The rating agencies have spoken and 2022 is expected to be a humdrum year for asset-backed securities (ABS). Credit performance is anticipated to remain middling -- unless certain risks that now border the radar screen move front and center.
Moody’s Investors Service predicts improving performance on corporate ABS ranging from equipment to wireless-tower leases, owing to a recovering economy. In its December 16 structured finance 2022 outlook, the rating agency said it expects rising “consumer demand will support obligors’ finances and transaction cash flow.”
Moody’s noted a caveat for ABS, however: high operating costs may pose margin risk, especially for obligors in small-business-loan and aircraft-lease ABS.
On the consumer ABS front, says Moody’s, “Delinquencies, defaults, payment rates and other metrics will remain solid, but weaken somewhat as a strong job market fails to fully offset fading consumer support and lingering effects of the pandemic, including displaced workers and higher inflation.”
While consumer-ABS performance deteriorates somewhat, Moody’s added that it does not expect a drop below pre-pandemic levels.
The Moody’s forecast echoes that of other rating agencies. Fitch Ratings, for example, casts a neutral outlook for ABS performance, expecting “losses and recovery rates to stay relatively flat in core sectors such as auto and credit cards.” Subprime auto, retail cards and student loans will remain more susceptible to performance volatility given generally weaker borrower profiles, the rating agency says, while aviation will continue to be challenged in light of the pandemic’s negative impact on travel and tourism.
ABS issuance volume in 2022 is forecast to drop a percentage point or two, according to Kroll Bond Rating Agency (KBRA), to $300 billion for the full year, down from an anticipated $305 billion for 2021. That would still be up significantly from earlier years, given 2021’s ABS volume of $293 billion as of November 22 was respectively 47% and 19% higher than 2020’s and 2019’s over the same period.
KBRA notes that much of the volume surge in 2021 came from a handful of sectors, with auto lease and non-prime auto loan supply rising more than 30% from the previous year, and student -loan ABS increasing more than 35%.
“We expect the ABS market to remain a cheap source of funding for issuers/sponsors across the spectrum of ABS asset types in 2022,” KBRA SAYS.
Prime and non-prime auto have fueled the most ABS volume since 2019, and KBRA forecasts the former increasing by 11.1% in 2022 compared to 2021, to $54 billion, while non-prime volume will remain unchanged at $45 billion. Auto-lease ABS is expected to be the next most voluminous category, reaching $30 billion in 2022, up 7.1% from 2021. Commercial auto and equipment ABS, both traditional small categories, are both expected to see relatively significant volumes and volume increases.
The biggest decrease in volume, KBRA says, will come from student-loan ABS, projected to be $15 billion in 2022, down from $26 billion in 2021, a negative change of 42.3%. Credit-card and whole business securitizations (WBSs) are also anticipated to see significantly less volume next year.
S&P Global Ratings’ more general global credit outlook also predicts improving credit markets. “We enter 2022 with largely positive credit momentum, reflecting favorable financing conditions and a powerful economic recovery,” the December 1 report says.
However, S&P provides a long list of risks globally and in the U.S. that could derail the benign credit outlook. They include persistent inflation and central banks’ responses to it, massive sovereign and corporate debt, renewed COVID-19 outbreaks and less effective vaccines, and uncertain economic policies from the Chinese government.
