Despite concerns over slowing global macroeconomic growth, 2019 was an active year in the structured finance markets, with over $1.1 trillion issued across the globe, up nearly 10% 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.

Table 1

Global Structured Finance Volumes(i)
	2015	2016	2017	2018	2019	2020 forecast
U.S. (bil. $)
ABS	183	191	229	239	244	240
CMBS	95	69	88	77	96	100
CLO	98	72	118	129	118	90
CLO reset/refi	10	39	167	156	43	40
RMBS-related	54	34	70	95	124	130
Total U.S. new issue(ii)	436	373	510	540	582	560
Canada (bil. C$)	15	18	20	25	19	20
Europe (bil. € )	78	81	82	107	102	100
Asia-Pacific (bil. $)
China	97	116	220	292	334	330
Japan	38	53	48	56	55	55
Australia	24	16	36	23	31	31
Total Asia-Pacific new issue	159	185	304	371	420	416
Latin America (bil. $)	11	12	17	9	13	15
APPROXIMATE GLOBAL NEW ISSUE TOTAL (bil. $)	700	670	930	1,050	1,140	1,120
(i)We reserve the right to periodically revise these numbers retroactively as new information arises. Covered bonds are excluded. (ii)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, Bloomberg, LCD, and Commercial Mortgage Alert.

REGIONAL BREAKDOWN

U.S.

Although GDP growth is slowing, the U.S. economy remains strong, with a solid labor market. Structured finance issuance in the U.S. this year is expected to remain in the same neighborhood as last year, but down slightly due to an anticipated contraction in collateralized loan obligation (CLO) issuance. Despite the expected reduction in new vehicles sales in 2020, auto loan asset-backed securities (ABS) issuance should remain stable because of higher average loan balances. In the cases of residential mortgage-backed securities (RMBS) and commercial mortgage-backed securities (CMBS), we should see slight growth, driven by the nonqualified mortgages (non-QM) sector and both the conduit and single-asset single-borrower (SASB) sectors, respectively. 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.

Canada

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 in 2020. 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.

Europe

European securitization volumes look set to remain steady this year, 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 in 2020. 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 (ECB) 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

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 be flat or 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.

Japan

We expect issuance of Japanese structured finance transactions to be on par with 2019, 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.

Australia

We expect 2020 annual new issuance in Australia to hover around the same levels as 2019, 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.

Latin America

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.

DETAILED SUMMARY

U.S.

Auto loan ABS

Amy Martin, New York, (1) 212-438-2538, amy.martin@spglobal.com 

Despite U.S. light vehicle sales declining nearly 2% in 2019, to an estimated 16.9 million units, auto loan ABS issuance cruised along, reaching approximately $82.1 billion, roughly in line with 2018's $81.7 billion. The top six issuers were: Santander Consumer USA ($8.2 billion), Toyota Motor Credit ($8.0 billion), GM Financial/AmeriCredit ($6.5 billion), American Honda Finance Co. ($5.9 billion), CarMax Business Services ($5.9 billion), and Ford Credit ($5.3 billion).

Although we're projecting lower new vehicles sales this year, we expect auto loan ABS issuance to remain nearly stable, at about $80 billion-$82 billion. This is because higher average loan balances will likely offset reduced unit loan volume. Consumers' shifting preferences in favor of larger, more expensive vehicles, particularly trucks and SUVs and CUVs, has increased average transaction prices and contributed to the growth in loan balances. Through June, the average financed amount for a new vehicle hit a record of $31,171, up from $29,805 a year earlier. Higher loan amounts caused total auto loan originations through the first nine months of this year to increase 3% to $453.8 billion (New York Fed Consumer Credit Panel/Equifax). The prime segment (Equifax score of 720+) had the fastest pace, accelerating 4.8% to $214.5 billion, and represented 47.3% of auto lending activity (up from 46.6% for the first nine months of 2018). Meanwhile, subprime (Equifax score of less than 620) inched up only 1.5% to $90.7 billion and continued to constitute 20% of auto originations. We expect subprime auto loan ABS volume of $29 billion-$30 billion next year, which would be consistent with 2018 and 2019 levels.

For 2020, we expect prime auto loan pools to post stable to improved performance thanks to low unemployment levels, a generally positive economic outlook over the next 12 months, and strong credit characteristics. Collateral credit quality through the first nine months of 2019 remained generally stable with the previous year (weighted average FICO and loan-to-value ratio [LTV] of 755 and 95.5%, respectively) and reflected an improvement relative to 2016 (FICO of 746 and LTV of 96.9%). While vehicle affordability issues are being addressed in the industry with longer loan terms, as reflected by 73-84 month loans representing 31% of new vehicle loans in the second quarter of 2019 (Experian), these loans constituted only 7.8% of prime amortizing auto loan ABS completed during the first nine months of the year. We expect this percentage to grow as securitizers that have been excluding them seek to add them going forward. For example, Toyota's inaugural five-year revolving TALNT 2019-1 transaction allows up to 15% of the pool to consist of 84-month loans, whereas its term deals exclude loans longer than 72 months. Higher concentrations of longer-term loans would likely be met with higher levels of credit enhancement, unless offsetting factors are present (see "U.S. Prime Auto Loan ABS Are Seeing More Back-Loaded Losses As Loan Terms Lengthen," July 30, 2019).

With the influx of late-model vehicles coming off lease this year (4.1 million units), we expect used vehicle values to decline 3%-5% in 2020. Although off-lease vehicle volumes reached a record 4.1 million in 2019, used vehicle values held up surprisingly well, which we credit to the high price of new vehicles and desirable mix of late-model vehicles coming off lease. However, current record high incentives (estimated by J.D. Power to have reached a record $4,538 in November) to move out 2019 inventory is an ominous sign. If manufacturers grow dependent upon these for a prolonged period, recovery rates could skid going forward. However, at the present time, auto loan ABS recovery rates are holding up well. Last year's monthly recovery rates averaged through October for prime and subprime were approximately 59% and 44%, respectively, compared to 59% and 42% for the same period in 2018.

Tighter credit standards and better pool mix attributes from a few lenders, coupled with a slight improvement in recovery rates, is benefiting vintage static pool cumulative net losses (CNLs), as reported in our Auto Loan Static Index (ALSI) reports. CNLs on the prime 2017 vintage at month 22 are trending below 2016 levels (0.62% vs 0.68%), and 2018 and Q1 2019 are also performing better than the 2016 vintage (see chart 1).

Currently, we expect most outstanding subprime auto loan ABS pools to perform within or close to our current expected CNL levels. In fact, aggregate CNLs have been stable to slightly lower for the 2016-2018 annual cohorts (see chart 2 and "U.S. Auto Loan Prime and Subprime Losses Improved In September," Nov. 27, 2019). The 90-plus day delinquency level for subprime auto loan ABS transactions that we rated (and that are included in our subprime composite) was 1.60% as of Oct. 31, 2019, nearly unchanged from a year earlier (1.62%).

Nonetheless, caution is warranted in the subprime segment. These obligors generally have limited financial resources to draw upon if their incomes are reduced or they incur other financial hardships. Also, with nonmortgage consumer debt continuing to rise, this places a disproportion burden on individuals with lower incomes. Further, the already competitive environment could intensify given that Wells Fargo and Capital One have recently ramped up their lending volumes, and small, newer lenders are still trying to expand their footprint in order to meet profit targets. We noticed slightly weaker collateral characteristics through the first nine months of this year. The weighted average FICO and LTV were 583 and 112.0%, respectively, versus 586 and 110.2% for the same period in 2018.

With respect to ratings performance, we expect investment-grade classes (rated 'BBB-' or higher) to continue to benefit from deleveraging and consistent credit performance. Given the growth in noninvestment-grade subprime auto loan ABS over the past two years and the significantly lower credit enhancement associated with these tranches, we believe they are more vulnerable to downgrade. Not only could macroeconomic factors negatively affect performance, but so could idiosyncratic issues, such as servicer-related concerns and higher-than-expected losses.

Auto lease ABS

Jennie Lam, New York, (1) 212-438-2524, jennie.lam@spglobal.com) 

U.S. auto lease ABS issuance reached a new peak in 2019 at $21.4 billion--a 35% increase from 2018's $15.9 billion issuance, despite a decline in new light vehicle sales (see chart 3). Twenty transactions closed in 2019 versus 17 in 2018, with an average issuance size of $1.0 billion, compared with $934 million in 2018.

After making a debut in 2017 with its inaugural issuance and following it with its second single issuance in 2018, Santander Consumer USA led 2019 auto lease ABS issuance volume with three securitizations totaling $3.7 billion via the Santander Retail Auto Lease Trust with auto leases it underwrites in its capacity as the U.S. preferred lender for Fiat Chrysler. Following closely behind was GM Financial, also with three deals, totaling $3.5 billion. In 2019, VW Credit reentered the auto lease ABS market with one issuance at $1.3 billion, after being absent since 2015.

We expect similar issuance volume for 2020 at about $22 billion, despite a projection for further declines in light vehicle sales. We expect industry lease penetration levels will remain elevated at 30% or slightly above. Incentive spending will continue to rise as auto makers aim to sell off older inventory to make way for new or refreshed models that may contain better and more robust content. According to J.D. Power, the average incentive spending per unit in 2019 reached a record high of $4,600, representing a year-over-year increase of 2.9%, and roughly 11% of MSRP. Incentive spending could also be used to offset the growing concern of vehicle affordability as new vehicle prices continue to rise amid mounting pressure to boost auto sales. We expect that manufacturers will continue to tighten inventory levels and product lines by shedding older models, discontinuing those that are nonperforming, and manage production to align with demand.

