Five months after a liquidity crisis halted trading on about one quarter of the outstanding paper in the Canadian ABCP market, banks have made several key changes that have drastically tightened spreads and opened the possibility of a global market for Canadian ABCP.
Several Canadian banks, including Bank of Montreal, Royal Bank of Canada and Scotia Bank recently converted their liquidity agreements from the general market disruption (GMD) system to the more globally accepted global-style liquidity facility. Previously, a GMD needed to occur before any single bank would be required to honor draw requests for CP that could not roll again in the marketplace.
Undertaken in December, the conversions did a lot to stabilize a market that had frozen trading for ABCP issued by specialty finance companies. After Canadian banks refused to provide liquidity to issuers, much of that paper, about C$33 billion ($33.1 billion), went unpaid as it came due and effectively defaulted.
The unpaid CP amounted to about one quarter of the total volume at the time, and caused spreads to widen out to as much as 60 basis points over the Canadian Deposit Offering Rate (CDOR) in the summer, according to market sources.
Although that paper remains unpaid, but some of positive effects of the conversion are taking hold, according to Darryl Osojnak, an analyst at Fitch Ratings. The Canadian banks began changing their liquidity structures primarily to appease domestic investors and alleviate some of the ongoing issues there, Osojnak said. Now the rating agency is in talks with several Canadian banks to have Fitch assign ratings to their ABCP for U.S. investors, he said.
"Canadian banks are approaching U.S. rating agencies," about the possibility of getting their paper rated for U.S. investors, said market sources in the U.S.
The conversion has begun to have another positive effect on Canadian ABCP. As recently as last Tuesday, spreads had tightened to CDOR plus 10 basis points, said market participants in Toronto.
Days after maturing ABCP went unpaid, a consortium of banks, dealers, investors, issuers and other market participants hammered out an agreement called the Pan Canadian Investor Accord, and commonly referred to as the Montreal Accord. It called for investors to exchange their unpaid ABCP for long-term floating-rate notes, which would be backed by the assets of their respective issuers. The term of the replacement notes would match the terms of the underlying assets, according to Fitch. That agreement should be finalized by the end of March, said Purdy Crawford, an attorney in the Toronto office of Osler, Hoskin & Harcourt, a law firm.
The other benefit to restructuring the paper is that investors will have full transparency on the underlying assets of the affected vehicles, Crawford said.
"Full transparency is to have full information about the assets underlying the paper, including the names of the issuers," he said. "[There will be] a lot of data on the Web site as the backups on that. They'll have as much information as the rating agencies had when they rated the paper."
In a related development, the Canadian government repealed withholding tax on arms length interest payments to all non-Canadian investors and lenders, regardless of their country of residence. By itself, the move is expected to open up Canadian term asset-backed paper and ABCP to global investors. The repeal went into effect at the beginning of January.
"Canadian residential mortgages, auto loans and other consumer assets will begin to access the U.S. securitization market, in much the same way as occurred with Australian residential mortgages after Australia repealed withholding tax for certain international financings," according to an article on the situation by attorneys at Blake, Cassels & Graydon, a Toronto-based law firm.
Further, access to the Canadian ABS market will give international issuers a new exit strategy for their secured paper, following the leads of Capital One Financial Corp., Citibank, CNH Global, Ford Motor Co., and other global enterprises that have established Canadian financing platforms, wrote the Blake, Cassels & Graydon attorneys.
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