The RBC Capital Markets is marketing what is likely to be one of very few offerings of Canadian commercial mortgage bonds this year.
Mortgage bonds play a much smaller role in Canada’s economy than they do in the U.S., where conduit lenders account for about a quarter of all real estate lending. And since the middle of last year, when weakness in oil prices roiled Canada’s capital markets, it’s been even harder to compete with traditional portfolio lenders such as commercial banks and insurance companies.
Thanks to weakness in the Canadian dollar, there’s also competition from foreign players such as U.S. and Asian banks.
“In general borrowers have more choices, because there is so much capital available, and conventional lenders are very active,” said Karen Gu, senior vice president, DBRS.
But Real Estate Asset Liquidity Trust, Series 2016-1, is notable for more than its scarcity. The $400 million deal also illustrates just how different lending standard in the U.S. and Canada really are.
Perhaps the most striking difference is the lack of interest-only lending. REALT 2016-1, is backed by 55 loans secured by 91 properties. It is rated by DBRS and Fitch Ratings. All of the loans were originated by RBC, one of the few conduit lenders currently active in Canada. And all of them amortize - for their entire loan terms.
By comparison, Wells Fargo Commercial Mortgage Trust 2016-C3, the most recent U.S. CMBS to be rated by DBRS and Fitch, is backed by a pool of loans that will only pay off 12.3% of their initial balance prior to maturity. And that’s better than the average CMBS rated by Fitch this year or last. Two of the loan pay only interest, and no principal for their entire terms and 32 pay only interest for part of their terms; just 10 are fully amortizing.
Another big difference between commercial real estate lending in the U.S. and Canada: recourse. Twenty-seven loans in RBC’s deal, representing half the pool, provide lenders with recourse to individuals and REITs or established corporates. By comparison, U.S. commercial mortgages do not offer any recourse to the borrowers, with the exception of some smaller loans to landlords.