Credit quality should remain high in the ABS pools, as these leases are usually originated to "super prime" customers with high FICOs. Based on our forecast for a stable economic outlook over the next 12 months, we expect defaults to remain minimal.

Auto lease ABS transactions issued after the Great Recession have generally experienced positive residual performance (chart 4 shows the residual performance by vintage of the transactions we rated). Used vehicle prices have generally held up well, especially in last two years, despite increasing year-over-year off-lease supply and changing consumer preference. Based on recent trends, rising new vehicle transaction prices may be steering more customers towards purchase of a preowned or used vehicle, as their desired new vehicle may be out their price range. This trend is enhanced by the mix of more affordable CUVs, SUVs, and trucks coming off-lease that may serve as a suitable substitute.

For 2020, we expect used vehicle prices to decline 3%-5% with the large influx of 4.1 million late-model vehicles expected to come off lease. However, we expect auto lease ABS residual performance will remain consistent with historical performance and our ratings to remain stable. Imbedded in the ABS structures is a relatively conservative estimate, provided by a third party, of the vehicles' residual value at the end of the lease term, which takes into account certain factors including economic indicators, gas prices, wholesale prices, incentive spending, fleet penetration, competitive position, product offerings, and lifecycle. In addition, based on our analytical approach, we will generally apply at least a 26% haircut to the base residual for a 'AAA 'rating. Similar to auto loan ABS, credit enhancement grows quickly due to deal deleveraging, providing more credit support as the transaction seasons. During 2018 and 2019, we witnessed a number of rating downgrades and negative outlook changes or CreditWatch placements on major auto manufacturers. As original equipment manufacturers' (OEMs) ratings decline, the potential for a manufacturer bankruptcy (and the relative impact on residual values) becomes more important and could have a more material effect on rated ABS notes should the OEM's rating fall below investment grade.

Consumer ABS

Frank Trick, New York, (1) 212-438-1108, frank.trick@spglobal.com  

We expect total unsecured consumer ABS volume for 2020 to range from $35.5 billion to $44.0 billion. We anticipate about $20 billion-$25 billion in credit card ABS, $12 billion-$15 billion in the personal loan asset class, $3.5 billion-4.0 billion for mobile handsets.

Looking ahead to 2020, headwinds from the significant growth in total consumer credit and indebtedness--$4.16 trillion as of October 2019, a 4.8% increase from 2018--buoyed by low unemployment and interest rates, could negatively affect consumer spending and asset performance as the credit cycle turns. Although we anticipate weaker performance across the unsecured consumer credit sector in general, we expect the impact on receivables backing unsecured consumer credit ABS to be marginal.

Notwithstanding robust growth in the unsecured consumer credit sector, not all consumer receivables originated are securitized. In the case of credit card ABS, our bankcard and retail-private label receivables indices declined by about 15% in 2019 to $201.4 billion, representing 18.5% of the $1.09 trillion in revolving consumer credit outstanding as of October 2019. In the faster-growing personal loan debt segment, the amount outstanding was $0.43 trillion as of third-quarter 2019, of which approximately 10% is securitized.

Similarly, performance in the broader unsecured consumer credit sector is not necessarily reflective of the unsecured consumer receivables backing ABS. The charge-off rate as of third-quarter 2019 on credit card loans at all commercial banks was 3.7%, compared to 2.3% for our Bankcard Credit Card Quality Index (CCQI). At this late stage of the current credit cycle highlighted by low bankcard loss rates, we expect only a gradual increase over the next two years, to a normalized level of about 3%–4% in securitized trusts, reflecting strong credit metrics including high seasoning, strong credit quality, and geographic diversification. The retail-private label receivables charge-off rate, which was 5.0% as of October 2019, is generally 200 basis points (bps) higher than for bankcards. We expect retail-private label charge-offs to normalize at 6%-7% over the next two years. In the personal loan segment, we have observed rising charge-offs in 2019, and our expectation over the next two years are for loss rates to be maintained at the higher end of the 8%-10% range. For the industry as a whole, we project a loss rate of 4%–5% over the two-year period.

On the legal and regulatory fronts, the ongoing lawsuits against two credit card securitization entities, which seek to expand the Madden (2015) decision, introduce uncertainty into the broader ABS market. Recent proposals from the Office of the Comptroller of the Currency (OCC) and The Federal Deposit Insurance Corp. (FDIC) to codify the "valid when made" doctrine should ease some angst in the market.

Our base-case and stress performance variables reflect our forward-looking views on factors including unemployment, shifts in receivables composition, stressed performance variables, and regulatory issues. We believe the considered risks to performance from a turn in the credit cycle and potential impact from legal and regulatory developments are addressed by our base-case assumptions and rating category stresses. On balance, although we anticipate unsecured consumer ABS performance to be marginally weaker, we believe it will remain relatively strong and expect ratings stability for unsecured consumer ABS.

Credit card ABS

Sanjay Narine, CFA, Toronto, (1) 416-507-2548, sanjay.narine@spglobal.com; Jonathan Zimmerman, New York, (1) 212-438-1002, jonathan.zimmerman@spglobal.com 

We expect 2020 credit card volume to be flat, in the range of $20 billion-$25 billion, primarily from the refinancing of maturities, with an approximate 85%-15% split between bankcard and retail-private label credit card ABS. Issuance will likely continue to be influenced by programs' relative all-in cost of fund levels, investor preference, and general interest rate volatility. Increasing consumer indebtedness could negatively affect affordability and credit performance if there is a sharp increase in unemployment and interest rates. Similarly, continued uncertainty in the retail sector could affect retailers' solvency and retail-private label receivables performance. Our outlook for 2020 is for marginally weaker, although still strong, performance of credit card receivables and, correspondingly, we expect our ratings on credit card ABS to remain stable.

The $24.5 billion credit card ABS volume through Dec. 20, 2019, is down 31% from $35.9 billion in 2018. Excluding cross-border issuance (i.e., nondomestic domiciled issuers who transact U.S. dollar credit card ABS in the U.S. market) reveals an even more dismal picture for this asset class: Domestic issuer volume amounted to $17.9 billion, down 37% from $28.4 billion in 2018. Overall, U.S.-domiciled issuance was less than maturities by about $19.8 billion. The precipitous decline was mainly attributable to bankcard ABS, with $14.5 billion in issuance compared to maturities of approximately $32 billion-$35 billion. Retail-private label credit card ABS volumes totaled $3.3 billion, which, like bankcards, was less than maturities (of approximately $5 billion-$6 billion).

The general net decline in credit card ABS issuance in 2019 was influenced by, among other market driven factors, the relative all-in, less cost-effective credit card ABS funding compared to unsecured bank debt and investor search for yield in a flat yield curve environment. For example, five-year fixed-rate spread to swaps for 'AAA' credit card ABS started the year at 44 bps, widened out to 50 bps in the first quarter, and averaged 44 bps to October 2019 before declining to about 39 bps in December 2019, despite the lack of supply. The relative flatness of the yield curve and robust economy saw investors reaching for yield down the credit spectrum, which was disadvantageous to 'AAA' credit card ABS, but beneficial for lower-rated unsecured bank debt issuance.

Despite the 37% fall-off in issuance in 2019, credit card ABS remains an effective and diversified funding source for issuers. Bankcard receivables tracked in our U.S. Bankcard CCQI, as of October 2019, totaled $169.5 billion, down about 15% from $199.4 billion in 2018, largely due to one bankcard trust bulk receivable removal. Retail-private label receivables tracked in our U.S. Retail-Private Label CCQI amounted to $32 billion, unchanged from 2018.

Credit card receivables continue to demonstrate strong credit metrics, such as high seasoning, solid credit quality, and geographic diversification. On average, approximately 94% and 71% of bankcard and retail-private label receivables, respectively, are of accounts aged at least five years. About two-thirds of bankcard receivables are from accounts with FICO scores of at least 720, and only 10% with FICO scores of 660 and below. Retail-private label trusts, which tend to have weaker credit profiles, had 60% of receivables with FICO scores above 720 and 12% with FICO scores less than 660.

These strong credit metrics influence credit card ABS performance, which remains robust. For the 10 months ending October 2019, bankcard 30-plus-day delinquency and charge-off rates were 1.6% and 2.2%, respectively. Comparatively, retail-private label 30-plus-day delinquency and charge-off rates were 3.6% and 5.0%, respectively, reflecting the difference in credit metrics vis-à-vis bankcards. Average payment rates and yields for bankcard and retail-private label remain stable at 30% and 20.5% and 19.4% and 26.3%, respectively. Our outlook for 2020 is for continued stable performance of the credit card receivables and, correspondingly, we expect our credit card ABS ratings to remain stable as well.

Personal loan ABS

Romil Chouhan, CFA, New York, (1) 212-438-3512, romil.chouhan@spglobal.com 

In 2019, year-over-year personal loan ABS issuance by branch-based and online marketplace lenders grew by nearly 25%, to approximately $15 billion, from around $12.1 billion in 2018. This growth is the result of increased origination volumes from existing issuers and new market participants entering the securitization market. Similar to last year, roughly two-thirds of 2019 issuance was from marketplace platforms such as SoFi (excluding student loan deals), LendingClub, and Marlette (which together accounted for more than 30% of the total $15 billion issuance), while the remaining one-third came from traditional brick-and-mortar lenders. We anticipate a similar issuer composition in 2020, and total issuance volume of $12 billion-$15 billion.

