With ABCP markets disrupted since last summer, the Bank of Canada began soliciting feedback in early March on its proposed eligibility criteria for accepting ABCP as collateral for borrowings under its Standing Liquidity Facility (SLF). The Bank of Canada's actions are an attempt to inject liquidity into a constrained ABCP market in Canada and to promote minimum acceptable standards of disclosure and transparency, which should benefit all market participants.
On March 31, 2008 the Bank of Canada published the eligibility criteria and conditions for ABCP to qualify as eligible collateral under its SLF that became effective as of that date. For the Bank of Canada to consider accepting, ABCP as collateral for the SLF, the programs must meet certain criteria including:
* The program must be sponsored by a bank that has a minimum stand-alone credit rating equivalent to at least A'. (Credit ratings from Fitch Ratings, Dominion Bond Rating Service, Moody's Investor Service, and Standard & Poors are eligible.);
* The liquidity agreements must be global style facilities and be available to provide funding except in the event of insolvency of the conduit or certain circumstances related to the default of the underlying assets ;
* The program can not contain exposure to assets that were securitized prior to being acquired by the conduit, with the exception of National Housing Act mortgage-backed securities.
The structural changes recently employed by many Canadian bank sponsored ABCP conduits have significantly strengthened the level of protection available to ABCP investors. The nature of the recent structural changes has primarily centered on the conversion of liquidity support facilities to cover funding disruptions arising from a variety of reasons. These newly instituted liquidity facilities incorporate mechanisms that allow issuers much greater accessibility to funds when needed to pay maturing commercial paper. The new facilities, referred to as global style liquidity' (GSL), have always been a key element of Fitch's global ABCP rating criteria. As a result of these changes, certain Canadian ABCP programs are now eligible for ratings consideration by Fitch Ratings.
The Bank of Canada's requirement that eligible pledgable ABCP have a minimum of two credit ratings, versus the previous market standard of only one rating, is a positive development that should improve the quality of opinions and information available and provide investors access to additional analytical resources and tools to assist in their decision making.
And while restricting eligible ratings to the highest possible' rating should help the Bank address its goal of mitigating the risk it is willing to take, it is important to consider the differences among rating scales of the various rating agencies and recognize that some agencies highest ratings may cover a broader spectrum of risk than others.
Under current eligibility guidelines, only F1+' rated programs would qualify as acceptable collateral. Programs achieving the highest rating under other scales would not necessarily qualify for an F1+' from Fitch. This distinction is important for investors to consider when purchasing ABCP as well.
Generally speaking, Fitch's ABCP criteria allows for appropriately structured programs to achieve ratings in the highest category, which includes F1' and F1+'. Key considerations in our analysis include sponsor credit quality, asset composition, legal structure, and structural protections afforded investors including but not limited to liquidity support, deal specific credit enhancement, and programwide credit enhancement facilities. We note that while appropriately structured programs are eligible for ratings in the highest category, it is more difficult to achieve F1+' absent a programwide credit enhancement facility or other structural protections or mechanisms.
An issuer's access to same day availability of funds to pay maturing ABCP has always been a paramount consideration in Fitch's ABCP analysis as Fitch's short-term ratings place great emphasis on the liquidity necessary to meet financial commitments in a timely manner. Fitch's highest short-term rating category of F1' indicates the strongest capacity for timely payment of financial commitments; and may have an added +' to denote any exceptionally strong credit feature.
Fitch appreciates the opportunity to provide feedback on the BOC proposal to accept ABCP as collateral for the Bank's SLF and looks forward to working with the BOC in the future prior to its announcement of additional results from its review in June 2009.
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