In a move that could potentially benefit U.S.-Canada cross-border asset-backed transactions, the Canadian Institute of Charted Accounts recently passed a measure that replicates the U.S. accounting rule FAS 140.
The new rule is currently in effect voluntarily, and will become mandatory sometime in the second quarter. A major benefit to the ABS market is that the rule would eliminate the 10% cap on recourse for asset-backed transactions.
"And now they're freed up and we can do more challenged assets because we'd need a lot of recourse," said Martin Fingerhut, a partner with the law firm of Blake, Cassels & Graydon LLP. "It's a pretty important development going forward."
As for completing cross-border transactions, it clears up many of the accounting problems that prevented such deals from being done.
"It's a structural problem because [the old rule] doesn't permit the seller to get off-balance-sheet treatment and [doesn't] give the deal the amount of recourse from the seller, [that the deal or the rating agencies require] as opposed to from a third party, which would be relatively expensive," Fingerhut said. "Or it requires you to split up kinds of recourse."
For example, if a deal has 12% recourse, and 3% of that is dilution, the dilution can be split from the deal.
However, "If you have extra left over for dilution, you can't throw it over and help out the credit loss, because theoretically you'd have more on the credit side," Fingerhut said. "That's always been a burden to explain to U.S. investment bankers, U.S. lawyers - how the system works. That issue will go away."