Fueling the increase in personal loan volume is the robust U.S. economy, which has been remarkably resilient over the course of the year in the face of a plethora of market uncertainties. The U.S. consumer continues to benefit from a low unemployment rate, rising real wages, and low inflation--factors which resulted in total household debt reaching record highs over 2019. Personal loan debt (including sales financing debt) has steadily grown to $0.43 trillion in third-quarter 2019 from a low of $0.30 trillion in second-quarter 2013. This has drawn in a multitude of new market participants and created a flourishing securitization market as lenders seek to diversify their funding sources and investors search for higher-yielding assets. As in prior years, these demands led to new market entrants securitizing for the first time in 2019--a trend that we expect to continue to see, albeit at a decreased pace, in 2020.

Our view of the marketplace lending sector continues to be cautious in the face of legal uncertainty surrounding the "valid when made" doctrine and who the "true lender" is in marketplace loans. While there has been recent movement by the OCC and FDIC to address "valid when made" legal risk, actions at the federal legislative level have not yielded any solutions or definitive legal precedence. Consequently, S&P Global Ratings has only rated a handful of marketplace lending securitizations for which we felt this risk was mitigated. We expect progress toward a marketwide resolution to remain slow moving in 2020.

We observed rising charge-offs in the personal loan space over 2019--a trend that has been ongoing for a number of years. At this late stage of the credit cycle, our expectations over the next two years are for loss rates to be maintained at the higher end of the 8%-10% range. Notably, the majority of marketplace lending platforms have only been in operation since after the Great Recession and have never been tested through a downturn. In addition, newer entrants into the space may be competing for growth and market share by lending to potentially riskier borrowers. However, we have observed certain issuers respond to rising losses by tightening their underwriting standards and are beginning to see improvements in loan loss performance for recent vintages, as well as marginal decreases in delinquencies.

With the Fed expected to maintain or cut interest rates in 2020, there will likely be less pressure on borrowers coming from increases in pricing and a deterioration in ability-to-pay metrics. Lenders are also becoming increasingly sophisticated in their use of technology to apply risk mitigation tools and collect payments from borrowers. Consequently, while we anticipate slightly elevated loss levels over the next two years in the personal loan space, we expect our ratings on personal loan ABS to remain stable.

U.S. mobile handset ABS

Mark O'Neil, New York (1) 212-438-2617, mark.o'neil@spglobal.com 

As we enter 2020, Verizon Communications Inc. remains the lone U.S. wireless carrier to issue device payment plan agreement (DPPA)-backed ABS bonds. Since July 2016, it has completed 10 transactions totaling $13.2 billion in total note issuance. Verizon's inaugural issuance (series 2016-1) was redeemed in October 2019, leaving four transactions (series 2016-2 through 2017-3) in their amortization periods and the remaining five still in their two-year revolving periods.

To date, the Verizon transactions have relatively short lives of approximately 3.5 years, including the two-year revolving period. This is a function of the short term of DPPA assets and the unique operational risk link to Verizon as the loan originator and network carrier provider. Strong transaction collateral performance, an increasing amount of portfolio loan loss data, and a general comfort with the DPPA asset type led to rating upgrades on multiple transactions since the initial issuance. Since July 2016, all tranches of the first four transactions (series 2016-1 through 2017-2) were upgraded to 'AAA (sf)' prior to, or as of, the amortization period commencing.

Today we have access to approximately six years of Verizon portfolio static pool DPPA loan loss performance segmented by obligor tenure from which we derive our expected loss rates for transactions. Loss performance over this time period has been very stable. Further, with four Verizon transactions currently in or having completed their amortization periods, we have observed very consistent transaction-specific loss levels over time (see chart 2 in "Presale: Verizon Owner Trust 2019-C," Sept. 23, 2019).

The operational risk link we believe exists between DPPA loan obligors and the network carrier from which they contract service at the time of the phone purchase remains the most significant challenge to achieving ABS note ratings higher than our issuer credit rating on the carrier (see "Global Framework For Assessing Operational Risks Specific To Wireless Device Payment Plan Agreements," Dec. 6, 2017). As addressed in the criteria article, a carrier's business risk profile (BRP) assessment plays a significant role in the maximum potential rating of DPPA ABS notes. Of the four major U.S. carriers, Verizon and AT&T Inc. have BRP assessments of "strong," whereas T-Mobile US Inc. and Sprint Corp. have BRP assessments of "fair".

Factoring in potential rating limitations that may result from the application of these operational risk criteria, we believe that Verizon will maintain its annual volume of DPPA securitization in 2020 at $3.5-$4.0 billion across two or three transactions. We also believe that the credit performance of DPPA loans and DPPA-backed ABS bond transactions will remain stable going forward.

U.S. student loan ABS

John Anglim, New York, (1) 212-438-2385, john.anglim@spglobal.com 

Student loan ABS issuance in 2019 pulled back to approximately $14 billion compared with the $18 billion in 2018. There was growth in originations for the private student loan sector in both the refinance and in-school channels. However, the increased loan volume did not lead to elevated ABS issuance, suggesting that originators may have been accessing the whole loan market or simply holding more loans on their balance sheet. In 2019, ABS issuance of loans originated under the Federal Family Education Loan Program (FFELP) was just under $6 billion, after tracking $8 billion per year for a number of years. This may be signaling the end of meaningful FFELP ABS issuance in the future, with loan originations ending nearly a decade ago.

As expected, Navient and Nelnet were active issuers in the FFELP space, closing 11 transactions, versus only nine in 2018. However, the average deal size was much smaller in 2019, resulting in a significant decrease in new-issue FFELP volume. We see this as a trend that will continue in 2020, as the economics to execute a FFELP deal are challenged by the dwindling supply of FFELP loans.

In terms of ratings, we believe that the credit quality of FFELP student loan ABS will remain stable due to the U.S. government's guarantee on the underlying loans. We continue to monitor the impact of income-based repayment plans through the surveillance of the existing transactions. On April 4, 2019, S&P Global Ratings published "U.S. FFELP Student Loan ABS: Methodology and Assumptions" and a related criteria guidance article, which shows how we apply the criteria to evaluate the liquidity risk in our outstanding FFELP transaction ratings.

In the private student loan segment, the major issuers again this year were Navient and SOFI. Navient closed seven private student loans deals totaling $4.1 billion, while SOFI brought $1.7 billion to market with three deals. The total private student loan issuance in 2019 was smaller, at $8 billion, than the approximately $10 billion in 2018. Investor demand for private student loan ABS remains strong, as the credit losses in the securitizations continue to perform well. Credit attributes in both the loan pools for the refinance and in-school segments have been consistent. The low unemployment level and relatively stable economy are also providing a nice environment for strong credit performance in these segments.

With the fall-off in FFELP issuance expected to continue in 2020, we believe student loan ABS volume will struggle to reach the 2019 level. Private student loan originations will see further growth in 2020 as lenders operate in a rather benign economy with a growing supply of borrowers looking to refinance student loan debt or bridge the gap between the in-school cost of education and available personal funds. We expect private student loan ABS issuers will keep looking to the ABS markets as one of the options to optimize funding costs.

Commercial ABS

Steve D. Martinez, New York, (1) 212-438-2881, steve.martinez@spglobal.com; Jason Mccauley, Centennial, (1) 303-721-4336, jason.mccauley@spglobal.com 

Our commercial ABS outlook for 2020 is for a slight decrease in issuance volume. For each of 2018 and 2019, equipment, fleet lease, and floorplan issuance totaled approximately $32 billion and $35 billion, respectively. Equipment ABS volume increased during 2019, as relatively new entrants, such as De Lage Landen (small ticket), Daimler (truck), and BMO Harris Bank (truck), offset some declines in floorplan issuance. We expect a slight decline this year to $33 billion due to our forecast of declining GDP growth. The ongoing trade war and tariffs with China could significantly affect business investment and lead to a decrease in overall issuance volumes in the near term. However, we expect the base of new entrants from prior years continuing to support volumes through repeat issuance.

Fleet lease issuance, while the smallest of the three segments, remained a consistent contributor in 2019. Over the past three years, fleet issuance averaged approximately $7 billion, and we expect this to continue next year given the aging of fleets and the demand for replacement.

Floorplan volume experienced the largest decline across the three segments, but the decline was partially attributable to the absence of Ally in the floorplan ABS market. Issuance in this segment tends to be more opportunistic than volume driven, which may explain Ally's absence considering its capital needs can be satisfied through its large deposit base. We expect floorplan issuance to remain stable in 2020.

Commercial ABS encompasses a wide range of industry types, so credit drivers are diverse. While we acknowledge the diversity within the segment, we expect credit quality to remain generally stable, with some weakness in certain segments due to lingering tariffs and trade tensions with China.

Agricultural equipment 

The agricultural economy in 2019 has remained stable amid the uncertainly from the prolonged tariffs, African swine fever, and adverse weather conditions that have delayed the planting and harvest season this year. Direct government support has certainly helped, but stress is building in the farm sector. Net farm income according to the U.S. Department of Agriculture is expected to increase slightly, to $92.5 billion for 2019, with direct government farm payments, including those from the market facilitation program, expected to reach $22.4 billion. Crop prices were mixed with some positive pricing momentum for corn toward the end of the year due to tightening supplies, while soybean prices were down due to the tariffs and the trade war with China.

For 2020, the tariffs and trade conflict with China, if not resolved quickly, could significantly affect business investment and result in lower equipment demand. However, we don't expect much ratings volatility, as credit quality should continue to generally remain stable compared to more stressful periods.

