Last week Judge Colin Campbell, who is overseeing the $32 billion restructuring plan for Canada's nonbank ABCP, said that he will decide quickly on whether he will approve the plan or not. This is a ray of hope for a market that has been frozen since the liquidity crisis started last year.
However, despite this move toward a resolution, Canadian ABCP players still maintain that this sector is going to be smaller no matter what the outcome of the restructuring plan is.
"I think we are going to be looking at a more constrained market overall, as there will be significantly fewer players," Xeno Martis a partner at the Montreal office of Fasken Martineau.
According to Martis, the market is probably not going to see nonbank sponsored product because of the requirements that investors and regulatory authorities are now demanding, which would make it very difficult for nonbank sponsored product to get out into the market. "I think there will be product, but it will be simplified and there will be fewer market participants coming out with it," he said.
However, despite the Canadian market's expected slimming down, the converse is that the demand for fixed-income or quasi fixed-income product in Canada is not shrinking but is actually increasing at a massive rate, Toronto-based Partner Alfred Apps at Fasken said. "In this country, although we have shrinking amounts of government debt, there is also a massive growth of pension funds who are aggregating capital." So there are two things going on.
Canada now has constraints on the types of transactions as well as sources of sponsors that will be accepted by the market, which goes beyond ABCP.
"People are building up cash assets because of the gap in supply and demand and that is not going to be sustainable in the long term. There is demand to be met," Apps said.
"Precisely how this demand is going to be met, that is the $300 billion dollar question," Martis said.
Rating Agency Role
With the Canadian market currently in the midst of a major crisis, U.S. rating agencies are starting to find a niche.
Several factors are driving this trend, foremost of which is movement toward global style liquidity by many ABCP programs, allowing U.S.-based agencies to apply their methodology to rate these types of deals. Prior to this, many Canadian programs were only able to access liquidity lines if there was a market disruption, which is not in keeping with the rating methodology of these rating agencies.
Aside from the movement to having global style liquidity, government authorities and other market participants are starting to require two ratings on ABCP paper for it to become eligible as investments. As a result, these U.S. agencies have been receiving an increased number of inquiries from ABCP sponsors and investors alike regarding their ratings.
Fitch Ratings, for example, has assigned expected F1+' ratings to ABCP programs that are sponsored by Royal Bank of Canada, which have traditionally employed global style liquidity facilities, according to Michael Dean, a managing director in the ABCP group at Fitch. The rating agency is now analyzing other sponsors conduits to determine if they qualify for its top tier ratings given the structural changes they have made. Meanwhile, Standard & Poor's also rated its first Canadian ABCP conduit at the end of last year - the Deutsche Bank administered program called Okanagan Funding Trust.
"We are going to apply our global ABCP standards when rating Canadian ABCP, " said John Detweiler, a director at S&P. "Conduits we rate in Canada will meet the same standards that we apply around the world. I think that's an important point because until 2007, Canada had a different set of standards. The Canadian ABCP market is changing quickly as it converges to international norms."
The market has clearly undergone a huge liquidity crisis and disruption, making market participants revaluate the way they have been doing business. According to Maria Rabiasz, S&P senior director who is based in Canada, investors are currently revisiting and reworking their investment guidelines to state that eligible investments must have a minimum of two ratings with the highest rating category. Rabiasz also mentioned that the Bank of Canada has stated that it would accept ABCP as collateral for borrowing but with a list of conditions including that these products should have a minimum of two ratings in the highest category as well. "Until now, commercial paper has not been accepted by the Bank of Canada as collateral, but now it will, assuming the investments meet the criteria," Rabiasz said.
"It is our understanding that Canadian regulators are also revisiting their policies regarding conduits in terms of what needs to be said from a transparency and disclosure perspective," Rabiasz said. "They are starting to ask should they be instituting recommendations in light of the fact that for the most part, there has only been a single rating agency rating these deals," she said.
Detweiler said that another recent event that would likely boost the Canadian ABCP market is the elimination of the Canadian withholding tax. This move will probably allow Canadian issuers to get their assets funded in U.S. conduits and also encourage U.S. investors to buy Canadian conduit paper without incurring the tax so it makes it more economical for them to do cross-border transactions.
Transparency is another issue that the Canadian ABCP market participants are trying to improve. "They don't necessarily want more information but they want relevant information," said Thomas Gillis, managing director at S&P, adding that, at least in the U.S., there is a difference between funds that have a big staff that are able to produce reports on transactions and smaller funds that don't have the depth of staff and would have to rely more on the rating agencies for insight about the different ABCP programs.
Rabiasz said that clearly there was little transparency in ABCP transactions and many Canadian investors were buying ABCP on the basis of a single rating as required by their investment policies. Disclosure through the Canadian securities filing system was limited because an information memorandum on ABCP conduits is required to be filed but these documents were usually very general in their descriptions, and only stated that certain conduits were allowed to invest in certain types of assets, but did not specify whether they were actually invested in certain collateral or not, and if leverage was being used.
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