Research

The credit quality of Canadian covered bond programs will be strong in the new year

By James Langton |

The global securitization markets will are facing a mixed bag of economic and regulatory trends in the year ahead, according to a report published on Monday from Moody's Investors Service.

Asset credit quality will continue to weaken in some sectors, the New York City-based credit rating agency says in a news release, but will stabilize in most others.

"Slow but stable economic growth and monetary conditions in advanced economies will support the credit performance of most structured finance assets around the globe," Moody's says.

At the same time, regulatory reforms affecting the market will take full effect in the United States and Europe next year, which will have variable effects on structured finance sectors in those regions.

"In the year ahead, the credit quality of the assets underlying new securitizations will remain stable or weaken for most asset classes, driven by macroeconomic factors or changing demand and supply dynamics," says Joseph Snailer, senior vice president at Moody's, in a statement. "Meanwhile, issuers in some asset classes, such as US RMBS, will expand into new products, mostly at the low end of the credit spectrum."

"The credit quality of Canadian covered bond programs will be strong in the new year as will the loan receivables backing Canadian auto ABS," Moody's adds.

The performance of existing securitizations is also expected to hold up in the year ahead. "Economic growth in advanced economies will continue at a slow pace, of around 1%-2%, in 2017 benefiting the credit performance of existing transactions in most structured finance asset classes to varying degrees," says Snailer.

Improving economies in Canada, Mexico and Argentina will help the structured sectors in those countries, Moody's says, while continued low interest rates, modest GDP growth, and an improving employment picture, will support the credit performance of existing European securitizations.

On the regulatory front, new U.S. risk-retention rules, among other reforms, will take full effect in 2017. "Although president-elect Donald Trump has called for a temporary moratorium on new regulations and a possible repeal or roll-back of certain facets of the Dodd-Frank Act, at this point, it is too early to assess Trump's policy choices," the rating agency says.

The Brexit vote will have credit and legal implications on U.K., and some EU, transactions, Moody's says. "Brexit creates legal uncertainty for existing structured finance transactions because many cross-border deals depend on harmonization and mutual recognition of EU laws," it says.

Moody's also expects the issuance of green bonds to grow in 2017.