Like many market segments, the Canadian structured finance sector is weathering the Covid-19 pandemic well, thanks in large part to extraordinary government support measures. The coming year should mostly see a return to more normal conditions, says DBRS Ltd. in a new report.
The rating agency released a report on the structured finance market — asset-backed securities (ABS), asset-backed commercial paper (ABCP) and covered bonds — which finds that structured finance portfolios performed well throughout the pandemic, thanks to both government supports and relief measures by lenders that “helped mitigate credit risk.”
DBRS said the Bank of Canada’s monetary policy response also “played a key role” in driving strong new issuance of covered bonds and ABCP last year.
Total new issuance of term ABS, ABCP and covered bonds in 2020 reached $162.6 billion, which was double the total of $81.3 billion in 2019.
Looking ahead, the outlook for structured finance remains tied to the pace of the economic recovery and the ongoing impact of the pandemic, DBRS said.
“As a result of the government support and structural protections, credit performance in term ABS, ABCP and covered bonds was strong throughout 2020 giving rise to a moderate level of optimism for 2021 despite continuing challenges,” the rating agency said.
The key challenge for the coming year is the pace of the recovery.
The report said that a delayed recovery “will continue to add financial pressure to consumers and businesses, which may lead to an increase in delinquencies and credit losses.”
In particular, “certain sectors such as ABS auto rental and CMBS retail and hotel are expected to continue to face challenges brought on by the pandemic,” the report said.