Evolution of Product
Distribution: Private
Placements
ABS 2010 Canadian Structured Finance Forum
June 2010
Yatendra Killer
HONDA CANADA FINANCE INC.
Mark McElheran
STIKEMAN ELLIOTT LLP
Marie-Claude Morrissette
NISSAN CANADA INC.
Jonathan Zamir
BANK OF AMERICA MERRILL LYNCH
Trends in Public and Private Offerings
Total
Market Size (in billions of CAD$)
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Feb-10
Mar-10
25.8%
61.1%
13.0%
0.0%
0.0%
0.0%
27.4%
58.4%
14.2%
0.0%
0.0%
0.0%
27.6%
57.5%
14.9%
0.0%
0.0%
0.0%
30.9%
55.7%
13.3%
0.0%
0.0%
0.0%
33.6%
49.9%
16.4%
0.0%
0.0%
0.0%
32.3%
47.2%
20.6%
0.0%
0.0%
0.0%
31.9%
40.6%
27.5%
0.0%
0.0%
0.0%
32.3%
43.6%
3.2%
19.7%
0.3%
1.0%
35.9%
36.0%
1.2%
23.0%
0.6%
3.3%
40.3%
29.8%
0.1%
0.0%
22.3%
7.5%
41.8%
28.6%
0.2%
0.0%
22.5%
6.9%
44.9%
28.3%
22.8%
4.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
79.9
84.5
88.8
94.3
102.3
127.7
166.0
164.3
141.4
107.4
105.6
104.5
Ju
l-0
9
Ja
n10
Dec-00
As At
Term ABS (incl. CMBS)
ABCP - Bank Sponsored
ABCP - Non Bank Sponsored
Affected ABCP
Structured Notes
Private Placements
Ju
l-0
8
Ja
n09
Market Share (by %)
Dec-01
Dec-02
Dec-03
Dec-04
Note: Private Placements includes On Balance Sheet as well as ABS Private Placements.
Canadian Securitization Market Size
(Jan 1995 - Feb 2010, in billions of C$)
200
180
160
140
120
100
80
60
40
20
Term ABS (incl. CMBS)
Source:
ABCP - Bank Sponsored
DBRS
STIKEMAN ELLIOTT LLP | SLIDE 1
ABCP - Non Bank Sponsored
Affected ABCP
Ju
l-0
7
Ja
n08
Ju
l-0
6
Ja
n07
Ju
l-0
5
Ja
n06
Ju
l-0
4
Ja
n05
Ju
l-0
3
Ja
n04
Ju
l-0
2
Ja
n03
Ju
l-0
1
Ja
n02
Ju
l-0
0
Ja
n01
Ju
l-9
9
Ja
n00
Ju
l-9
8
Ja
n99
Ju
l-9
7
Ja
n98
Ju
l-9
6
Ja
n97
Ju
l-9
5
Ja
n96
Ja
n95
-
Structured Notes
Private Placement
Trends in Public and Private Offerings
> Apart from the significant contraction of the ABS market generally,
what can be discerned from these figures?
– High water mark for public ABS in 2006 and 2007
– Total term ABS (public and private combined) relatively stable since then
– Private ABS picked up most of the slack in public issuance after 2007
– From 2007 to 2009 public ABS outstanding shrunk (by 2.3B and
7.5B respectively) while private issuance of ABS grew (by 3.1B
and 3.4B respectively)
STIKEMAN ELLIOTT LLP | SLIDE 2
Trends in Public and Private Offerings
– From 2009 to 2010 public ABS grew by 0.8B and private ABS shrunk by
0.8B, however
– Public distribution under the BDC program was limited to the BDC
– Although public disclosure was a requirement of BDC involvement, in substance
these transactions were rated private transactions (and in fact private placement
investors participated in a number of these transactions outside of the
prospectus)
– ABCP market has steadily declined both in absolute terms and as a
percentage of the total ABS market
– High of approx $113 billion in Dec ’06 to low of approx $30.4 billion in Feb ’10
– Capital constraints on banks means smaller bank-sponsored conduits going
forward
– Conclusion
– Private term issuance is becoming a significantly greater proportion of a smaller
Canadian ABS market
STIKEMAN ELLIOTT LLP | SLIDE 3
Use of Private Placements Versus Public
Transactions Going Forward
> Regulatory environment may be a significant determining factor
> Rule changes proposed in the U.S. by the SEC
– Comment period remains open
– Open question as to the nature and extent of the reform that will
result
– Enhanced accountability and transparency requirements in SEC
proposals all based on eligibility for short form public issuance
– Only material change to private placement protocols is to require that
investors be expressly offered prospectus-level disclosure
– By and large, Canadian-style OM already meets this standard
STIKEMAN ELLIOTT LLP | SLIDE 4
Use of Private Placements Versus Public
Transactions Going Forward
> Benefits of public ABS in terms of pricing and market depth appear
to be far less compelling in Canada
> If Canadian regulations follow the same model, may spur further
increase in rated private placements
> Recent trends indicate that even in the U.S. there has been a
recent movement from public to private issuance
– According to data compiled by Asset-Backed Alert, public ABS
issuance in the US consistently exceeded private placement
issuance from 2005 to 2007 (over eight times more in 2005,
over four times more in 2006 and just under three times more in
2007)
STIKEMAN ELLIOTT LLP | SLIDE 5
Use of Private Placements Versus Public
Transactions Going Forward
– Public and private ABS issuance reached virtual parity in 2008
and in 2009 private 144A ABS issuance exceeded public ABS
issuance by 15%
– For the first quarter of 2010, Asset-Backed Alert has reported
over US $21 billion of 144A ABS issuance vs. $9 billion of US
public ABS issuance
STIKEMAN ELLIOTT LLP | SLIDE 6
Benefits of Private Placements
> Originator’s Perspective
– Timing
– No regulatory review or delay
– Easier to hit market windows
– Flexibility
– No mandatory form of offering document
– Although OM disclosure is typically “prospectus-like”
– Fewer rules governing the process in the exempt market (restrictions on
marketing, etc.)
