Toronto-based Bank of Nova Scotia is all set for the year in terms of its asset-backed securitization program after doing a $1.32 billion issue through its Hollis Receivables Term Trust in February.
Of significance, the Hollis Receivables offering, which was backed by Scotia's personal line of credit receivables, is the largest public term securitization ever done in Canada.
"The Hollis Receivables transaction we did in February would probably meet our demand for this year," said Michael Lomas from Scotiabank.
The Hollis deal came after a year driven by large securitization volume.
In the first quarter of 1999, the bank securitized three, four and five year tranches out of its Trillium Credit Card Trust, bringing the total volume securitized through Trillium to C$ 2 billion. The bank also securitized an initial tranche out of Trillium in October 1998.
It was also in 1999 when Scotiabank came out with the first Hollis Trust offering. The two-tranche deal was worth $905 million. In 1Q 1999, the bank issued mortgage-backed commercial paper though Lynx Receivables Trust.
"Last year was exceptional in that we did a lot of transactions," Lomas stated. "I think some of that was pent-up from 1998 when market conditions weren't as we expected. There was a lot of volatility in the market then."
Lomas said that even though the bank had a full securitization calendar in 1999, the quality of the deals did not suffer.
"All of the transactions we did last year were quite good and we are pleased with them," he stated. "We didn't lower our standards to do any of them."
Also, doing larger but fewer transactions was an effective strategy for the bank. "It's more cost-effective to do large transactions in terms of legal and other set-up costs and it provides investors with greater liquidity," Lomas noted.
A Late Bloomer
Compared to its peers, Scotiabank is often considered a latecomer to asset-backed securitization.
In fact, its first asset-backed commercial paper (ABCP) transaction through Atlas Auto Loans Receivables Trust came to market only in 1997, while its first term securitization, the first Trillium deal, appeared in 1998.
"We did approach securitization rather tentatively," Lomas said. "Atlas was the first step in 1997 and that went well."
Through Atlas and subsequent securitizations "we saw the benefits of securitizing assets to manage our arbitrage of the regulatory and economic capital that's required to underpin these assets," he noted.
Lomas mentioned that the bank's focus in the last couple of years in terms of its securitization program was to improve its regulatory risk capital ratio.
He added that since Scotiabank's regulatory capital is in fairly good shape it would probably approach securitization a little more selectively in the future. "We don't want to get too far ahead of our peers," Lomas said.
"There's a trade-off between the regulatory capital and funding costs and ratings capital relief that the bank gets," he stated. "So we have to balance a number of different factors since we've gotten to a position we're quite comfortable with now."
Role In The Securitization Arena
Though Scotiabank has "no incremental demand to securitize assets" at present, it is still looking to be an active player in the ABS securitization market going forward.
One of the avenues the bank is exploring is the idea of doing a synthetic collateralized loan obligation. And in addition to the asset classes Scotiabank has securitized - auto loans, personal lines of credit, residential mortgages, and credit cards - the bank is looking into commercial mortgage-backed securities. However, Lomas added, "While we continue to investigate opportunities we're not working on anything right now."
Lomas credits the bank's strong securitizing finance team, Scotia Capital, as a factor in the success of the bank's securitization program.
"We've been able to work with them on a number of different asset classes," he said. "We've got a good team in place and we have developed an exceptional working relationship. The bank has a strong credit culture and this has allowed us flexibility to consider different structures and asset classes."
Timing the markets well is good not only for Scotiabank but for the general Canadian asset-backed market as well.
"I think if we come to a balance between issuers and investors, that should allow for the pricing to reflect the underlying assets," stated Lomas. "This would cause the spreads to tighten in and to be consistent with the ratings, rather than flooding the market with a lot of product that will naturally result in prices and spreads rising. The pricing will reflect the balance rather than the need to place paper."
"I see that we are going to be a major player over time," he added. "But we won't likely be as active as we were in the last couple of years."
Lomas sees Scotiabank's place in the securitization market as trend-setting. "We have been at the forefront over the last couple of years and its presence has probably given a lot more substance to the securitization market in Canada," he noted.
He added that Scotiabank's strong credit performance along with the recent proliferation of the securitization of Canadian bank assets, have helped investors achieve a certain comfort level in Scotiabank ABS offerings.