Trucks 

Truck loan performance is closely tied to overall economic activity that drives demand for freight services. We project a slight decline in freight demand during 2020, in line with our GDP growth expectations. The trucking industry in 2019 experienced mix results, with continued increases in contract freight demand as demonstrated by the ATA Truck Tonnage Index, yet a sharp decline in spot market freight. While the spot market is a relatively small segment of the trucking industry, it has resulted in a number of layoffs and closures of trucking companies in 2019. Trade tension with China, to the extent it continues, coupled with our expectation for slowing GDP growth, will weigh on truck performance in 2020.

Construction equipment 

Our 2020 outlook for construction loan performance is for modest volatility, based on our view of flat housing starts, along with an expected decline in GDP. Total construction spending through October 2019 was generally flat with the prior year, based on data from the U.S. Census Bureau. We expect spending could decrease further in 2020 in line with our expected decline in GDP growth, coupled with the lingering tariffs fueling uncertainty in the overall economy. Housing starts in 2020 are expected to generally remain flat, but should cushion any weakness in other sectors of the construction industry. While construction equipment loan performance tends to be volatile, most ABS pools benefit from diversification, with construction equipment being mixed with other equipment types that have different credit drivers.

Small-ticket equipment 

Small-ticket equipment loan performance in 2019 experienced an increase in net losses. The increase is against the backdrop of record loan performance that the segment experienced over the past five to six years. Our outlook is for continued stable performance of small ticket equipment loans for 2020, albeit with slight increases in delinquencies and defaults above the recent record low levels.

Floorplan 

Our 2020 outlook for nondiversified floorplan trusts is continued stable performance, with losses expected to remain near zero primarily due to manufacturer support. We view the manufacturer's financial health, as well as the dealer's (as obligor of the floorplan loan), as the key credit factors for this sector. Our outlook is based on the expectation that manufacturers will likely continue to provide significant financial support to dealers and may repurchase inventory upon dealer termination.

While we predict slightly lower auto sales for 2020, we do not anticipate that this will affect floorplan ABS issuance because issuance volume in this segment tends to be more opportunistic rather than directly tied to retail auto sales. However, we do expect slight decreases in payment rates as dealers encounter some weakness in moving inventory. This will not have a material impact on the nondiversified auto dealer floorplan trusts we rate because auto manufacturers have historically shown a willingness to support their dealer bases through production cutbacks and offer incentives to keep inventory levels in line with demand. We believe that payment rates will likely remain above the amortization trigger levels set in most transaction structures.

Non-Traditional

Kate Scanlin, New York, (1) 212-438- 2002, kate.scanlin@spglobal.com; Belinda Ghetti, New York (1) 212-438-1595, belinda.ghetti@spglobal.com  

Whole business 

Corporate securitizations again had a record setting year in 2019. We assigned ratings to 11 whole business securitization transactions during the year (representing total new issuance of about $8.9 billion, up from $6.7 billion in 2018). Strong investor demand featured prominently in this sector. Repeat issuers included Driven Brands Funding LLC, DB Master Funding LLC (Dunkin'), Applebee's Funding LLC/IHOP Funding LLC, Wendy's Funding LLC, Domino's Pizza LLC, and Planet Fitness Master Issuer LLC. First-time issuers--Jack in the Box Funding LLC, Jersey Mike's Funding LLC, and Servpro Master Issuer LLC, a franchisor in the restoration and reconstruction services industry--all tapped the market in 2019. The sector's performance has been mixed with weakness at certain smaller restaurant operators. Quick-service restaurants have been performing well overall, while casual dining restaurants continue to face challenges due to oversaturation and changing dining habits, among other pressures. We are likely to see a downtick in issuance in 2020 given the robust issuance activity of the last three years, with fewer deals requiring refinancing.

Timeshare  

Strong issuance in the timeshare sector continued in 2019, with 11 securitizations coming to market again, as in 2018. Issuance consisted fully of repeat issuers, including Orange Lake, Marriott, Wyndham, Hilton, Diamond Resorts, and Welk. We continued to observe generally stable collateral performance and we expect similar issuance levels in 2020.

Marine cargo container 

Marine cargo container ABS issuance in 2019 issuance was lower than 2018, as only two rated transactions came to market for a total issuance of $725 million, compared to eight in 2018 for a total issuance of $2.415 billion. Marine cargo container performance has continued to slowly improve since the 2015-2016 downturn, with few defaults. In 2017-2018, global containerized trade grew during a period of limited new marine cargo container supply. In addition, rising steel prices resulted in an increase in the cost of new marine cargo containers. In this environment, lease rates for both new and used dry marine cargo containers rose. However, more recently the cost of new marine cargo containers has declined due to lower steel prices, which has resulted in pressure on lease rates, as well as weaker demand and renewal of leases that were originally entered into at higher rates when demand was stronger. Going forward, lease rates might also be negatively affected by a slowing in world trade growth. However, as previously indicated, the industry has curtailed growth to maintain utilization. Lease rates for refrigerated marine cargo containers have remained more stable, primarily because steel prices have less of an impact on refrigerated container (reefer) prices. Demand for the commodities transported in this equipment is more stable than for those commodities transported in dry marine cargo containers. With exception of refinancing activities, we don't expect issuance to increase significantly unless demand and accordingly capex picks up.

Aircraft leases 

Securitization of aircraft leases remains an important source of financing for the aviation industry. In recent years, robust new issuance was spurred by growth in the commercial aviation industry, as well as demand from new ABS issuers and investors due to continued strong trading activity. Aircraft ABS 2019 issuance wrapped up the year above 2018. The general consensus among market participants is that volume in 2020 will remain strong.

According to the most recent Airbus and Boeing forecasts, airline passenger traffic is expected to grow in the mid-4% range annually over the next 20 years. Airbus and Boeing predicts 4.3% and 4.6% annual growth, respectively, in the next 20 years. Airbus forecasts 39,210 new passenger aircraft deliveries, and Boeing forecasts 43,000 new passenger fleet deliveries. Of the new aircraft scheduled for delivery, 42% will be delivered to Asia-Pacific to meet continued growth demands, and about 36% will be delivered to North America and Europe, mostly to replace aging aircraft. While the sector continues to benefit from an extended industry cycle, we remain focused on the ability of new leasing platforms to withstand an economic downturn and other industry trends that may put downward pressure on securitization performance.

The capital markets have been quite receptive in this sector, on both a secured and unsecured basis, including an increase in the number of asset-backed securitizations. New capital flowing into the aircraft leasing space has supported the formation of new leasing platforms, as well as increased competition among lessors.

Railcar  

The railcar ABS sector saw moderate issuance with four transactions rated for $1.8 billion, reflecting both refinancing activity and financing of new purchases by financial investors under ongoing portfolio acquisition programs. In addition, one transaction was brought to market by a major manufacturer/servicer. We do not expect a significant change in issuance volumes in 2020.

S&P Global Ratings expects U.S. GDP growth of 2.3% in 2019 and 1.7% in 2020, which should contribute to demand for certain car types, especially those that transport chemicals and housing-related products.

Leasing companies provide most of the tank cars in service, and shippers own the remainder. Because of the shortage of tank cars through 2014, lessors had been able to secure longer-than-typical lease terms (10 years, rather than the normal four to seven) and higher rates. However, many of these are beginning to come up for renewal, which we expect will be renewed at lower lease rates.

Even with weaker demand, the contracts' terms make it difficult to return cars early, which should keep utilization, revenues, and cash flows fairly stable over the next several years. However, lease rates for other cars that have been re-leased have been at substantially lower rates with shorter lease terms. Lessors can also reduce capital spending to add to their fleets (and thus maintain utilization levels) and write shorter lease terms at lower lease rates, with the expectation that they will be able to increase rates when stronger demand returns. Over the longer term, we expect the North American railroads' focus on precision scheduled railroading, which results in improved operating efficiency and the need for fewer railcars, to hurt demand.

CLOs

Daniel Hu, FRM, New York (1) 212-438-2206, daniel.hu@spglobal.com; James Manzi, Washington, D.C., (434) 529-2858, james.manzi@spglobal.com 

Last year brought more than $118 billion in new issuance, and an additional $43 billion in reset/refi volume, which, while still robust, was a far cry from the $290 billion record volume (including $130 billion in new issuance) seen during 2018. In 2020, we project some slippage in the new issue total, to about $90 billion, and refi/reset volume to be roughly flat year over year. While that large 2018 vintage opens up for reset/refi potential in 2020, 'AAA' discount margins were approximately 100 bps-120 bps then, versus in the 130s now. Indeed, liability spreads in general remain on the wider end of the recent range, and managers currently face a challenging arbitrage. Further, the sector remains subject to elevated headline risk, which could serve to hamper new transactions. Still, for perspective, $90 billion represents significant volume: Pre-crisis highs were around $95 billion-$100 billion.

On the credit side, we now tend to moderately higher numbers of CLO downgrades, though upgrades continue to outpace downgrades for now (see chart 5). A record number of resets began to limit the upgrade count during the past few years by delaying amortization, which previously had been a primary reason for the large numbers of positive rating actions. Subordinate classes are also showing increasing downgrade risk, as the average CLO obligor credit mix has continued to shift more toward 'B' and 'B-' rated credits, and the recovery prospects for loans in broadly syndicated loan (BSL) CLOs have deteriorated.

Indeed, the 'B-' (obligor) exposure in U.S. BSL CLOs is closing in on 20%, and every time it rises it's a new record (see chart 6). We have been following this topic very closely, as it is front of mind for investors, managers, and market participants as a whole (see "To 'B-' Or Not To 'B-'? A CLO Scenario Analysis in Three Acts," Nov. 26, 2019, and "When The Cycle Turns: How Would Global Structured Finance Fare In A Downturn," Sept. 4, 2019).

