As expected, two deals closed in the Canadian term market last week.
Honda Auto Receivables Trust's (HART) $480 million transaction, aside from being HART's first ever public term offering, the deal's structure was also a first-of- its-1 kind in the Canadian securitization market.
"We've taken a $500 million pool of car loans and funded it with $100 million of two- and three-year semi-annual pay bullet bonds, with the rest of the funding provided through the issue of asset-backed commercial paper," said David Allan, managing director and head of securitization at CIBC World Markets. CIBC was sub-administrative agent for the deal.
Most of the large asset-backed transactions that have been financed in the term market have been revolving pools of short-term consumer receivables that have been funded by semi-annual bonds, such as Genesis Trust and York Receivables Trust.
"That works well if you're looking at short term assets, but when you have a longer-term asset like a lease, a normal residential mortgage or car loan, it becomes trickier because you can't just have a revolving pool," said Allan. "When you stop revolving the assets, the amount of time it takes to repay the principal is much longer, so those programs have to be funded on an amortizing basis."
Traditionally, monthly pay amortizing passthrough asset-backed notes were used to fund these kinds of portfolios. But because many investors who buy ABS are moving over from government bonds, the idea of passthrough, monthly-pay amortizing securities is not very attractive. Amortizing assets have much poorer liquidity and hence poorer pricing.
"The challenge has been to take amortizing assets, and fund them in such a way that you take as much advantage of the liquidity available to semi-annual-pay bullet bonds."
HART is also looking to do another transaction later this year. "Given the size of the remaining pool, the high rate of asset growth and the overwhelming receptiveness of the market to this issue, I would not be surprised to seem them come our with a further tranche this year," Allan said.
Aside from HART, which closed Friday, the $820 million Genesis Trust transaction also closed last week.
The Genesis deal comes after two large ABS transactions happening in the last two months: a one-billion-dollar Hollis Receivables Trust deal in February and a $1.3 billion Genesis Trust transaction in January.
"Even though market liquidity in Canada for ABS has, in a way, grown substantially, there is only so many months in a year that you could come with a billion in product so it put a little pressure on ABS spreads, relative to other comparable sectors like say bank debt," said a source.
The source added that the deal itself did not see as much cash buying as previous deals. "A larger percentage of the buyers did it in exchange, through selling other ABS, as opposed to the other two deals, where there was mostly cash participation."