Canadian asset-backed securities issuance grew at a snail's pace during 2000. While there is potential to see significant growth in some ABS sectors, along with new regulations, Canadian market observers are not expecting a huge increase in issuance for 2001.
As of October 31, 2000, the close of the Canadian bank year, asset-backed commercial paper issuance stood at C$56.8 billion, up from $53 billion in 1999. ABCP issuance was expected to hit around $60 billion by the end of the year. Asset-backed term issuance totaled $19 billion, up from $13 billion in 1999.
Public versus private issuance also did a complete swap, with 90% of issuance in 2000 being done in the public market. Just the opposite was the case a few years ago. It is likely that all issuance will be placed publicly within the next year or two.
Bill Furlong, managing director of the asset securitization group at TD Securities, is predicting term issuance to be in the area of $20 billion to $25 billion for 2001. "We're probably looking at not much in the way of growth," he said.
A void in the ABS market will be seen in semi-annual bullet notes, as fewer bank asset deals are anticipated.
However, auto receivable-backed securitizations could fill that void rather quickly, as Honda Canada Finance displayed with its two well received HART issues in 2000.
"That's the funding format that the Canadian term investor wants to see, and now we've got successful programs in place to take monthly pay amortizing assets and fund them with semi-annual pay bullet bonds," said David Allen, head of the Canadian securitization group at CIBC World Markets. "And I think that's going to be a huge boon to the growth for auto and equipment lease and loan receivables originators."
Commercial mortgage-backed securities issuance saw explosive growth in 2000, and that asset class is only expected to grow for the coming year.
Merrill Lynch Canada, Caisse de Depot et Placement and Solar Trust all placed successful CMBS deals in the Canadian market last year, and investors are trying to figure out which structure is the best fit for the country.
"I don't know that those are the definitive formula for CMBS issuance in Canada, but they're certainly indicative of the fact that there's going to be more attention to the funding of commercial mortgages in the term asset-backed market over the foreseeable future," Allen said.
An increase in collateralized debt obligations is also foreseen for 2001. "We had a very small number of transactions this past year, and I think we'll see CDO securitization take on more prominence in the new year," said Martin Fingerhut, a partner with the law firm Blake, Cassels & Graydon LLP.
New Rule Fuels Growth
A new regulation from the Canadian government could also give Canada's ABS market a reason to grow. A rule similar to FAS 140 is expected to pass sometime this month, with it officially taking effect in July.
"These new accounting rules should also result in increased incidents in Canadian securitization," Fingerhut said. "Both for high risk portfolios, as well as the opposite end of the spectrum: very, very strong portfolios, because the cap for seller recourse will be eliminated."
Until now, a cap existed that stated a bank couldn't have more than a reasonable amount of recourse, and not have more than 10% recourse.
"The reasonable limit really prejudiced having a sufficient amount of seller recourse for very strong portfolios, and a 10% cap prejudiced the ability to have enough seller recourse for challenged portfolio," he added.
"It's going to open up a significant number of assets for originators who wouldn't have otherwise have access to securitization because of the fact that their pools had consistent loss numbers, but loss numbers that demanded higher recourse levels than the 10% that's permitted under the current accounting rules," CIBC's Allen said.
Bigger Deals Wanted
With consolidation on the buyside of the industry, investors are looking toward larger, more liquid deals.
For example, big investors would not dabble in a $150 million deal consisting of three $50 million tranches, because they're going to want a big chunk to spread over all of their accounts.
"The consolidation on the investor side is causing these investors to want to have larger, more liquid issues," said TD's Furlong. "And the principle even applies to tranches. Large transactions with large liquid tranches is becoming more important in the Canadian marketplace because of this consolidation on the buyside." He added that any tranche or issue less than $150 million probably will not be absorbed into the market quickly.