Canadian banks are increasingly crossing the border to fund their credit card programs, taking advantage of lower borrowing costs in the much larger U.S. market.
U.S. dollar-denominated issuance by Canadian card companies has been rising for three years, and shows no signs of stopping. In 2016, there were 15 deals from five separate programs totaling $7.33 billion, according to Moody’s Investors Service. That was up from $2.33 billion in 2015 and $1.0 billion in 2014.
Last year’s level was partly driven by the large amount of outstanding credit card-backed securities that were maturing and needed to be refinanced. But it also reflects rising U.S. interest in Canadian credit card receivables, which are very high quality.
This makes funding cheaper in the U.S., even after paying to swap the proceeds back into Canadian dollars.
Not only do Canadian issuers pay less interest in the U.S., they can do so despite offering fewer investor protections than do their domestic rivals. Major Canadian programs have an average credit enhancement of 7% on their senior notes, compared with almost 20% for U.S. programs, according to Moody’s.
That means for the same amount of collateral, the likes of Bank of Nova Scotia (8%) and National Bank of Canada (7.8%) can issue a greater amount of highly-rated bonds than, say Discover Bank (21%), or even Bank of America (31.8%).
Strong Sponsors, Good Performance
U.S. rating agencies, as well as U.S. buyers, take comfort from the superior financial strength of Canadian sponsors. Those rated by Moody’s have senior unsecured ratings of between Aa3 and Aa1 and counterparty risk assessments of Aa2 or Aa1. By comparison, the sponsors of the major U.S. credit card ABS programs have senior unsecured ratings ranging from Baa3 to Aa3, and counterparty risk assessments ranging from Baa2 to Aa2.
“In revolving consumer credit products such as credit cards, the performance of the assets depends to a large degree on the sponsor’s ability to maintain card utility by keeping the accounts open,” Moody’s stated in its report.
“Financially sound sponsors also have a greater ability to prevent their transactions from entering early amortization, and are better positioned to provide support through increasing the amount of [credit enhancement] via the addition or expansion of subordinate tranches, among other options.”
U.S. buyers also like the fact that Canadian collateral performance has been consistently strong over the past 10 years, and as opposed to U.S. credit card receivables, experienced only moderate deterioration during the credit crisis.
It doesn’t hurt that issuance by U.S. sponsors has fallen off sharply since the financial crisis, leaving buyers with fewer opportunities to invest in the credit card debt of their less prudent countrymen.
So far this year, two Canadian issuers have ventured south, Royal Bank of Canada and Bank of Montreal.