Coventree Capital Group, a small Toronto-based investment bank, plays a unique role in the Canadian asset-backed securities market as the only independently-owned provider of securitization services.
"All the providers of securitization services other than Coventree are owned by one of Canada's large banks," explained David Ellins, a partner at Coventree and an originator of the ABS industry in Canada. "Many customers would rather not turn over their credit and collection policies, their historical data, their special product features and other competitively-sensitive information to their competitors."
Ellins, along with Dean Tai, and Jeff Cornish, founded Coventree a little over a year and half ago. Cornish and Ellins were securities lawyers for a major Toronto law firm, and saw the opportunity to do business in an advisory, structuring and distribution capacity.
After its incorporation in 1998, the company's first major transaction was the acquisition of the 407 Highway, in which the company was special advisor to the purchasers. Since then, they have focused on servicing non-investment grade clients and securitizing bank assets, insurance company assets, leasing company assets, mutual fund company assets and other typical ABS products.
"We believe that there are a number of smaller customers or non-investment grade customers that are not being adequately serviced by the existing providers and so we think that there is a market for us to provide them with securitization solutions to their financing needs," Ellins said.
Canada Is Ready For ABS
Coventree has also taken steps to venture into the commercial mortgaged-backed securities market. The company recently hired Ken Toten as the managing director for real estate securitization. Toten, who spent four years at Citicorp, will advise debt issuers in the country's emerging CMBS market.
Overall, Ellins is bullish about the role that asset-backed securities will play in the Canadian investment market going forward, especially in light of the expected $25 billion net shortfall in government triple-A investment products.
"The asset-backed securities are uniquely qualified to fill that void," Ellins said. He also cited the accelerated growth in securitization, shown by the increase to 87% from 30% in market penetration level by investors from 1995 to 1999, and the increase in the percentage of new issuance attributable to securitization to 17% expected in 1999 from 2% in 1995.
"These are the macro economic factors which to me suggest the environment for the growth of this industry is very favorable," Ellins added.
Striking While The Iron Is Hot
With the Canadian market receptive to securitization, Ellins said that Coventree's strategy is "to strike while the iron is hot. We are working very hard at securing deals and bringing them to market."
Coventree is concentrating on working with investors in developing the triple-B-rated and below market. Canada's case is unique in that it has a very limited market for securities in this area. The country's investor base is mostly interested in triple-A-rated securities because of the premiums these yield over alternative products, Ellins said.
Moreover, he feels that the development of that market would be critical to the growth of securitization. "The spreads in Canada in single-A and above are much tighter than they are in the United States, but the spread on triple-B and below are much wider. This means that Canadian investors are looking for higher returns than their American counterparts on those tranches and eventually Canadian investors will want to purchase them because of the better yield they can get in Canada than elsewhere." Ellins explained.
The growth in the triple-B and below market would also lead to the emergence of new asset classes: "We believe that the growth into asset classes other than residential mortgages, auto loans and credit cards will be enhanced to the extent that Canadian investors become more comfortable with triple-B-and-below products," Ellins said.
Coventree, Broadening Its Horizons
Coventree is also working on bringing in new asset classes into the Canadian market. Though Ellins did not elaborate on the specific asset classes they are currently working on, he said that they are looking at "ones that are being done in the United States and ones that have not been done in the United States that are outside the parameters of existing traditional asset classes."
"The existing dealers generally do residential mortgages, credit cards, auto loans and auto leases," Ellins said. " There is a large pool of assets in the traditional classes that are eligible for securitization and much greater market penetration should occur in those classes. There are a number of asset classes that have never been done in Canada, and most of them have been done in the United States and Europe. That's what makes Canada unique. It's untapped in those areas and we will bring securitization in those areas."
Coventree is currently working on several deals that they expect to go to market, virtually all of them coming to market in the new year and many of them in the first quarter. "Some of them are just about ready to go. We are, however, sitting back a little, waiting for Y2K to work itself out," Ellins said.--- KS