(Editor's Note: A more detailed report on our global outlook for structured finance in 2020 will be available at the beginning of January.)
Despite concerns over slowing global macroeconomic growth, 2019 was an active year in the structured finance markets, with nearly $1.1 trillion issued across the globe, up approximately 4% on a year-over-year basis. By country/region, the U.S., China, Australia, and Latin America all printed higher new issue volumes, while Europe, Japan, and Canada were down modestly.
Looking into 2020, our baseline macroeconomic view is broadly neutral, but with risks weighted to the downside--a precarious balance. Some factors that could have knock-on effects for structured finance credit and issuance are global trade-related tensions, continued Brexit uncertainty, an unforeseen increase in interest rates, and market volatility that negatively affects liquidity. That said, our baseline view is still for global macroeconomic growth and relatively low (historically speaking) interest rates. As such, we expect 2020 issuance volume to remain in the $1 trillion neighborhood, with all covered countries/regions posting totals close to their 2019 volumes. On the credit side, we generally expect stability, albeit with pockets of weakness in some sectors and regions (see "When The Cycle Turns: How Would Global Structured Finance Fare In A Downturn," Sept. 4, 2019.). The table below summarizes our issuance projections relative to the volumes of the past five years.
|Global Structured Finance Volumes(i)|
|U.S. (bil. $)|
|Total U.S. new issue(iii)||436||373||510||531||562||555|
|Canada (bil. C$)||15||18||20||25||19||20|
|Europe (bil. € )||77||81||82||107||101||100|
|Asia-Pacific (bil. $)|
|Total Asia-Pacific new issue||159||185||304||371||384||396|
|Latin America (bil. $)||11||12||17||9||13||15|
|APPROXIMATE GLOBAL NEW ISSUE TOTAL (bil. $)||700||670||930||1,040||1,086||1,092|
|(i)Figures are approximate and subject to revision. (ii)U.S. auto loan ABS volume includes the U.S. dollar-denominated cross-border Canadian transactions. (iii)CLO resets/refis excluded. ABS--Asset-backed securities. CMBS--Commercial mortgage-backed securities. CLO--Collateralized loan obligation. RMBS--Residential mortgage-backed securities. Source: S&P Global Ratings.|
Although GDP growth is slowing, the U.S. economy remains strong, with a solid labor market. Structured finance issuance in the U.S. next year is expected to remain in the same neighborhood as this year, with growth in residential mortgage-backed securities (RMBS) largely negated by anticipated contraction in collateralized loan obligation (CLO) issuance. Despite the expected reduction in new vehicles sales next year, auto loan asset-backed securities (ABS) issuance should remain stable because of higher average loan balances. The aforementioned strong labor market and low interest rates support our stable credit outlook for most sectors. However, CLOs head into 2020 with elevated 'B-' obligor exposure, and we see rising risk for below-investment-grade class (rated 'BB+' or lower) downgrades.
European securitization volumes look set to remain steady in 2020, at about €100 billion. While uncertainties surrounding implementation of the EU's Securitization Regulation caused a slow start to issuance in 2019, the new rules have increasingly bedded down and shouldn't hold back activity next year. The approaching maturity of some originators' borrowings from official sector funding schemes could spur growth in bank-originated securitization in the U.K. That said, the European Central Bank's equivalent scheme has reopened to new drawdowns, potentially stifling any similar effect in the eurozone. While the CLO sector recorded a fourth successive year of issuance growth in 2019, we expect a dip in 2020, given increasingly challenging transaction economics and a dearth of new underlying loan originations. Although European economic growth may remain sluggish in 2020, strong labor markets and accommodative monetary policy mean household finances should remain resilient, with little sign of credit deterioration among securitizations backed by consumer risk. Declining credit quality in CLO collateral pools is an area to watch, however.
China's new securitization issuance slowed in the second half of 2019, driven mainly by inactivity among issuers in the RMBS sector. Favorable interest rate environments and rising loan originations continue to support new issuance in the consumer sectors. We expect structured finance new issuance to see single-digit growth in 2020 and, although RMBS issuance may continue to soften, auto loan, consumer finance, and credit card ABS could strengthen. Asset performance in retail receivables remained strong, although 2020 may continue to be difficult for certain nonretail securitization transactions.
We expect issuance of Japanese structured finance transactions to be on par with this year's, possibly with a marginal increase in 2020. The dominance of the RMBS and ABS asset classes in Japan endures, making up more than 95% of total issuance. We assume slower GDP growth in Japan in 2020 than in 2019. Although Tokyo is hosting the Olympic Games next summer, the positive effects will be partly offset by the negative impact of an October 2019 consumption tax increase to 10% from 8%. The U.S./China trade disputes could also exert downward pressure on Japanese business. However, we expect stable rating performance to continue into 2020 due to promising macroeconomic factors such as low unemployment and low interest rates.
We expect 2020 annual new issuance in Australia to hover around the same levels as last year, with nonbanks expected to keep up their momentum, as their lending growth continues to track well above bank lending growth. This will be offset to some extent by the biannual issuance patterns of some banks, as 2020 will be the off year for some of these issuers. The main risks to the RMBS sector are less elevated than they were 12 months ago, though economic conditions are weaker. Stable employment conditions have underpinned the strong collateral performance of securitization asset classes to date, as evidenced by low levels of arrears and cumulative gross losses across both ABS and RMBS. Lower interest rates, signs of stabilization in some property markets, and improving refinancing conditions will sustain this performance in the coming months, although weak wage growth and high household debt show no signs of abating.
We expect 2020 issuance volumes in Canada to be up slightly from last year. Auto loan and lease ABS volumes are expected to decrease, reflecting lower forecast vehicle sales next year. Cross-border U.S. denominated issuance through credit card and auto loan ABS is expected to remain stable. In the RMBS sector, volumes will continue to be low, due to investor considerations, housing headline risks, and cost-effective funding economics. Commercial farm equipment and commercial ABS volumes are expected to remain flat, influenced by the headwinds from trade and retail uncertainties. Overall, we believe our ratings on Canadian ABS will remain stable in 2020.
Structured finance issuance in Latin America should be up slightly in 2020, reflecting our expectation of continued strength in issuance from Brazil, which we expect to increase about 20%. Very low interest rates, coupled with new issuance in RMBS and covered bonds, should be the key drivers in 2020. In Mexico, lower rates and higher economic growth should lead to an increase in issuance. There is significant uncertainty in Argentina concerning the new government.
This report does not constitute a rating action.
|Primary Contacts:||James M Manzi, CFA, Washington D.C. (1) 434-529-2858;|
|Tom Schopflocher, New York (1) 212-438-6722;|
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