Mainstream media in Canada seems often to give securitization the short end of the stick. They either deplore it or ignore it.
Securitization, though, is not a bad word. That seemed to be the message experts tried to hammer home at the second annual edition of The Canada Forum, a series of workshops spreading over two days organized by Euromoney Conferences, the world’s leading organizer of conferences for cross-border investment and capital markets.
“In the Canadian market, securitization has been done correctly, it’s been done around the right assets and done within the context of good structuring and very little or nominal leverage,” said Paul Sandhu, vice president and director, Marret Asset Management Inc.
Securitization market in Canada has done very well although it’s not immune to international economic crisis, said Jerry Marriott, managing director, Canadian structured finance, DBRS Limited.
“If you look at self amortizing assets such as residential mortgages, auto loans and leases, and credit cards, they have always performed very well and continue to perform very well, but that didn’t make us immune to what was going on in other jurisdictions,” he said.
Global events in the past few years have indeed changed the way this financing tool is being used, admits Jason Ellis, managing director, capital markets, First National.
“A lot of the market has fundamentally and structurally changed; the biggest example being moving from market disruption to the global style of liquidity, but none of these changes have come cheaply,” he said.
One of the products, asset backed commercial paper (ABCP), was until recently a viable source of quasi-permanent funding that could earn a spread while investors could move on and originate the next mortgage.
Not any more, says Ellis.
“With the way the market changed, though, ABCP went from being really important part of our structure to being more of a warehouse temporary spot to put mortgages until we found a more permanent place to fund them,” he said.
Exponential rise in programme fees at the banks scared the investors away while the recent financial crisis opened up other securitization avenues. “It made NHA Mortgage Backed Securities (MBS) a much more interesting exit strategy,” said Ellis. “The adjustable rate mortgage market didn’t really exist in a meaningful way prior to the financial crisis, but it is a market that’s developed significantly and it’s made itself an alternative to ABCP mortgages.”
In the post-recession period transparency gained prominence as investors are now demanding increased disclosure around the assets and the asset performance, said Sandhu.
But is it that simple? Can there be the case of too much information? Ellis says he’s nothing to hide. “We have absolutely nothing to keep from investors. So ask away, there is probably not a question or information that we wouldn’t be willing to share with the investors to help improve the marketing efforts and liquidity of the paper.”
Marriott agrees it is a key consideration. “We want more transparency into how rating agencies do their work and how [the ratings are arrived at]; we want to understand that. And from the underwriters and issuers we want disclosure around what the assets in the pools are and how they performed so [as to provide investors] a better ability to make informed decisions.”
There was a general consensus that the market today is in a very different place than it was previously. This, they say, has led to buying lists getting more stringently vetted. “That’s better for the market, overall,” said Marriott.
The issuers have been quick to react with increased disclosure to increased demand for transparency from investors. Experts are referring to this phenomenon as the “new normal” and insist this is the future of securitization in the Canadian market. “The future of securitization in the Canadian market is very bright as long as securitization sticks to its roots in terms of types of assets and structure,” said Sandhu.
He warns, though, that “the risk taking culture and the compensation schemes of banks haven’t changed throughout this process in any meaningful way, and regulatory oversight has not been bolstered significantly; the role of rating agencies hasn’t changed [either].”
“We continue to believe there is an inherent conflict of interest when the issuers are paying the rating agencies,” said Sandhu.
Marriott wants to see increased regulatory oversight. “Whether it’s in Europe or the U.S. or Canada, the CSA (Canadian Securities Administrators) have made proposals that are currently out for comment not only for financial regulation but also for rating agencies.”
It may be noted that the CSA recently unveiled a host of reforms to govern the sale of securitized products. The 2007 meltdown of Canada’s $32-billion market for non-bank asset backed commercial paper (ABCP) triggered calls for tighter regulation.
The CSA responded with specific instructions to issuers of short-term securitized products like ABCP. These issuers have now been asked to post a monthly report on their web sites disclosing any change to the products or any events that could affect payments or performance of the pool of assets backing the securities.
“The proposed rules build on the CSA’s efforts to provide increased transparency to investors while taking into account the particular features of the Canadian securitization markets,” said Bill Rice, chair of the CSA in a public announcement. “We will work toward striking an appropriate balance between strong investor protection and an efficient, open marketplace.”
The proposed rules aim to narrow down the class of investors who can buy securitized products in the exempt market to a smaller, more sophisticated group. This is intended to help investors avoid products whose risk profiles and underlying components may not be suitable for their investment objectives.