Canadian securitization market remains resilient despite U.S. trade friction

Canada has seen some credit deterioration in the assets underlying its securitization market, but Canadian consumers' strong credit profile has so far offset economic headwinds stemming from contentious trade negotiations with the U.S., the country's largest trading partner. 

The Bank of Canada has cut its benchmark interest rate seven times since June 2024, to 275% as of June, Morningstar DBRS noted in a July 25 report. The higher borrowing costs and sluggish labor market have led to more consumers filing for insolvency, the rating agency says, and the impact of the U.S. trade war is likely to disrupt further the labor market's recovery and increase unemployment.

However, the savings rate of the average Canadian consumer has been high, mitigating downside credit risk.

"In general, downside risks to credit performance of securitization pools of secured and unsecured receivables will be partially mitigated by the mostly prime nature of obligors," Morningstar DBRS said. 

Canada is the U.S.'s largest trading partner, and contentious negotiations between the two countries over tariffs may come to a head by the August 1 deadline set by the U.S. government. The Trump Administration recently announced deals with Japan and the European Union that appear to set a minimum tariff rate of 15% for goods exported to the U.S.

The rating agency says that while Canadian ABS transactions have seen some collateral deterioration, they remain well within expectations across all asset classes. Those asset classes include credit cards and residential mortgages, making up 31.6% and 24.9% of the market, respectively, followed by autos, home equity lines of credit and commercial mortgages, accounting for 22.7%, 8.2% and 4.8%. 

Morningstar DBRS said credit losses in securitization pools remain limited because of the recovery value of the assets backing the deals.

"High asset resale values are likely to continue to limit losses on defaulted secured receivables, supported by ongoing supply constraints in the housing market, and the normalization of used-vehicle prices at still historically high levels," the rating agency said.

The total amount of Canadian securitizations including private placements, was $111.4 billion as of May 1, of which asset-backed commercial paper (ABCP) represented 50.4%, term ABS including commercial mortgage-backed securities (CMBS) represented 43.7%, and private placements 5.9%.