A significant surge in the Canadian ABS public-term market has catapulted year-to-date issuance to C$4.6 billion from C$300 million for the same period last year. On the heels of deals that are expected to close this week - an $820 million offering by Genesis Trust and a transaction from Honda Auto Receivables Trust (HART) - market observers predict a healthy year for Canadian public ABS.
"We are seeing a great rush to the public market which I expect will lead to increased growth in Canadian term issuance as compared to last year," said Martin Fingerhut, a partner at Blake, Cassels & Graydon LLP's Toronto office. "Issuers that have accessed the asset-backed commercial paper market in the past are now filing prospectuses for the purpose of issuing term debt in Canada's public capital market."
The migration to the public-term market is caused by several factors, observers say, one of them being the widening of spreads in the ABCP market last year, which "was an incentive for issuers to use the term market for securitization," said Latonia Dukes, vice president and senior analyst focusing on the Canadian asset-backed market at Moody's Investors Service. Moody's has rated Canadian public-term deals, including the two that are set to close this week.
Of equal importance is the introduction of a new system for clearing prospectuses through Canada's security commissions. Previously, the difficulty of this process caused Canadian issuers to turn to the private-placement ABS term market, shunning the public arena altogether.
"In the past, practically the only viable avenue for term securitization was the Canadian version of Rule 144A - the Canadian private placement market," Fingerhut said. "The approach has now been supplemented by a more efficient and cost-effective access to Canada's public markets."
In the past, since each province has its own securities commission, an issuer wishing to issue public ABS was required to clear its prospectus with each securities commission and deal with numerous regulators. Under Canada's new Mutual Reliance Review System, the issuer will deal only with its primary securities regulator, which is usually located in the province where the issuer's executive offices are headquartered. This commission will act as a go-between, receiving and responding to comments from the other commissions, Fingerhut explained.
Greater Capacity,
Larger Investor Base
According to Dominion Bond Rating Service's (DBRS) year-end report on Canadian ABS securitization, ABCP outstandings will probably have relatively slow growth from current levels. Furthermore, DBRS said that the term market will cover for much of this difference, as the rating agency expects this area of the market to grow rapidly going forward.
The slowdown in the ABCP market is caused by the cap on short-term debt. "There is a total, absolute capacity for short-term debt," said Huston Loke, assistant vice president at DBRS. "Given that last year ABCP composed such a large percentage of the total short-term market issuance (19% including government issues). ABCP growth is going to be constrained by overall market growth, to the extent that the other short-term products don't have decreases."
The DBRS report stated that another factor in the slowdown of the Canadian ABCP market is a lack of interest on the part of liquidity lenders.
"In order for ABCPs to maintain a R-1 (high) rating, we require that all ABCPs have liquidity provided by highly-rated institutions," Loke said. Most of these institutions, he added, are banks which have their own internal limits on liquidity.
The movement from the ABCP market to the term arena is leaning towards the public market, replacing, in some aspects, private placement issuance.
"A number of issuers have already taken advantage of the recently liberalized access to the Canadian public market for distributing ABS product," Fingerhut added.
"In addition to those that have already done so, others are at the planning stage and are considering public issuance. In some cases, this will replace existing CP facilities while in others it will take out a maturing private placement of term debt."
The public market also creates a larger investor base. Because of capacity constraints with respect to the private placement term market, by doing a public term transaction one's universe of investors grows, Loke explained.
The retail community can also be tapped through the public arena. "There is practical access for the first time to the retail community of investors," said Fingerhut.
This may be beneficial for issuers that have a household name, such as a number of the retail store chains and various financial institutions, he explained.
A factor that would create liquidity in public transactions, aside from having a wider range of investors to tap, is having a secured pool of assets. In Canadian public transactions, one typically deals with bank-originated assets.
"You are investing in a securitized pool of financial assets so from a stability perspective and from the view of seller risk, the risk is quite tolerable," Loke noted.
More Disclosure
Aside from enhancing liquidity in the capital marketplace, the movement from ABCP programs to the term arena increases disclosure, thus achieving a certain comfort level among investors.
"As investors see more term transactions in front of them," said Moody's Dukes, "and they become more comfortable with term structures - and having a prospectus or a private placement memorandum, where you have information regarding the structure, issuer and assets - we would expect more investors to get more comfortable with this type of execution." She added that these should cause the term market to open up further.
The limited amount of disclosure regarding the originators of the assets financed in multi-seller ABCP programs - though not stopping the growth of the ABCP market in Canada - may be seen as a drawback.
"Investors are increasingly becoming interested in understanding what is behind the ABCP they are buying," Fingerhut said.
In a public securitization or even in a private-placement term securitization, the investor knows who the issuer is, whereas in a CP multi-seller conduit transaction the individual issuers typically are not disclosed, although more information is being provided as to the underlying assets, he explained.
"This limited disclosure has nevertheless not inhibited the growth of the ABCP market, since it exceeded $53 billion at the end of last year," he added.
In the term market, disclosure is found more in public-term transactions. "When the deals were private placement," Loke said, "you would have to get on the mailing list from the investment banker, or we, as a rating agency, would publish some of the information related to the offering or performance of the issuer but it wasn't necessarily complete."
Currently, the general public can access offering documents or performance numbers through the Canadian equivalent of the SEC Web site: sedar.com. Also, some of these issues are included in the major indexes, making it easier for investors to evaluate a portfolio manager's performance, Loke explained.
The Road Ahead
The Canadian banks have led the pack in public-term securitization. In July 1999, the first public term ABS transaction involving bank assets - The Royal Bank of Canada's three-part Golden Credit Card Trust securitization - closed. This year, Bank of Nova Scotia's Hollis Receivables Term Trust issued a $1.32 billion offering, the largest Canadian public term-transaction to date.
This trend would continue going forward. "Many of the major Canadian banks still have on-balance sheet assets that they would be able to securitize when the market is willing and the time is right," said DBRS' Loke.
What assets will we see in the public arena in 2000?
"We've seen and will see public issuance of credit cards, secured or unsecured personal lines of credit, residential and commercial mortgages, retail car and motorcycle loans and leases, and equipment loans," Fingerhut said.
