Canada has burst into the structured finance scene full force with year-to-date issuance levels that have knocked last year's levels off the radar.
In 2004, a total of $11.4 billion was issued. However, this year, through the end of May, the Canadian ABS market has already seen $11.9 billion. While some analysts believe the cause for the sudden increase falls in the realm of the credit card sector, others argue that the auto sector and CDO market are the driving forces.
The Canadian marketplace started from a small base, grew rapidly for a number of years and generally became a large part of the fixed income market, said Greg Nelson, a managing director of structured finance at Dominion Bond Rating Service. However, over the last several years, the Canadian market slowed down considerably because organizations that were going to be involved in the securitization market, already were apart of it, so there wasn't a lot of new territory' to exploit or take advantage of, he explained.
A couple of changes have taken place accounting for the recent growth in the Canadian marketplace, and according to Nelson, the CDO market is one of the factors that has increased activity in the region.
"There has been growing interest in some of the innovative types of transactions that are coming out of the CDO marketplace that are boosting up volumes," he said. "The other change, which is a little bit more recent, is auto makers, which have become more active securitizers in the Canadian marketplace. Their volumes have gone up quite considerably as well."
With the auto sector's credit profile deteriorating and the cost of funds increasing, Nelson speculated the advantages of securitization might become more pronounced, which is why the industry's presence in the Canadian market has increased.
However, the issuance from the auto sector is down a bit for the first half of the year ending June 2005 compared to the same period the previous year, said Andrew Kriegler, a managing director in Moody's Investors Service's Toronto office.
Whereas there were three visible deals done in the auto sector last year including, CCARAT ($650 million), NIF-T ($505 million) and Windsor ($325 million), there are only two auto deals the market has seen this year from CCARAT ($680 million) and NIF-T ($606 million), he said.
According to Kriegler, by and far, the biggest percentage of the current Canadian structured finance market is bank credit cards. "The major Canadian banks are the largest single source of assets for the country, so when they get active, the market gets active," Kriegler added.
National Bank, which has a private placement, as opposed to a public structure for its vehicle, completed an $800 million issuance, and Royal Bank's Golden Credit Card Trust executed a $1.2 billion deal. Away from credit cards, TD Bank, which hadn't issued a deal in several years, came to the market in the first half of 2005, and issued $1.5 billion from its HELOC vehicle, Genesis Trust, said Kriegler.
Although the road has been bumpy in years past, Kriegler expects the Canadian market's growth trend to continue.
"We will continue to see the securitization market proceed to get bigger with Canadian issuance, but there's likely going to be some dips along the way," he said.
DBRS' Nelson, on the other hand, believes the trend to be a short-term phenomenon.
"I think the structured finance market in Canada and U.S. is pretty mature," he said. "There will be some innovations in the marketplace, but I don't think they are going to be so large that they're going to have fundamental changes in terms of the growth profile of the market on a long-term basis."
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