Finally, we continue to closely monitor documentation/loan structure erosion, which could further pressure recovery rates and exacerbate credit distress in a potential downturn (see "Par Wars: Short Debrief On U.S. CLO Document Trends," Sept. 20, 2019, and "Par Wars: Return Of The Covenants?," May 17, 2019, as well as our podcast "What's Up (CLO) Docs?," Sept. 17, 2019, on the topic). CLO investors are keeping an eye on a number of issues as managers structure transactions with an eye on future potential credit stress.

Overall, while we maintain a cautious view on non-investment-grade tranches and even some low-investment-grade tranches in certain circumstances (i.e., a manager overweights a distressed sector), we don't foresee much weakness within high-investment-grade classes, which remain well protected and should continue to perform well.

(To subscribe to our weekly Structured Finance Credit Update newsletter, which notes corporate rating actions that affect rated CLOs and publishes a running count of deals failing overcollateralization tests, email james.manzi@spglobal.com.)

CMBS

Senay Dawit, New York, (1) 212-438 0132, senay.dawit@spglobal.com; James Manzi, Washington D.C., (1) 434-529-2858, james.manzi@spglobal.com 

We expect $100 billion in private-label U.S. commercial mortgage-backed securities (CMBS) issuance in 2020 (not including commercial real estate [CRE] CLOs), which was up roughly 25% on a year-over-year basis in 2019, to $96 billion. The single-asset single-borrower (SASB) sector should continue to account for a little less than half of transaction volume, similar to this year's split. The trend of financing large loans either through the SASB sector or in the ever-growing portion of large pari passu loans within conduit pools has been one of the hallmarks of CMBS 2.0 (CMBS issued after the credit crisis), and we expect the trend to continue for the foreseeable future. Hotels have been decreasing as a percentage of conduit pools (12% in 2019 vs. 15% in 2018), but should remain a popular property type for SASB transactions, as they accounted for about 20% of dollar volume in 2019. While well off the 40% share they enjoyed in 2018, perhaps the shorter terms offered by floating-rate financing in SASB transactions dovetails well with the fact the sector is in one of the longest expansion cycles in its history and is starting to experience pockets of stress in terms of revenue per available room (RevPAR) growth and supply.

Clearly, the headwinds against issuance in 2018 caused by a rising rate environment translated into tailwinds for 2019 with the dramatic decline in interest rates. However, competition for originations from a variety of capital sources have persisted despite increased issuance volume in 2019 and likely in 2020, with most loans drawing from alternative funding sources. Outstanding commercial real estate and multifamily loan volume is up 6.3% ($268 billion) from the prior year, to $4.54 trillion as of Q3 2019, according to figures from the Federal Reserve. It's also up over $1 trillion since 2007-2008. Meanwhile, the outstanding amount of private-label CMBS is lower than in 2007-2008, although it has grown moderately over the past few years.

On the credit side, we see several risks to the status quo, which was characterized by stable underlying CRE performance overall and, until recently, positive rating activity (as measured by an upgrade to downgrade ratio of 1.7:1 in 2018 and even higher figures in 2016-2017, when maturing volume was much greater). While the upgrade/downgrade ratio fell below 1x in 2019 (see table 2), this was primarily due to negative rating actions on pre-crisis legacy deals, which continue to experience performing loans paying down and special servicing assets liquidating. For the CMBS 2.0 transactions, property-specific events continue to drive negative actions rather than any systemic change. As such, we expect overall stable credit quality for the sector into 2020.

Table 2

CMBS Rating Summary
	2014	2015	2016	2017	2018	2019
Upgrade	284	272	495	353	170	104
Downgrade	228	209	150	153	99	123
Up/down ratio (x)	1.2	1.3	3.3	2.3	1.7	0.8

First, CRE valuations remain high. For context, commercial property prices, as measured by Real Capital Analytics' Commercial Property Price Index (CPPI), are now approximately 30% above their August 2007 peak. Generally well-behaved CRE fundamentals, a supportive macroeconomic environment, and continued investment demand in a low-yield environment have let prevailing low cap rates look attractive on a relative basis and kept pricing stable and elevated. Still, trade tensions, Brexit, the prospect of slowing economic growth, the return of rising interest rates, and political uncertainty are just a number of external factors that could lead to a decline in confidence and/or prices, and knock-on impacts to CMBS credit.

We believe our ratings are well positioned for these risks, based on the gap between appraised values and S&P Global Ratings' property values. This gap varies by property type, but on average was about 35% in 2019, and it stems from our haircuts to underwritten cash flow and our utilization of stressed cap rates (currently about 150 bps above market values).

By property type, we are focusing on multiple areas. By now, everyone has heard the retail story, and conduit pool exposures have fallen to 22% last year from 27% in 2018 (see chart 7).

In suburban office, we're still carefully evaluating single-tenant exposures, especially where lease terms and loan maturities are coterminous. Office exposure was steady in the low-30% area in 2019, down from nearly 40% in 2017. For hotels, where exposure has decreased substantially to around 12% in conduits, we see low RevPAR growth and even year-over-year declines in several large markets.

Another credit trend we've been watching for some time now is the high percentage of interest only (IO) loans in collateral pools and, notably, full-term IOs. The trend is a continuation of a pattern that commenced in 2017 and reached a post-crisis high in 2019. Though concerning, it should also be noted that these loans, like their amortizing counterparts, exhibit lower leverage on average than their pre-crisis forebears.

RMBS

Sujoy Saha, New York, (1) 212-438-3902, sujoy.saha@spglobal.com; Tom Schopflocher, New York, (1) 212-438-6722, tom.schopflocher@spglobal.com 

Non-agency RMBS finished 2019 with more than $124 billion in new issuance. This marks a gain of over 30% compared to 2018. About 17% of the 2019 issuance total was related to credit risk transfer (CRT) securitizations by Fannie Mae, Freddie Mac, and a few mortgage insurance (MI) companies. Prime jumbo, re-performing, and nonperforming securitizations accounted for 16%, 29%, and 8%, respectively (see chart 8).

The greatest year-over-year growth was attributable to non-QM, for which issuance reached just over $25 billion, more than doubling the 2018 total of about $12 billion. With this annual growth, non-QM became the second-largest non-agency subsector in market share, making up 20% of the 2019 issuance. Other RMBS product types, including mortgage servicing rights, single-family rental, servicer advance, reverse mortgage, second liens, fix-and-flip, HELOC, and manufactured housing, accounted for the remainder (about 10%) of the total 2019 figure (see chart 8).

Mortgage rates fell steadily through the first three quarters of 2019 and have recently stabilized in the range of their historical lows. This trend has eased some of the housing affordability issues associated with the new home supply shortage. We are forecasting the 30-year conventional mortgage rate to increase slightly in 2020 to an average of 3.9%, which is still well below the long-term average. The S&P Case-Shiller Home Price Index, which has fallen to 3.2% annual growth in 2019 from 5.8% in 2018, is expected to continue its slowdown, with only 1.8% annual growth projected for 2020. This should also help to ease affordability constraints.

We are projecting non-agency RMBS volume for next year to increase slightly to $130 billion (see chart 8). We expect the non-QM sector to grow by $10 billion to $35 billion in 2020. However, expected growth in non-QM issuance volume will likely be offset by a decline in re-performing/non-performing loan securitizations. Our view on issuance and subsector representation accounts for the following:

• The Mortgage Bankers Association expects mortgage originations to decrease slightly, to $1.91 trillion in 2020 after exceeding $2 trillion in 2019 (which was the highest since 2007). While purchase originations are expected to grow 2.6% to $1.31 trillion, refinance originations could decrease by nearly 25% to roughly $600 billion in 2020.
• We expect the increase in the conforming loan limit, improvements in affordability tempered by home price appreciation, and increase in household formations driven by the millennial generation, to result in modestly higher CRT issuance in 2020.
• Agency-eligible loans could continue making their way into non-agency RMBS, bumping up prime jumbo issuance. Jumbo issuance also continues to get a boost from prime but technically non-QM loan securitization (such as interest-only prime mortgage pools).
• We expect non-QM issuance to grow in 2020 as demand for the product persists. However, the non-QM securitization volume is small; in 2019, it accounted for roughly 1.5% of annual residential mortgage originations.

U.S. RMBS has exhibited overall strong performance, as the unemployment rate across the country sits near a 50-year low and home prices continue to increase, albeit at a slowing pace. For legacy RMBS issued before 2009, upgrades outpaced downgrades for the year, and almost half of the rating actions were affirmations, while roughly one-third related to ratings being withdrawn. Post-2008 U.S. RMBS performed per our expectations. Other than two non-QM bonds that saw rating downgrades in 2019, we either upgraded or affirmed our ratings on post-2008 U.S. RMBS.

Continued home-price appreciation and a low unemployment rate--forecast to drop to 3.5% in 2020--bode well for U.S. RMBS performance in 2020.

Asset-backed commercial paper/letters of credit

Asset-backed commercial paper 

Radhika Kalra, New York, (1) 212-438-2143, radhika.kalra@spglobal.com 

We are forecasting U.S. asset-backed commercial paper (ABCP) outstanding to remain stable around $255 billion-$260 billion in 2020, from $254.8 billion as of year-end 2019. We expect sponsors to continue expanding the existing portfolios and issuances from new conduits to contribute to the overall increase. We rated three new programs in 2019.

