Moody's Investors Service last week announced it will be the first U.S.-based rating agency to move into the Canadian asset-backed commercial paper market, a sector dominated by Dominion Bond Rating Service.
DBRS last year rated more than 96% of Canadian ABCP transactions - a $64 billion market.
Standard and Poor's has, so far, refrained from announcing similar intentions.
The move north by Moody's comes at a time when the Canadian ABCP market is growing up. The conduits are sweeping up a more diverse range of collateral - such as highly rated synthetic CDO pieces - and posting increasing year-over-year growth in outstanding receivables. The 17-year-old Canadian ABCP market grew 21% in the last two years, from about $53 billion in 2004, according to Moody's. The rating agency already had its footprint on a sizable chunk of the Canadian market, rating as much as 85% of term ABS issuance in the country in 2005.
"We've been rating Canadian structured finance for a very long time, and we decided it was a good idea to take a fresh look at the issue of the ABCP market in the country," said Andrew Kriegler, a managing director in Moody's Canada-based structured finance group. "Even though market participants knew our views on the way liquidity is structured in Canada, they continued to want Moody's to provide ratings. Almost inevitably someone would always ask, When are you going to rate ABCP?' "
While asset types backing the CP conduits are arguably becoming more sophisticated, the market has performed well under the credit ratings of DBRS.
"Investors have trusted DBRS for ABCP ratings for the past 16 years, and there have been no defaults or downgrades through economic cycles," said Huston Loke, assistant group managing director and global head of structured finance at DBRS.
As is often the case, contrasting ratings methodologies could send issuers to one rating agency over another. DBRS often requires that asset credit quality be structured to levels above the minimum triple-A for CDO assets.
Moody's new ratings come with a new term - structured finance issuer rating - and a revised set of ABCP ratings criteria that cater to the Canadian market's standards for liquidity support. In contrast to DBRS, Moody's will use a long-term fixed income rating scale to measure the viability of the special purpose entity that is issuing the commercial paper, as opposed to the standard short-term rating scale for ABCP.
"To rate on a short-term prime rating scale would not be fair because liquidity is much narrower here," Kriegler said.
The structured finance issuer ratings are comparable to issuer ratings assigned to corporate borrowers, but will apply only to the issuing entities and not to actual operating businesses, he said.
The Canadian market in 1994 began operating under the standard of general market disruption liquidity, which fulfills the government's desire for a separation of credit support and liquidity. To draw cash under a GMD line, liquidity disruptions must be impacting more than one conduit under circumstances that don't include an erosion of the conduit's creditworthiness, its assets or an originator.
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