The commercial mortgage-backed sector in Canada, with roughly $3 billion outstanding, has been seeing some action lately: a $235 million public term deal by Caisse Depot currently being pre-marketed, will likely close in mid-June, and a $260 million offering by Merrill Lynch Canada was recently completed.

Caisse's deal, which is being issued through its N-45 First CMBS Issuer, is divided into six tranches and is rated by Moody's Investors Service, Canadian Bond Rating Service and Dominion Bond Rating Service. Caisse's last CMBS deal was in May 1999. The company is planning to issue twice a year going forward.

This recent activity is indicative of things to come as market players predict significant growth in the sector.

"I would consider CMBS to be the current hot term asset class in Canada, which is accessing both the private-placement market as well as the recently revitalized public market," said Martin Fingerhut, a partner at Blake Cassels & Graydon LLP.

He added that Canadian securitization is starting to move to some of the less homogeneous asset classes that are sitting on the books of the banks and insurance companies, such as commercial mortgages and corporate bonds and loans.

One possible source of this growth is the entrance into the market of some U.S. players such as GMAC, Merrill Lynch and Donaldson, Lufkin & Jenrette, which a source said is opening an office in Toronto.

GMAC has originated loans currently in the pipeline and will likely come to market later this year.

In related news, the company recently made a privately placed investment of C$6.1 million to become a strategic equity investor in Basis 100 Inc., a commercial mortgage e-commerce technology solution provider. Through this alliance, GMAC will be represented in Basis 100's Board of Directors.

Merrill Lynch, on the other hand, will likely come to market again sometime in October or November through its Merrill Lynch Mortgage Loans Inc., the same shelf that it issued its last three deals from.

One of the causes for this onslaught of American players is the fact that "to a certain extent the Canadian banks have not been interested in the real-estate market," said Greg Nelson, senior vice president of structured finance at DBRS.

"This has opened the window for the Merrill Lynchs and GMACs of the world and also the life insurance companies," he added.

Insurance Companies and Banks

The first commercial mortgage-backed transaction in Canada was completed in April 1998, by insurance company Manulife Financial through its Life Mortgage Trust.

Since then, the company has come to market with four transactions totaling $630 million issued into its two trusts. Though the company has no definite plans as to whether it would come to market this year, it will likely continue to be a periodic issuer in the CMBS market going forward.

Though Manulife is currently the only insurance company active in CMBS, sources say that other insurance companies are looking to enter the market as well.

Another active issuer is Canadian Imperial Bank of Commerce (CIBC), which issued approximately C$1 billion in commercial paper through three transactions last year. The bank will likely not come to market in the near term and its future securitization activity will largely depend on the economics of the CMBS market in Canada.

Joining CIBC, sources say that TD Bank is also looking to enter the securitization market down the line.

Aside from Canadian banks and insurance companies, Nelson mentioned independents and some real estate companies "that may do securitized or structured product who are trying to re-orient their portfolio" as possible players in the CMBS market.

Why CMBS?

The decision of these companies to enter the market is reliant on how they feel about the sector.

"Canadian banks and Canadian life insurance companies see the benefit of increasing their presence or conversely decreasing their presence in the marketplace depending on whether they are comfortable with real estate generally," DBRS's Nelson said.

A factor that may spur insurance companies to access the CMBS market is the fact that there is a lot of "demutualization" happening, which would have an effect on the availability and price of capital, said a source.

"Instead of them being mutual companies where there isn't as close attention on the return on equity, now they are going to be stock companies whose shareholders are going to demand a return," he explained.

The source said that if securitizing mortgages would prove more efficient for these companies than keeping assets on their balance sheets, then it would likely spur the growth of the CMBS sector in Canada. "But that depends on the economics," he added.

However, the most basic driver for these institutions to turn to CMBS is the desire to explore all possible financing options.

"Unlike the U.S. market where there was a savings and loan crisis that kind of served as an impetus for the growth of the CMBS market," said DBRS's Nelson, "in Canada, the reason for the growth is kind of a fundamental evaluation of opportunities in the marketplace as well as new ways of portfolio management."

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