As the Canadian asset-backed market has shown considerable growth over the last three or four years, Canadian banks are looking towards more term deals.
Following this trend, TD Canada Trust (an entity to be formed when TD Bank acquires Canada Trust on Feb. 2) is set to access the Canadian term market this year.
"Like other Canadian banks, TD Canada Trust will likely be doing term ABS issuance in the year 2000," said William Furlong, managing director of the asset securitization group at TD Securities.
TD Securities is also set to launch a single-seller conduit called Darwin Trust, which will be backed by floating-rate unsecured lines of credit and Mercury Trust, a new multi-asset, multi-seller securitization program. Both programs can issue as much as C$3 billion and will begin issuing in February 2000.
Though the commercial paper market has been a more popular option, increasing numbers of players are looking into the term market because of pricing considerations.
"In the last 18 months, asset-backed commercial paper has not been as cheap and as predictable a source of financing as it has been in the past," said Furlong. "And as asset-backed commercial paper has become expensive, certain changes in the Canadian legal infrastructure has allowed the term market to become more easily accessible. This is leading more and more issuers to do more term business then before."
The unpredictability is due to widening spreads driven in part by increased volumes of asset-backed commercial paper issuance. Historically, commercial paper traded zero to five basis points over 30-day BAs, the Canadian benchmark. Currently, asset-backed CP trades eight to 10 points over the benchmark, Furlong explained.
The market will also see more public deals this year. Genesis Trust recently did a $3 billion public offering structured by Nesbitt Burns Inc.
"Prior to last year, all term transactions were private placement deals. The Genesis Trust deal is the fourth public deal done in the market," said Paul Smeeton, vice president and director at Nesbitt Burns.
"The preferential pricing that a public deal attracts relative to a private placement transaction will result in more deals utilizing the term market whereas historically these would have been done in the conduit market," Smeeton added.
On Asset Classes and Issuers
Furlong said that the variety of asset classes being done in Canada is "reasonably comparable" to the United States. He noted that Canada securitized leases and reverse mortgages before the U.S.
"We have been much slower in assets like collateralized loan obligations and commercial mortgage-backed securities because the market is fundamentally different as to how those asset classes are financed," he explained. They are typically financed by the big Canadian banks or insurance companies and the required spread on the assets is often insufficient to finance the resulting securitization structure."
No new asset classes seem to be on the horizon either. "You won't see new asset classes being done. Most of the assets that have historically been done will continue, such as credit cards, auto loans and mortgages," Smeeton said.
And who will be the issuers in the year 2000? "It will still be the banks. If you look at the deals that have been done in the last couple of years in the term market, probably 80% to 90% of the issuances came from the banks," he added.
"We may see some new term ABS issuance from the U.S-based credit card issuers that are coming into Canada. We also regularly see agricultural companies like John Deere and Case Credit," Furlong noted.
In a related development, MBNA Canada Bank recently launched its third credit card securitization, with a C$37.5 million subordinate piece sold privately into the Canadian term market. The company is said to be eyeing a public deal down the line.
The Big News
The most significant thing that may occur in the Canadian market this year is the change in the underlying regulatory infrastructure. The Bank for International Settlements, which is based in Switzerland, is looking to amend its international banking guidelines, which would cause revisions in Canadian banking guidelines as well, Furlong said.
"This can potentially change the Canadian markets and harmonize it more with the U.S.," he stated. "Currently, we have liquidity facilities that are uniquely Canadian. We may move towards more U.S.-style liquidity facilities which may change suppliers' view of the risk of these facilities. It may also facilitate the entry of U.S. rating agencies into the Canadian asset-backed CP market."
