KBRA released its 2023 ABS Sector Outlook, examining key trends from 2022 and providing forecasts for the new year.

Persistently high inflation, tighter monetary policy and slowing economic growth have weighed heavily on risk assets in 2022, and the U.S. ABS market was no exception. Over the past year the sector has faced a challenging environment, as funding costs rose sharply, credit spreads widened, and credit fundamentals experienced negative drift. It expects greater challenges in the year ahead, as the Federal Reserve is determined to raise rates further to combat inflation.

Key takeaways from the report include the following:

• We forecast approximately $242 billion in new issue volumes in 2023, down roughly 6.3 percent from where we expect supply to finish in 2022.
• Consumer ABS fundamentals are expected to generally weaken next year as real consumption continues to outpace real wage growth, while persistently high inflation, rising interest rates, and softer labor markets take their toll on household balance sheets.
• Broadly, we believe commercial ABS credit fundamentals will come under increasing pressure next year, given our expectation for slowing or negative GDP growth, coupled with continued hawkish monetary policy and declining consumer and business confidence in 2023. That said, the commercial ABS sector encompasses a large and diverse range of asset types, from aircraft leases to music royalties, and some asset types will be impacted more than others.
• As of Nov. 18, 2022, its surveillance portfolio included 2,155 ABS ratings across 740 transactions with an initial balance of $224.5 billion. Of the 1,942 ABS note classes outstanding at the end of December 2021, a total of 39 have experienced one or more downgrades in 2022 to date, bringing KBRA’s overall ABS rating stability ratio to just over 98 percent. The downgrades experienced in 2022 have mostly been in aviation ABS because of performance concerns stemming from Russia/Ukraine exposure and have been concentrated in the low investment grade and non-investment grade rating categories.