In a recent report on its approach to rating Canadian commercial mortgage-backed securities, Moody's Investors Service said that it expects the Canadian CMBS market to grow substantially going forward.

Investors would likely be drawn to the more creditor-friendly legal system in Canada, as compared to the U.S., as well as the availability of recourse lending and the tight underwriting standards.

"Many loans have been underwritten at conservative leverage levels which may make them attractive to investors," said Stewart Rubin, a vice president at Moody's. "If loans are being underwritten at this stage of the cycle, then loan-to-value ratios will most likely get better."

CMBS is viewed by the rating agency "as a viable alternative for Canadian borrowers" in the face of the ongoing demutualization and consolidation of Canadian life insurance companies, pension funds and banks.

According to the report, the same companies are looking into the product. While banks are expected to enter the market through conduits, life insurance companies and pension funds will likely securitize existing mortgages. Another source of growth would be U.S.-based conduit lenders who are currently building Canadian operations (ASR 6/5/00).

Though the outlook is bright for Canadian CMBS, a factor that may mitigate the sector's growth is the high level of concentration of assets in certain geographic regions. For instance, currently, there is a very high level of concentration of industrial and office supply in Toronto, where 15% of Canada's population resides.

Moody's said that it takes into consideration the level of geographic concentration in the major markets in its analysis, and makes the appropriate adjustments to credit support to accommodate these concentration risks.

As for asset types, currently the retail sector, at 38%, has the largest share in CMBS collateral. Rubin said that though it is difficult to predict, there is no reason why other CMBS products, such as office and industrial supply, wouldn't gain a greater foothold going forward

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