On May 24, 2023, members of Miller Thomson’s Structured Finance and Securitization team had the opportunity to attend the Structured Finance Association (SFA) SF Canada 2023 conference. Miller Thomson team members in attendance were Jason Kroft, Ahmad Adam, Shaun Parekh, Shimmy Igelman and Margaret Shodeinde. Below are some of the main takeaways that our team identified from the conference (comments reflected below are those of the authors and not the conference organizers or any other conference participant):
1. Asset performance remains robust
Although the performance of many asset classes, such as mortgage-backed securities, credit card asset-backed securities and auto loan asset-backed securities are down from all-time highs in 2021, generally speaking, performance across all asset classes has continued to be very good. Even in the context of increased delinquencies and defaults during the current economic downturn, securitization structures continue to provide robust coverage for investors, and the performance of most major asset classes remains high even in comparison to pre-pandemic levels.
2. Uncertainty in the residential mortgage-backed security market
The swift and severe hike in interest rates which took place over the course of 2022-2023 had a significant chilling effect on the mortgage market, as pre-approvals dipped sharply, and as such, mortgage origination slowed significantly. Absent a crystal ball, there is some uncertainty over the short term-effects and what the long-term outlook will be in the Canadian housing sector. Notwithstanding the foregoing, arrears continue to be at historic lows, and recent major M&A activity in the industry has signaled confidence in the continued strength of the Canadian mortgage market. There appears to be an upturn in demand for securitization products to support enhanced mortgage origination levels recently.
3. Downturn in ABS issuance
2022 was a down year for the issuance of asset-backed securities (ABS). Over the course of 2022, total ABS issuance amounted to less than half of the issuance volume during a pre-pandemic year, with only $6 billion issued in the Canadian markets. Issuers instead tapped private markets, and asset-backed commercial paper (ABCP) issuance grew to around $43 billion over the course of 2022. Things are expected to remain flat in the ABCP space over the course of 2023, and issuance levels are consistent with those in 2022. In addition, due to the interest recent rate hikes which occurred over the course of 2022-2023, Canadian banks have less active in underwriting ABS. However, one source of consistency has come from auto-finance ABS issuers, who continue to issue at significant volumes.
4. Strength of Canadian covered bond market
The Canadian covered bond market remained strong during 2022, with $97 billion in covered bonds issued by the “big six” banks over the course of the year. Covered bond issuance remained strong into 2023, with $42 billion already issued as of May of the current year. It is worth noting that covered bond issuance numbers are up from pre-pandemic levels; prior to the pandemic, covered bond issuance remained steady at around $35-40 billion per year.
5. Transition from CDOR to CORRA
The transition of benchmarks from the Canadian Dollar Offered Rate (CDOR), which will cease publication by June 28, 2024, to the Canadian Overnight Repo Rate Average (CORRA) was another topic of discussion. The first phase of the transition from CDOR to CORRA has begun, with newer derivative products shifting from CDOR to CORRA by June 30, 2023. Although the benchmark transition from CDOR to CORRA is expected to affect securitization transactions, particularly legacy deals that rely on the existing CDOR framework, many transactions have made the move to accommodate for the switch.
Should you have any questions or concerns, please feel free to reach out to a member of Miller Thomson’s Structured Finance and Securitization team.
