Many of Miller Thomson’s structured finance team members, including myself, Jason Kroft, Ahmad Adam and Margaret Shodeinde, took to the Las Vegas Strip at the end of February. No, it wasn’t to try our hand at the World Series of Poker, but rather to attend the Structured Finance Association (SFA) SFVegas 2024 conference. Amidst the bright neon lights and slots, MT and fellow market participants gathered insights on currents trends in the structured finance industry. Below are some key insights on performance and trends that are relevant for participants in the Canadian market.
Market Trends
Issuance
Globally, new ABS (excluding covered bonds, RMBS/CMBS) issuance volume in 2023 was down in comparison to 2022, which can generally be attributable to interest rate volatility against the backdrop of uncertain economic conditions. However, in contrast to the rest of the global market where new ABS issuance volume in 2024 is expected to grow or remain steady, Canada’s securitization market issuance is forecasted to continue to decrease by approximately 18% (from USD $11B to USD $9B). There are different reasons for this decrease but the rise in private securitization and the enhanced role of alternative lenders (rather than bank conduit funding) explains this trend, at least in part.
Performance
Performance across Canadian asset classes has also slightly deteriorated with delinquencies trending upward, mainly as a result of consumer finances being impacted by higher interest rates and costs of living. In particular, 2021 and 2022 vintage transactions have shown noticeably higher levels of losses compared to other years. With that being said, lending standards generally tightened in the back half of 2022 and performance is expected to improve into 2024.
As such, structured debt in the Canadian market continues to remain an attractive option, particularly for US investors looking for Canadian denominated notes and where exchange rates and interest rate spreads work to their advantage. The yields are especially appealing in the consumer ABS space as Canadian consumers tend to perform better than their US counterparts.
Asset Classes
As a general note, asset classes in the Canadian securitization space tend to be more “vanilla” compared to the US. The difference can be attributable to a smaller structured finance market and a more conservative investor base. However, portfolio managers agree that esoteric asset classes can be particularly attractive; they tend to increase diversification with a low correlation to the performance of other ABS and tend to carry a higher yield when compared to similarly rated debt instruments such as corporate bonds. These can offset the risks that are typically associated with esoteric asset classes – lack of historical data, lack of liquidity and/or complex or unfamiliar structures. At MT, we believe that new or novel asset classes will continue to be a feature of the Canadian structured finance market and we will see increased use of securitization technology and structures by private, mid-market companies in Canada – many such companies will be using securitization and structured finance in 2024 for the very first time.
Of note, digital infrastructure (which includes data centers, fibre optic and cellphone towers) is expected to be one of the highest growing ABS asset classes over the next few years. Specifically, new data centre issuance could top $15B in the US for 2024 and grow to be one of the largest commercial ABS asset classes by 2030. We expect to see increased issuance of securitized instruments to fund esoteric asset classes in Canada including for digital infrastructure. By way of example only, data centre securitization isn’t US specific – Miller Thomson acts for a large data centre operator, including in connection with its USD$1.214B issuance of securitized notes.
The SFVegas 2024 conference revealed a number of useful themes to watch for in the North American structured finance market. We believe traditional Canadian assets will continue to appeal to Canadian structured finance investors but only time will tell if new and novel asset classes will become routinely financed in our market. We look forward to continually engaging with Canadian and foreign market participants in this dynamic and evolving space and Miller Thomson will be sure to provide a further update on the Canadian structured finance space after attending SFACanada 2024 in May. We will miss the sights and sounds of the Las Vegas Strip but are happy to be back in Toronto and look forward to sharing market insights and structuring ideas with our clients and colleagues.
