadian Structured Finance Ratings.