WHISTLER, B.C. - What a shame nobody thought to hold the sessions outdoors, as the sun was shining bright for Canada's Fifth Annual Asset Securitization Forum 2002. In fact, several speakers thanked the attendees for not slipping out prematurely. But while the days were filled with sunshine, the nights were about moonlight and schmoozing.
Can life get better than sipping champagne on a gondola ride to the top of one of Whistler's snow-capped mountains?
And well into the night, sherry and port were served at CIBC World Market's suite. Both spirits come from the tradition of fortified wines. Originally, this fortifying process was done primarily to better transport them on long sea voyages.
This is somewhat an apt symbol for one of the main topics at the conference: Will securitization - which is really about building fortified finance structures - survive the rocky waters that it now traverses?
This is a question that inevitably brings forth the Enron debacle. Participants at the opening panel dubbed Enron's use of SPVs as "scam perpetuating vehicles." They said there should be a distinction made between the bankruptcy-remote entities used for securitization and Enron's SPVs, clearly not even bankruptcy remote, and which obviously contained "dubious assets."
Aside from "Eronitis", Canada, like the U.S., is currently facing regulatory issues related to how special purpose entities are to be treated from an accounting perspective. This issue is crucial in Canada, as the changes would affect the way multi-seller conduits are managed, which comprise two-thirds of the Canadian asset-backed market.
Attendees said depending on how the changes turn out, the market may either see a rush of pent up demand or a lot of deal restructuring to accommodate the changes brought about by the new rules.
And like any other conference at this point in the economic cycle, there was panel devoted specifically to the effect of the ailing global economy on ABS. CIBC Managing Director David Allan in his presentation assured participants that the economic cycle would only have minimal impact upon the risk of loss and the downgrade risk of R-1(high)/AAA tranches in ABS.
As TD Securities Managing Director William Furlong said, "Securitization earns its stripes in tough times."
Activity has also been rather slow on the term side. As one investor said, "We would really like to buy more but there isn't really much out there." This is a direct effect, he said, of issuers holding off as they try to decipher what the new accounting rules would mean for their respective balance sheets. It is also a result of the lack of bank issuance.
Some participants noted that the lack of supply is probably why the recent auto deal by AmeriCredit did very well in spite of three factors against its favor: the firm was a first-time issuer in the Canadian market, the deal was backed by non-prime assets and it had a monthly-amortizing pay schedule, the first Canadian deal to use this structure in a long while.
While Canadian investors have taken to semi-annual bullet securities because of the lack prepayment risk, the question now is: will investors accept monthly-pay deals going forward?
"They really have no choice at this point if that's what's available," a participant noted. Observers are waiting for the result of Daimler Chrysler's new deal currently in the works that uses a monthly-pay structure to gauge true market acceptance of this product.
Going down in credit
There was a lot of talk at the conference about Canadian investors starting to go deeper in credit, a significant development as Canadian investors have being known to be skittish.
Aside from the nascent CDO market - evidenced by market acceptance of CIBC's two balance sheet synthetic CLO transactions, there is also growing interest in CMBS B-pieces (see related article on p. 18).
Participants at the opening panel said that the increase in the number of local CMBS B-piece buyers shows that when the product is out there and is being issued on a regular basis, the investor base grows, facilitating more issuance.
As the Canadian subordinate market opens up, panelists noted that it would eventually become much easier for banks to truly transfer the economic risk in their portfolios.
Another development that panelists focused on was the elimination of the withholding tax on interest payments between Canada and the U.S., which is expected to effect the way Canadians raise corporate debt and capital for securitization.
One effect this would have is that U.S. ABCP conduits will probably see the amount of Canadian dollar denominated receivables increase by several billion dollars.
Attendees noted that this development might result in one large North American market with Canada being seen merely as a sub-niche. They said that this would have a negative impact on investor appetite for smaller Canadian asset-backed deals because investors would naturally gravitate towards the larger, more liquid issues.