Liquidity issues that destabilized the delicately balanced ABCP market in recent weeks migrated north into Canada. Similar to problems that unfolded in the U.S. ABCP market, lack of investor confidence in the debt capital and credit markets widened spreads on all types of Canadian ABCP.
More to the point, investors virtually stopped supporting ABCP vehicles that were sponsored by specialty finance companies and that funded residential MBS, particularly securities supported by U.S. assets.
A huge wave of bad news hit last Monday, after Toronto-based Conventree realized it would be unable to roll new ABCP to fund the repayment of outstanding notes. The company announced it would extend the term on about $250 million in maturing extendible notes (ENs) from all nine of its ABCP vehicles, which include Apollo, Aurora and Gemini.
DBRS placed about 87 ABCP vehicles Under Review with Developing Implications. Although the vehicles fund a wide variety of assets, including mortgages, CDOs, lines of credit and auto receivables, which themselves were considered strong credits, current market conditions dictate that they cannot be funded, DBRS said.
"If such a situation were to continue beyond prescribed grace periods, the underlying assets would be liquidated," the rating agency said. "Depending on the individual issuer, it is likely that note holders would experience a loss."
Coventree, which is one of many specialty finance companies that cropped up in recent years to sponsor and administer ABCP conduits, also requested about $700 million from sources of liquidity that support the liquidity-backed paper, also known as A' notes. Another $720 million in extendible notes matured last Tuesday, and by last Wednesday, it was able to find liquidity support for all but $120 million of those notes, according to a spokesman for Coventree.
The ongoing effort to find adequate liquidity support for its maturing notes, whether they are A or E, is getting mixed results for the company. Some liquidity providers have agreed to fund some of Coventree's maturing notes, while others, according to market sources, turned down Coventree's request for liquidity.
"That [market] is becoming scary," one market source said. "People thought the underpinnings of the market were coming loose."
Indeed, Coventree officials say they believe that some investors are reducing or eliminating their investments in the Canadian ABCP market, "including ABCP issued by conduits sponsored by such companies as Coventree."
Historically, spreads on liquidity-backed ABCP and extendible ABCP issued by Coventree's vehicles have fallen three to 11 basis points over the Canadian Deposit Offering Rate (CDOR). Recently, however, spreads on ABCP issued by specialty finance companies have widened more than spreads on ABCP issued by traditional, bank-sponsored vehicles. On August 10, spreads on 30-day liquidity-backed ABCP and extendible ABCP issued by Coventree-sponsored conduits widened to levels of 22 basis points and 42 basis points over CDOR, respectively, according to Coventree's third-quarter management discussion and analysis.
To the relief of many market participants, most of the trouble from the liquidity crisis is localized and can be traced back to conduits sponsored by niche finance companies, such as Coventree. Traditional, bank-sponsored conduits are still able to roll maturing ABCP and place newly issued paper, albeit at slightly wider spreads, suggest market sources.
"We're getting everything done that we set out to do," said Katherine Gay, a spokeswoman for RBC Capital Markets in Toronto. In the early days of the current market disruption, the Royal Bank of Canada launched Lakeshore Trust, a multiseller, partially supported vehicle that funds a variety of assets, including CDOs.
Meanwhile, the U.S. ABCP market continued to experience volatility. Late last week, Moody's Investors Service placed KKR Pacific Trust and KKR Atlantic Funding Trust, collectively known as the KKR Programs, on watch for possible downgrade. The KKR Programs issue secured liquidity notes, also known as extendible notes.
Amid the ongoing turmoil in the ABCP sector, market observers delineated important differences among EN conduits, in an attempt to persuade their colleagues that all was not completely lost.
Recalling that Standard & Poor's affirmed the A-1+' ratings of Broadhollow Funding and Luminent Star Funding, UBS analysts pointed out that those vehicles escaped negative rating actions because their structures include swap counter parties rated A-1+' and P-1.' Those counter parties are responsible for taking the CP holder out at par before the end of the extension period, UBS analysts wrote.
"Thus, as long as the swap provider is solvent, the likelihood the CP investor actually losing money is zero," UBS wrote.
Programs such the KKR programs use an overcollateralization structure.
"If the market declines by more than the OC amount, and the parent is unable/unwilling to help, the CP investor suffers losses equal to the total decline minus the OC amount," according to UBS.
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