Strong U.S. consumer sector fundamentals support an increase in ABCP volume; however, a low interest rate environment and robust levels of bank deposits will continue to dampen growth in ABCP over the short term. The LIBOR phase-out by the end of 2021 will have minimal impact on ABCP issuance, as the majority of ABCP is not indexed to LIBOR and fall-back language is included in program and transaction documents. However, ABCP issuance may benefit with the commercial paper (CP) rate being widely accepted in the market as participants explore alternative reference rates to LIBOR. While still in the nascent stages, new environmental, social, and governance (ESG)-compliant ABCP programs could positively impact volume in the future. There is also a growing interest in using Blockchain technology in ABCP programs.

In a recession scenario, we expect stable ratings for U.S. ABCP based on high-investment-grade ratings on bank sponsors and in-depth experience of nonbank sponsors. U.S. recession risk over the next 12 months has eased to 25%-30%, based on economic conditions improvements (see "U.S. Recession Risk Eases To 25%-30%, Business Cycle Barometer Says," Nov. 25, 2019). Bank fundamentals are stable, supported by low credit losses and sound capitalization despite a slower economy and high corporate leverage. While growth for banks is expected to be slow due to weakness in manufacturing and trade driven principally by the U.S.-China strategic confrontation, we expect a robust U.S. consumer sector, which has a favorable impact on outstanding ABCP.

For ABS, we expect a stable rating performance, with the risk of downgrades and defaults higher in the speculative-grade rating categories. Asset or credit risk is typically covered by the liquidity provider in fully supported programs. However, in partially supported programs, while banks provide liquidity support, credit risk is typically covered by credit enhancement. In a recession scenario, we expect stable performance for assets in the high credit spectrum while credit weakens in the lower rating categories. In partially supported programs, credit risk may be ameliorated by credit enhancement, a fungible layer of programwide support, or funding the asset on the liquidity bank's balance sheet.

Traditional assets, such as auto loans and leases, credit cards, student loans, consumer loans, trade and equipment loans and leases, have continued to dominate partially supported programs and comprised approximately 81% of total collateral at the end of September 2019. Funding of nontraditional assets, including repurchase agreements, servicer advances, aircraft financing, and commercial assets, continue to grow, albeit comprise a smaller percentage in partially supported programs (19%). However, nontraditional and commercial assets comprise 48% of total assets funded in both partially and fully supported programs at the end of September 2019. (For prior data, see "Inside Global ABCP," Oct. 23, 2019).

Variable-rate demand obligations 

Alexander Gombach, New York, (1) 212-438-2882, alexander.gombach@spglobal.com 

We expect 2019 year-end total variable-rate demand obligation (VRDO) rated issuance of approximately $7 billion--below our forecast from a year ago, and below 2018's $9.7 billion. The liquidity-backed form of the VRDO, in which credit quality is dependent on a municipal issuer with external liquidity support, was the most frequently issued structure in 2019, with $2.8 billion of total par issued. Leading sectors within liquidity-backed VRDOs were health care (approximately $1.1 billion) and housing (about $663 million). Looking ahead to 2020, we do not expect to see significant increases in issuance over 2019.

We base our expectation on these key factors:

• Low interest rates have led many issuers to refund variable tax-exempt issues with taxable fixed rate issues.
• The broader muni investor base, potentially driven by foreign investors indifferent to tax exemption, have shown great interest in high-quality taxable U.S. municipal debt.
• The Sifma Swap Index, a seven-day index of tax exempt VRDOs and a benchmark of VRDO remarketing rates, continued to show volatility this year. The index had a yearly range of approximately 1.07%-2.30%, which was a continuation of large swings that the index began to see in 2018 after spending many years below 1%.

VRDO credit quality is tied to the credit quality of the supporting bank; as such, issues affecting banking in the year ahead could affect the VRDO space as well. We do not expect a major deterioration in credit quality in the near term, yet we do believe loan growth and deterioration in asset quality could lead to higher loan loss provisions (see "U.S. Bank Earnings Are Bruised But Buoyant, Despite Rate Cuts," Nov. 20, 2019). Fed policy and lower interest rates could benefit asset quality, however, and extend the current credit cycle.

Last year, we looked for signs of a change in extensive use of direct bank loan, or "direct purchase" financing rather than VRDOs. While we certainly saw some issues convert from bank direct and add external credit support, it was hard to call what we observed a true trend. Tax law changes theoretically made direct loans less attractive to banks relative to issuing letters of credit, yet in reality, banks seem to prefer direct loans regardless of any new tax impact. While we expect to continue to see conversions from direct loans occur, we do not expect to see a large trend materialize in 2020.

We will continue to follow the various cases alleging rate fixing in VRDOs by large remarketing agents. While these cases in many states (e.g.,California, Massachusetts, and Illinois) are ongoing, the facts of the cases suggest one potential outcome could be more transparency in VRDO rate setting and put operations. We will follow any new technological initiatives, such as alternative bid-rate systems, and look to apply our operational risk and letter of credit criteria with a consistent approach.

Tender option bonds 

Mindy Xu, New York, (1) 212-438-2879, mindy.xu@spglobal.com 

The volume of tender option bonds (TOBs) experienced a drop in 2019. By November 2019, total TOB new issuance reached $10.30 billion, which was 24.7% lower than $13.68 billion at the end of 2018. We rated approximately 665 TOB new issues, which made the number of transactions lower by 32.8% compared to the 1,056 that we rated in 2018.

A couple of factors contributed to this decrease in TOB volume. First, the volume of municipal bond issues was down. Second, the decrease in interest rates made it less attractive for sponsors to structure TOB transactions, as TOBs are created to issue short-term certificates to finance high-quality long-term municipal bonds on the expectation that the borrowing rate is less than the yield of underlying assets.

However, we saw an increase in credit-enhanced TOB programs, where a third party provides credit enhancement so the lower-rated underlying assets can benefit from the joint support when added to the trust. We also saw a new bank enter the market, as well as increases in the number of unique programs used by existing banks. As such, we expect new issuance volume to reach about $11.5 billion in 2020, which is slightly higher than 2019.

We anticipate our ratings on TOBs to remain stable in the near future. TOBs are exposed to the credit quality of the underlying municipal bonds in the trust and the liquidity provider. Given continued GDP growth and low unemployment, we expect the rating on most of the underlying assets and liquidity providers will remain stable as the revenue growth for most states remain strong (see "In The Mist of Mixed Economic signals, U.S. State And Local Credit Quality Remains Strong," Oct. 29, 2019). As for the liquidity providers, the U.S. banking industry remains generally healthy given excellent asset quality, fairly stable noninterest revenues, and continued improvements in operating efficiencies.

Referenced repackaged securities 

Mayumi Shimokawa, New York, (1) 212-438-2606, mayumi.shimokawa@spglobal.com 

The volume of reference repackaged securities (RRS) continued to see a decline in volume last year. Total RRS new issuance dropped 58%, to $45 million in 2019 from $112 million in 2018. Total new issuance for RRS totaled three, down from six the previous year. We expect to see flat issuance in 2020, or perhaps a slight increase, as the market continues to find ways to get higher interest rates in a low interest rate environment. S&P Global Ratings currently maintains ratings on approximately 128 issues, with a total par value of approximately $10.91 billion.

Canada

Sanjay Narine, CFA, Toronto, (1) 416-507-2548, sanjay.narine@spglobal.com; Piper Davis, New York, (1) 212-438-1173, piper.davis@spglobal.com 

Canadian securitization (excluding covered bonds) volumes decreased 23% to C$19.3 billion as of Nov. 20, 2019, from C$25.1 billion in full-year 2018 (see chart 11). In 2019, lower U.S. cross-border auto loan and flat credit card ABS issuance were the primary drivers for the relative volume decline. Despite market volatility, approximately 57% of 2019 volumes were U.S. cross-border transactions, led primarily by credit cards and auto loans ABS, compared to 46% in 2018. New issuer activity in the developing uninsured RMBS sector is encouraging for this asset class.

Looking ahead to 2020, headwinds from trade policies, volatility in commodities prices, elevated house price, and consumer indebtedness can negatively affect consumer spending and asset performance. Previous macro prudential policy tightening and tougher mortgage qualification rules have contributed to a deceleration in house prices and a slowdown in household credit growth. Consumer debt service burdens are easing with the slower accumulation in new debt, an increase in the household savings rate, lower unemployment, a pick-up in income growth, and the Bank of Canada's recent shift to a dovish policy, all of which will be supportive of debt servicing capacity and asset performance.

We expect issuance volumes for 2020 to range from $18 billion to $21 billion, driven by about $13 billion in credit card ABS maturities, up from $8.8 billion of maturities in 2019. Auto loan and lease ABS volumes are expected to decrease, reflecting lower forecasted vehicle sales in 2020. Cross-border U.S.-denominated issuance through credit card and auto loans 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.

On balance, we expect Canadian term ABS transactions will continue to benefit from strong and stable performance in 2020. Overall, we believe our ratings on Canadian ABS structured finance bonds will remain stable in 2020.

Credit card ABS

We expect 2020 credit card volume to remain flat year over year, in the range of C$12 billion-C$13 billion, led by the refinancing of maturing ABS. U.S. dollar-denominated cross-border volume is expected to remain robust, accounting for approximately 60% of issuance.

