Notwithstanding concerns about household debt levels, the outlook for Canadian asset-backed securities and covered bonds is stable, says Moody’s Investors Service in a new report.
The rating agency says that it sees a stable outlook for auto and credit card ABS, given that the performance of their collateral will also remain strong. And, it believes that the credit quality of Canadian covered bonds will also be stable because the Canadian financial institutions that issue covered bonds are strong.
Moody’s says that it expects that automotive ABS issuance will be similar to its 2011 level of about $3 billion. And, it says that strong underwriting and a focus on prime quality customers will continue to lead to strong performance.
“While auto originators are continuing to increase the concentration of loans with extended terms in new transactions, borrower quality as measured by credit scores has remained consistent between older and more recent vintages,” says Michael Buzanis, a Moody’s vice president and senior credit officer. “A period of economic weakness or consumer credit stress, however, would result in higher default and loss levels on extended term loans.”
The performance of credit card ABS will also remain stable, it predicts, as collateral continues to be “highly seasoned accounts from prime quality obligors”. Moody’s indicates that it does not expect the performance of Canadian credit card collateral to improve much, however, with unemployment unlikely to decline.
Moody’s expects credit card ABS issuance in Canada to be in the $7 billion range in 2012, slightly higher than the $6.7 billion issued in 2011, as cross-border issuance remains attractive.
Covered bond issuance will also remain healthy in 2012, says Moody’s, but will have a difficult time exceeding the robust issuance of 2011. It expects issuance in 2012 will be in the $20 billion range, slightly down from 2011 levels. Seven major Canadian financial institutions have established programs and will tap the market opportunistically, it notes.