BANFF, Alberta-The rain in Banff did not stop the golfers from playing in between and during conference sessions. But despite those who played hooky, the sessions were well attended, with many early morning speakers surprised at the audience they got despite the late-night partying. And with the spectacular view of the mountains, lots of sweet Canadian Ice Wine, good food, sightseeing, whitewater rafting, and horseback riding mixed in, people generally had a great time.
Speaking of shedding light on a dreary day, executive vice president at Dominion Bond Rating Service Greg Nelson tried to do exactly that in a session entitled "Rising from the Dark Ages," where he talked about the Canadian inferiority complex and how it is based on false assumptions.
"Canadian expertise is masked because of the high number of conduit transactions," said Nelson. He added that there is a considerable amount of homegrown technology and just because it does not show up on the radar screen, it doesn't mean that it does not exist.
And as to the commonly held belief that U.S. results are better than Canada, Nelson's answer to that is, "ABS performance in Canada has outperformed the U.S." He pointed to the fact that Canadian ABS has not seen any losses, credit enhancement draws or downgrades in contrast to the U.S., where even triple-A investors have suffered losses, citing CFS as an example.
But can the unblemished record of Canadian ABS withstand a downturn? TD Securities managing director William Furlong gives a thumbs up.
"Canadian ABS structures are designed to weather severe turbulence,' many times worse than historical experience," said Furlong.
As one investor puts it, "I guess it's worth going all the way up here to be assured that everything is okay."
New kid on the block: CMBS
Though investors are still wary of this burgeoning asset class, and many are still out of the CMBS loop - in the pre-conference workshop on analyzing CMBS, only one investor admitted to being a CMBS buyer - there was a lot of interest among conference participants to step up the learning curve, as there was robust attendance in the numerous sessions devoted to this topic.
Robert Follis, associate director at Scotia Capital, said that the uncertainty about the product and the wide spreads associated with it are a result of its "newness." Also, different panelists have stated that it would take time for CMBS to be seen as a triple-A product rather than as real estate, which is not very popular right now.
Louise Poirier-Landry, vice president at Caisse de depot et placement du Quebec, said that there is a captive audience for this asset class. However, the major dealers have to take time to visit investors even when there are no deals in the market.
In the meantime, the major CMBS issuers are ramping up. Merrill Lynch is planning to increase its deal sizes going forward - targeting the $250 million to $300 million range - in light of good demand for its last deal which was two times oversubscribed.
Caisse, on the other hand, is said to be prepping two deals, one of which is a single-asset transaction. TD Bank's CMBS offering is expected in July.
The advent of
Though Canadian investors have traditionally set internal limits as to how deep they could buy, sticking mostly to single-A and above product, recent events have pushed them to accommodate lower-rated tranches in their portfolio.
On the corporate side, communications company Telus Corp. recently sold a substantial amount of triple-B plus rated notes to Canadian investors. And when Standard and Poor's bought Canadian Bond Rating Service, and their ratings were harmonized, many of the existing CBRS ratings were lowered to the B area. Thus some Canadian investors inadvertently became B-piece holders.
Sources say that these events might trigger increased Canadian investor appetite for the more deeply subordinated tranches. However, in the ABS arena Bs are still a hard sell.
Vernon Wright, chief corporate finance officer at MBNA America Bank, said that it would be harder to see the evolution of a subordinate market in Canada where investors are traditionally buyers of higher-rated classes. MBNA has made inroads though. In its last Gloucester Credit Card Trust deal, MBNA Canada sold almost $55 million worth of triple-B-rated ABS.
In the CMBS arena, there has been less success. In all its Canadian CMBS deals to date, Merrill has sold its B-pieces to U.S. investors. Caisse, on the other hand, has chosen to keep its B pieces.
Some conference participants said that they are hoping that Caisse, a servicer of commercial loans, would eventually become a CMBS B-piece buyer.
The change in Canadian accounting rules was also a hot topic at the conference. The change is generally viewed as positive because it would provide sellers with structuring flexibility as the 10% cap on recourse is lifted and it would also allow for greater disclosure in the market place.
However, at the session called "The Nuts and Bolts of Canada's New Accounting Regime," issuers were going nuts as they were shown the mechanics of gain-on-sale accounting.
"Securitization is complex enough," muttered an issuer. "This makes it even more complicated."
And as for the Basel rules, panelists said it's "no big whoop."
"BIS rules will create new opportunities, some new challenges," said David Allan, group head of the Canadian securitization group at CIBC World Markets. "But it will not radically transform the economics, function or growth prospects for the Canadian securitization market."
People are also watching out for the new version of the Canadian Bank Act coming out soon, which provides a set procedure for the merger of Canadian banks.
Sources say people in the market think that Royal Bank of Canada and Bank of Montreal are the most likely to merge. This would have implications for ABS because both banks have existing dealerships. It might also mean more asset-backed issuance as these banks may use securitization to fund the merger, which is exactly what happened when TD Bank bought Canada Trust.
The rating agency showdown
U.S. rating agencies have been unable to rate Canadian ABCP thus far.
The issue: Canada's Office of the Superintendent of Financial Institutions only allows ABCP liquidity lines to be drawn in cases of "market disruption." Because of this limited view of liquidity, the U.S. rating agencies are barred from applying their global ratings to Canadian ABCP transactions, which comprises 75% of the Canadian asset-backed market. Thus ABCP conduits in Canada are only rated by DBRS.
Mark Mettrick, associate director from S&P, said that the "market disruption" clause does not take into account credit and perception risks and does not address the issue of timeliness.
DBRS's Nelson, on the other hand, said that it is more crucial to rely on a diversified pool of assets to get to a triple-A rating without undue reliance on liquidity. It is just a different way of going from point A to point B.
Since there have been no mishaps in Canadian ABS so far, isn't that an indication that Canadians are doing something right?
"Take no comfort that there has been no default," said Steven Grossnickle, managing director, North American securitization group at Royal Bank of Canada. "It will change."
He added that it is important to note that Canada has mostly securitized bank assets so far and has concentrated on pure ABS, as opposed to doing structured transactions.
And there is rising concern in the market place. Some investors are coming together to talk about this regulatory and ratings issue, said Andrew Kriegler, managing director at Moody's Investors Service.
But do another set of eyes really matter? In the ultimate analysis "supply and demand drive this more," said Doug Noe, associate director at Scotia Capital.
In the meantime, S&P, as part of its ratings harmonization effort since it acquired CBRS, is withdrawing all ratings on CBRS-rated ABCP transactions.