The C$9.9 billion credit card ABS volume, through Nov. 20, 2019, is down 39% from C$16.2 billion in 2018. Issuance exceeded maturities by C$1.1 billion, compared to net new issuance of C$5.2 billion in 2018. General market volatility, shifting yield curves, and spread premiums in the U.S. and Canada markets provide challenging conditions for issuance. Nonetheless, U.S. dollar-denominated cross-border issuance totaled US$6.1 billion through October 2019--approximately 82% of issuance versus 51% (US$6.5 billion) in 2018 (see chart 12). Moreover, U.S. dollar-denominated Canadian cross-border credit card ABS issuance accounted for approximately 30% of the total U.S. bankcard issuance volume through Nov. 20, 2019, providing liquidity and investor choice at a time of reduced issuance from U.S. bank-sponsored credit card ABS trusts.

Through established cross-border credit card ABS issuance, the major Canadian bank sponsors continue to access the broader and more diversified U.S. investor base for funding. For U.S. investors, Canadian credit card ABS offer a spread pick-up and comparatively better receivables performance relative to similar U.S. bank credit card ABS.

Canadian credit card receivables continue to demonstrate strong credit metrics, such as high seasoning and credit quality. On average, approximately 84% of the receivables are of accounts aged at least five years, and approximately 35% of receivables comprise accounts that can be classified as "super prime." The receivables are also geographically diverse, with province exposure consistent with the nation's population distribution.

These strong credit metrics influence Canadian credit card ABS performance, which remains robust. For the nine months ending September 2019, 30-plus-day delinquency and charge-off rates were 2.0% and 3.0%, respectively. The payment rate also stayed healthy, at 44.9%. These figures positively affect yield and excess spread, which averaged 23.6% and 17.0%, respectively, as of September 2019.

Our outlook for 2020 is for continued stable performance of the credit card receivables backing rated ABS.

Auto ABS (loan, lease, dealer floorplan)

We expect 2020 auto loan and lease ABS volumes to decrease to $5.2 billion, reflecting lower-forecasted vehicle sales of 1.915 million units in 2020. Auto loan U.S. cross-border transactions are expected to remain steady, accounting for 40% of issuance.

Year-to-date November 2019, auto-related ABS decreased by 3% to C$6.3 billion, compared to C$6.5 billion in 2018. Vehicles sales year-to-date October 2019 amounted to 1.937 million units, lower than the 1.984 million units in 2018. The slowdown in auto sales was driven by decreasing consumer household wealth, higher prices for new cars and light trucks, and economic uncertainties, all of which negatively affect affordability.

In the auto loan segment of the market, Canadian banks are a major source of loan financing for consumers. Loan financing accounts for 52% of new vehicle and 55% of used vehicle sales. For 2019, auto loan ABS decreased by 9% to C$4.6 billion, from $5.0 billion in 2018. Issuance from auto captive or dealer-affiliated entities, which tend to issue domestically, remained consistent, at $1.7 billion.

Auto captives, which dominate the leasing space (banks are prohibited from offering auto leases) have been driving strong Canadian auto sales over the past few years--and new vehicle sales in particular. Lease financing accounts for 30% and 3% of new and used vehicle sales, respectively. As of November 2019, auto lease ABS issuance was C$1.5 billion--an increase of 13% over C$1.4 billion in 2018. There was one rental car affiliated auto lease ABS for C$200 million, which was in line with 2018 issuance.

Higher vehicle prices, competition between loan and lease providers, and availability of credit have resulted in longer loan terms in the auto market--as much as 96 months. This increases the likelihood of negative equity--borrowers refinance a new vehicle before they have an equity position in their current one--which could result in increased indebtedness for consumers. That said, rising interest rates and affordability constraints may dissuade consumers from refinancing their vehicles, which would help keep residual values steady and reduce the risk of negative equity.

Notwithstanding the lengthening of loan terms in captive and noncaptive auto portfolios, the maximum original loan term in the collateral pools of rated auto ABS is 84 months, which, after accounting for seasoning, results in a lower remaining term. We have not observed risk layering or credit deterioration of obligors in securitized pools. Cumulative net losses for rated auto loan ABS are trending in line or below initial levels.

Overall, we do not expect any deterioration in the credit quality of collateral backing term ABS, and our expectation is that cumulative net losses will remain stable.

Commercial farm equipment ABS

We expect Commercial farm equipment ABS volume to remain flat in 2020, influenced by headwinds from trade and tariff uncertainties, which can constrain farming activities. There was one public farm equipment ABS issuance in 2019 for $425 million, which represents a 51% decline from $876 million in 2018.

RMBS

In the RMBS sector, our expectation for 2020 is that volumes will continue to be low, due to investors still getting comfortable with an unguaranteed product and issuers figuring out how to make the economics cost effective.

Mortgage-related ABS issuance increased 267%, to $1.8 billion, from C$0.5 billion in 2018. Of the $1.8 billion, $1.3 billion was related to home equity lines of credit. The remaining $0.5 billion was from a new issuer, which is an encouraging development for this sector. To date, there have been two issuers of nonguaranteed RMBS in the Canadian market. The lack of issuers and low volumes are reflective of a market transitioning from the federal government-guaranteed and insured MBS programs to private-label nonguaranteed and noninsured mortgage-backed RMBS. Our expectation is that volumes will continue to be low until potential issuers get over challenges related to program establishment and cost-effective economics, and investors understand the underlying credit risk of the mortgages.

CMBS

Headwinds from retail sector challenges, including the length of time to market and the competitive lending environment, leave securitized commercial mortgages somewhat disadvantaged to the traditional portfolio lending option. Thus, for 2020, we expect issuance will be about C$0.5 billion, down from C$0.9 billion in 2019, which was from one transaction.

Europe

Andrew South, London, (44) 20-7176-3712, andrew.south@spglobal.com 

Greater regulatory certainty to support steady securitization issuance

Investor-placed European securitization issuance recovered from a slow start to end 2019 at €102 billion, down only 5% (see chart 14). While uncertainties surrounding implementation of the European Union's Securitization Regulation stifled supply early in the year, the new rules have increasingly bedded down and should not hold back activity in 2020, with securitization volumes set to remain steady at about €100 billion. European benchmark covered bond issuance remained strong in 2019, rising by 8% to €132 billion. In 2020, an increase in scheduled covered bond redemptions could support a further modest rise in volumes.

Continued modest growth in underlying lending to the real economy should provide a supportive backdrop for wholesale funding issuance. The approaching maturity of some issuers' borrowings from cheap Bank of England funding schemes could further spur a rise in bank-originated securitization and covered bond issuance in the U.K. However, the ECB's equivalent scheme reopened to new drawdowns in late 2019, potentially suppressing any similar effect in the eurozone.

The diversity of European securitization issuance arguably took a step backwards in 2019, with less activity in niche areas and volume growth mostly confined to what were already the largest sectors--leveraged loan CLOs, U.K. RMBS, and German ABS. While CLOs recorded a fourth successive year of issuance growth and continued to be the highest-issuance sector in 2019, we expect volumes to dip in 2020, given increasingly challenging transaction economics and a decline in new underlying loan originations. Among smaller sectors, Spanish securitization was a bright spot in which investor-placed volumes grew by 60% to reach a new post-crisis high of nearly €4 billion, as more originators began to print capital relief transactions. In the benchmark covered bond market, the U.K. and Spain saw strong growth, with €20 billion and €7 billion of issuance, respectively--up about 60% in each case compared with a year earlier.

With interest rates now set to remain low for even longer, the floating-rate nature of most European securitization products is less likely to spur marginal investor demand. However, another effect of continued accommodative monetary policy may more than compensate, with the ECB's recent restart of net purchases under its quantitative easing program bringing a large buyer of both securitizations and covered bonds back to the market.

In addition, the long-running regulatory uncertainty that has caused a drag on securitization issuance continued to lift through 2019 and should no longer represent a significant hindrance in 2020. Market participants have had to comply with the EU's new Securitization Regulation since the beginning of 2019. As well as introducing preferential treatment for so-called "simple, transparent, and standardized" (STS) transactions, the regulation also included a revamp of rules regarding risk retention, investor due diligence, and disclosures, which apply to all securitizations. However, significant elements of the market infrastructure envisaged in the regulations--as well as drafts of various technical standards providing implementation guidance--were still under development in early 2019, despite the new rules already being in effect. This kept many originators and investors on the sidelines.

Now, however, the key technical standards are all but finalized and likely to enter into force in the first quarter of 2020. Confidence in the new STS regime already improved throughout 2019 as third-party verifiers received regulatory approval and began to opine on transactions' STS compliance. By the end of the year, more than 35% of all investor-placed European securitization issuance had come to market with the STS label, and originators have also begun to apply the label retrospectively to outstanding pre-2019 issuance. The significance of the label will likely rise further in 2020. From April, only STS-labeled securitization exposures can count as high-quality liquid assets in EU banks' calculation of their liquidity coverage ratio (LCR)--a key regulatory test.

Opposing effects from central bank funding schemes in the U.K. and eurozone

While annual growth rates of underlying bank lending to households and nonfinancial corporates remain only in the low single digits, they are still close to post-crisis highs for both the U.K. and the eurozone. This provides a supportive context for growth in net issuance of wholesale funding, potentially including both securitizations and covered bonds. That said, the role these products play in the funding mix will partly depend on the availability and cost of issuers' alternatives. Bank-originated European structured finance volumes have been depressed for several years given the availability of cheaper funding options offered by the ECB and Bank of England.

In the U.K., however, these central bank schemes have been closed to new drawdowns since early 2018, and the maturities of past borrowings are on the horizon. We estimate that about £17 billion will mature in the second half of 2020, but with more than £75 billion to come in 2021. As a result, U.K. bank issuers are increasingly likely to once again tap debt markets as they plan for the gradual run-off of this official sector term funding.

