Whole company securitizations, a blooming asset class in the U.K., may soon find a home in Canada, according to a recent Fitch report.
Fitch said that Canadian law may allow protections for secured creditors similar to those available in the U.K.
"Canada, with a similar legal system to the U.K., might be able to do whole business' or operating cashflow' securitizations," said Greg Kabance, a senior director at Fitch. "We are currently exploring that legal aspect."
The securitization of operating cashflows of a particular company thrives in creditor-friendly environments. Since the Canadian legal regime has long been believed to be more creditor-friendly compared to that of the U.S., experts say that, on a practical level, a U.K.-style whole business loan securitization could be effected in Canada.
The UK legal system allows a secured creditor to appoint an administrator which can operate the debtor's business in the event of its insolvency. A back-up liquidity facility will give 18-24 months debt service coverage during the time that it may take to put a key administrator in place or to liquidate the assets, according to Martin Fingerhut, a partner at Blake, Cassels & Graydon LLP.
This type of set-up is considered to be creditor-friendly. However, Canada's legal regime falls somewhere between the U.S. and the U.K. on the creditor-friendly spectrum. For instance, Canada does have a U.S.-style Chapter 11 type of automatic stay in the event of the debtor's reorganization.
But unlike the American system, that stay is extremely short, and therefore more creditor-friendly; in fact, eight months is considered long by Canadian standards.
During this insolvency stay period, a liquidity facility similar to that of the U.K.'s can be made available in Canada to give the protection that the rating agencies believe bond holders should have.
Furthermore, in Canada, if the bond holders are the only, or the predominant, secured creditors, then they would form a separate creditor class and could not be "crammed down" as they could be in the U.S. This means that the bond holders would, in practice, play a significant role in the restructuring process: the restructuring could not take place without the consent of the bond holders or full payment of their bonds.
Though a whole business securitization might be possible, Canadian investors might take time to warm up to the product, sources say.
"The Canadian investor appetite might not be the same for this product as it is in Europe, " said Fitch's Kabance. "Most of the UK transactions are rated single-A or triple -B. Typically, Canadian investors are used to products higher up in the rating scale."
Meanwhile, Pearson International Airport in Toronto will be charging airport improvement fees starting June 1, a cashflow that experts say may be a candidate for a whole business securitization. The securitization of airport cashflows has been done in the U.K in the past.