KBRA releases its 2025 ABS Sector Outlook, which discusses our expectations for new issue supply in 2025 and provides our views on credit fundamentals among each of the major sectors where KBRA is most active. We also discuss year-to-date (YTD) KBRA-rating trends and metrics, take a closer look at 2024 ratings activity, and provide our expectations for 2025, including factors that may affect credit performance.

The ABS sector saw a massive surge in new issue supply in 2024 as stable interest rates, tight labor markets, and a growing economy led to a rise in consumer and commercial loan and lease origination volumes. The ABS primary market also benefited from structural tailwinds in the form of increased bank issuance in response to new capital requirements, as well as rising insurance company demand for higher-yielding ABS debt products to match their growing policy and annuity volumes. With November’s Federal Open Market Committee (FOMC) meeting marking the second rate cut of 2024—coupled with our expectation for further economic expansion in 2025—we expect ABS new issue supply to continue to rise in the year ahead.

In terms of credit fundamentals, the ABS market remains on stable ground, although some pockets of weakness exist. With 60%-70% of the ABS market directly backed by U.S. consumer loan and lease products, the strength of labor markets and household balance sheets have the largest impact on ABS credit fundamentals. Labor markets are tight, with unemployment at 4.1%, while household balance sheets are on solid footing, with both debt-to-income ratios and the percentage of debt service payments to disposable income at or near cyclical lows. However, lower income and less creditworthy borrowers continue to show signs of stress, as inflationary pressures over the past few years have taken their toll. Continued stress among this consumer segment will pressure ABS rating stability in the non-prime auto and consumer loan segments in the coming year. That said, we expect ABS credit fundamentals, more broadly, to remain solid in 2025.

Key Takeaways

• The ABS market saw extremely robust primary market activity through the first 10 months of the year, with new issue volumes rising roughly 30% year-over-year (YoY) to $309.5 billion. We expect full-year (FY) 2024 volumes to land around $325 billion, smashing the previous post-global financial crisis (GFC) full-year record of $287.4 billion set in 2021. We forecast new issue volumes to increase to $345 billion in 2025 (a 6% increase from the prior year), driven by economic and structural tailwinds.
• Credit performance has varied across consumer ABS asset classes in 2024. Credit performance weakened marginally in securitized auto loan and solar loan pools in 2024, while parts of the unsecured consumer loan sector showed signs of improvement during the year. In general, we expect consumer ABS credit performance to stabilize and improve in 2025, but certain borrower types, particularly lower income and less credit worthy borrowers, may continue to experience stress.
• Many commercial ABS sectors exhibited steady credit performance in 2024 as debt service coverage ratios were mostly stable across whole business, fiber, and data center-backed securitizations and have begun to climb above 1.0 in the aviation ABS sector.
• As of October 31, KBRA’s ABS surveillance universe included 2,713 ABS ratings across 996 transactions with an initial balance of $411.5 billion. Ratings were stable throughout 2024, with 2,105 affirmations, 548 upgrades, and 60 downgrades, resulting in an overall ABS rating stability ratio of 97.9%. The negative rating drift occurred mostly in the consumer loan and auto loan/lease ABS sectors and reflected ongoing credit performance deterioration as well as credit support erosion. Although we expect further downgrades in these sectors, issuers have generally tightened underwriting standards over the past two years, which should help to limit downward rating migration for more recent vintages.

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About KBRA

KBRA is a full-service credit rating agency registered in the U.S., the EU, and the UK, and is designated to provide structured finance ratings in Canada. KBRA’s ratings can be used by investors for regulatory capital purposes in multiple jurisdictions.

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