However, the ECB's equivalent scheme of targeted longer-term refinancing operations (TLTROs) has reopened to new drawdowns, potentially suppressing any similar effect in the eurozone. While issuers' renewed access to TLTRO funding may substitute for some covered bond issuance in particular, ECB asset purchases and ongoing negative yields could help spur supply. According to our data, scheduled covered bond maturities are also set to rise in 2020. Even assuming flat net issuance, gross volumes could therefore rise modestly, by 5%-10% in our view. Another positive is that the European Commission's project to better harmonize the region's covered bond markets cleared the European legislative process in 2019. Although it will take some time for different national covered bond frameworks to align with the new rules, much of the uncertainty surrounding the project has now lifted.

Our issuance figures here do not include the volume of CLO refinancings and resets, which accounted for about €11 billion of further activity in 2019. Senior CLO tranche liability spreads are currently similar to their levels of two years ago, though trending lower. Collateral manager and equityholder incentives to refinance or reset transactions that exit their noncall periods in 2020 are therefore finely balanced and sensitive to future spread movements.

Ratings show continued stability, though CLO pools are weakening

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.

On most measures, we expect aggregate European structured finance credit performance to be positive in 2020. For most asset classes, the 12-month trailing average change in credit quality has been positive for at least three years, indicating aggregate upward ratings movements (see chart 15). In the CMBS sector, where credit performance has been weakest, legacy transactions are now largely wrapped up, with most of the expected losses already crystallized. In fact, the sector's average change in credit quality turned positive in October 2019 for the first time in more than a decade.

Although the eurozone economy has been slowing over the past two years, unemployment has also been trending lower--a credit positive for the assets backing most European securitizations and covered bonds. We expect eurozone GDP growth to slow further in 2020, to 1.0%, from 1.2% in 2019. However, we believe the risk of recession is receding, thanks to strong labor markets that are supporting consumer spending. The unemployment rate is now at 7.5%--the lowest in over a decade--and we expect it to fall marginally further in 2020. In the U.K., the outlook is still partly dependent on Brexit-related developments. Although the decisive outcome of the recent general election means the process has moved forward and may lead to a bounce in economic activity in the short term, there remains a risk that the U.K. could leave the EU without a free trade agreement at the end of 2020.

Despite some concerns over the length of the current credit cycle, there are few signs of deterioration in underlying collateral performance for transactions backed by lending to consumers. However, one area of focus is the gradual deterioration in credit quality of CLO collateral, with more recent transactions backed by loan pools with lower ratings and recovery prospects, on average, than earlier vintages. That said, a lower-quality collateral pool is generally reflected in higher credit enhancement for tranches of a given rating, all else being equal. Other effects are countered by structural features. For example, a growing concentration of loan collateral rated 'B-' puts CLO structures at greater risk of eventually breaching their 'CCC' concentration limits--and subsequently junior overcollateralization tests--in the event of a corporate downturn. However, such a breach could actually be credit positive for senior noteholders, as these CLOs would then pay down their liabilities and de-lever earlier.

China

Aaron Lei, Hong Kong, (852) 2533-3567, aaron.lei@spglobal.com  

The growth momentum of China's new securitization issuance slowed down in the second half of 2019. It even recorded the first year-over-year drop in years in the third quarter, falling 8.72% from one year ago. The full-year issuance, RMB2,341 billion (around US$334 billion), remained 16% greater than the number in 2018, primarily due to robust activity in the first two quarters. Some previous strong sectors, RMBS in particular, have weakened.

RMBS issuance recorded a 12% year-over-year decrease in 2019. A significant drop in issuance from the top RMBS originators accounted for the decline. The increase of repeated issuance from other large banks and first-time issuances from midsize and small banks have tempered the reduction.

Favorable interest rate environments and rising loan origination continued to support new issuance in the consumer sectors. Consumer receivables transactions, including auto loans, credit cards, and consumer loans, are picking up in issuance. Auto loan ABS issuance, for instance, came back strongly from 2018, with new issuance increasing by 62% year over year. Repeat issuance from captive auto-finance companies and the participation of new originators have lifted the number.

We expect flat or single-digit growth of new issuance in 2020 for China securitization. The issuance amount may reach around US$330 billion in 2020, around the same as the full-year 2019. Across sectors, RMBS issuance may continue softening, while credit card ABS may strengthen.

Asset performance in retail receivables remained strong in the quarter, although we continue to see 2019 a challenging year for some nonretail securitization transactions (see table 3).

Table 3

China Securitization Issuance
Year	RMB (bil. $)
2012	28.1
2013	28.0
2014	331.0
2015	613.5
2016	881.3
2017	1,467.6
2018	2,013.2
2019	2,341.2

Japan

Yuji Hashimoto, Tokyo, (810) 30-4550-8275, yuji.hashimoto@spglobal.com 

In 2020, we expect the issuance of Japanese structured finance transactions to be worth between $52 billion and $57 billion (excluding covered bonds). This is roughly the same level of issuance as we saw in 2019. Since 2016, annual issuance of Japanese structured finance transactions has totaled $50 billion-$55 billion. We expect to see roughly the same, or a marginal increase in issuance, in 2020 (see table 4.)

Table 4

Japan Securitization Issuance
(Bil. $)
Asset type	2018	2019F	2020F
ABS	28	27	28
RMBS	26	26	26
F--Full-year forecast.

The dominance of the RMBS and ABS asset classes in Japan endures. They together comprise more than 95% of total issuance. Japan Housing Finance Agency remained as the largest originator of RMBS, comprising around one-third of overall Japanese structured finance issuance in 2019. Within ABS, originators were more fragmented. Auto ABS, lease ABS, and consumer credit ABS were the main sub-asset classes. We expect these trends to continue in 2020.

The performance of loans backing Japanese structured finance transactions and, thus, our ratings on them, was relatively stable in 2019. However, with more than 90% of the tranches rated 'AAA' at the beginning of 2019, there was little room for upgrades. Having said that, downgrades were also limited.

We generally expect stable ratings performance to continue in 2020. We assume slower GDP growth in Japan in 2020 than in 2019. Tokyo hosts the Olympic Games in 2020. However, the positive effects of the event will be partly offset by the negative impact of an October 2019 consumption tax increase to 10% from 8%. In addition, U.S.-China trade disputes could exert downward pressure on business in Japan. However, we expect ratings performance, as well as loans backing Japanese structured finance transactions, to be relatively stable in 2020, backed by stable macroeconomic factors such as a low unemployment and low interest rates.

Australia

Erin Kitson, Melbourne, (613) 9631-2166, erin.kitson@spglobal.com; Narelle Coneybeare, Sydney (61) 2-9255-9838, narelle.coneybeare@spglobal.com  

New issuance in 2019 has been relatively buoyant, up around 36% over 2018 volumes. RMBS volume outpaced 2018 by approximately 26%, and ABS issuance has nearly quadrupled, to over AUD$4.6 billion off a small base. The ABS issuance rise reflects the increased appetite for shorter duration and reduced exposure to housing price risk. New players also entered the ABS auto space in 2019 despite declining car sales globally. We expect new issuance to hover around the same levels in 2020. Nonbanks are expected to keep up their momentum, as their lending growth continues to track well above bank lending growth, although it remains a small component of total overall lending. 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.

After weathering a recent property price downturn, the main risks to the RMBS sector (the major asset class in the Pacific) 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.

Vulnerabilities still persist for some borrowers, as weak wage growth and high household debt show no signs of abating. We expect households to adopt a more cautious approach to debt serviceability over the next 12 months by taking advantage of lower interest rates to pay down debt. This will enhance equity buffers and increase households' resilience to any economic downturns.

Latin America

Jose Coballasi, Mexico City, (52) 55-5081-4414, jose.coballasi@spglobal.com; Leandro C Albuquerque, Sao Paulo +55 (11) 3039-9729, leandro.albuquerque@spglobal.com 

Structured finance issuance in Latin America should be up in 2020, reflecting our expectation of continued strength in issuance from Brazil, which we are forecasting 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, which will have little room to maneuver as evidenced by its recent default.

We estimate that marketwide issuance for Structured Finance in LatAm was $13 billion in 2019. This figure is in the high end of our forecast. In 2020, we expect issuance to be approximately $15 billion (see chart 16.)

The trending assets in the region are corporate repacks (mainly certificates of agribusiness receivables or real estate receivables in Brazil), followed by securitizations of loans originated by fintechs in Brazil and equipment leasings in Mexico. Looking to 2020, we expect increased activity in RMBS, covered bonds, and fintechs in Brazil. As economic activity picks up and interest rates remain low, we also expect an increase in issuance from multi-seller trade receivables transactions in Brazil. In addition to these asset classes, there has been market interest in auto loans. Elsewhere in the region, equipment leasing in Mexico, consumer credit in Argentina, and repacks in the cross-border market should continue.

In terms of collateral performance, our focus remains on the consumer sector in Argentina, where the outlook is very foreboding. We expect Argentina's economy to contract 3% this year and 1% next year, which will mean three consecutive years of GDP reduction. The political situation in Argentina is fluctuating, and pressures on the currency and the government's debt profile could trigger more drastic policy measures that result in a more protracted downturn in domestic demand. We also expect further depreciation of the domestic currency and inflation to reach about 45% in 2020, which would have a direct impact on real income, consumption, and delinquencies.

Primary Contacts:	Tom Schopflocher, New York (1) 212-438-6722; tom.schopflocher@spglobal.com
	James M Manzi, CFA, Washington D.C. (1) 434-529-2858; james.manzi@spglobal.com