STIKEMAN ELLIOTT LLP | SLIDE 7
Benefits of Private Placements
> Originator’s Perspective
– Lower Cost
– Additional costs in a public transaction
– Prospectus
– Translation
– Continuous disclosure obligations (AIF, annual and interim financials, MD&A,
material change reports)
– Filing fees
STIKEMAN ELLIOTT LLP | SLIDE 8
Drawbacks of Private Placements
> Originator’s Perspective
– Higher price
– Potential of tighter spreads on public offering
– Market Depth and Breadth
– Potential of access to investors who can’t buy private or are limited in
size of private book
– Finite Nature of the Canadian Market
– Potential investors for private and public offerings can be one and the
same
STIKEMAN ELLIOTT LLP | SLIDE 9
Key Drivers in the Choice of Distribution Channels
Driver
All-in Cost
Nature of the
Assets/Structure
Public
Market Pricing
Liquidity Premium
Cost
Lower Cost
Simple
Higher Complexity
Well Understood
New
Evolving Investor Demand Large
Certain
STIKEMAN ELLIOTT LLP | SLIDE 10
Private
Low
Uncertain
Key Drivers in the Choice of Distribution Channels
Driver
Market Sentiment
Public
Private
Risk Taker
Risk Averse
Stable
Volatile
Existence of Public
Platform
Required
Indifferent
Ongoing Funding Needs
Frequent
Less Frequent
Diversification
STIKEMAN ELLIOTT LLP | SLIDE 11
Differences in the Market for Loans vs. Leases
> Demand for loan securitization product is larger and more stable
> Leases add complexity with residual value risk
– Internal (originator) factors:
– Manufacturer price setting behavior
– Introduction of new models
– Remarketing management
– External factors:
– Canadian $
– Oil price
– Overall level of economic activity
STIKEMAN ELLIOTT LLP | SLIDE 12
Benefits of Private Placements
> Investor’s Perspective
– Customization
– Details of issues are negotiated directly
– More likely to fit specific investment needs
STIKEMAN ELLIOTT LLP | SLIDE 13
Drawbacks of Private Placements
> Investor’s Perspective
– Lack of Secondary Market Liquidity
– Although benefits of public offering may be more theoretical than real due
to limited size of investor base
– Public ABS also has wide bid-offer spreads
– Secondary trades in private placements are between institutional
investors without intervention of market making dealers
STIKEMAN ELLIOTT LLP | SLIDE 14
Drawbacks of Private Placements
> Investor’s Perspective
– Lower standard of disclosure
– Appearance of less transparency
– Statutory liability for underwriters may result in more rigorous due
diligence and disclosure in public transaction
STIKEMAN ELLIOTT LLP | SLIDE 15
Private vs. Public - Conclusion
> While there are a number of variables to consider, achieving
optimal pricing is a very significant consideration
> Where investor demand for ABS exceeds supply, potential for better
pricing in public market is low
– Cost and flexibility advantages will favour private placement
STIKEMAN ELLIOTT LLP | SLIDE 16
Private Placements Going Forward
> Public markets will likely continue to be the preferred channel for programmatic
issuers with traditional asset classes
> Private placements may make sense for transactions that are new or unique
– First time issuer or new asset class (student loans, trade receivables…)
> Private placements offer investors an opportunity to perform a more thorough and
tailored credit analysis
– Flexible timeline
– Access to more information/documents
– Scenario analysis
> Issuers have the opportunity to test the market and pull back if needed with no
public consequences
> Another leg down in the world economy could bring private placements to the
forefront again
STIKEMAN ELLIOTT LLP | SLIDE 17
Domestic Versus Cross-Border Transactions
> Cross-border vs. domestic could be as important a consideration as public vs.
private
> Removal of withholding tax has opened up cross-border possibilities
– US funding of Canadian assets
– US funding of assets transferred from Canada to US
> There has been some cross-border activity but difficult to get true measure of the
potential as the elimination of withholding tax coincided with slowdown in the
securitization market and the broader economy
> For a 144a offering, investors are generally indifferent to whether the transaction
is public or private in Canada
– No impact on pricing
– No impact on eligibility
> Not necessary to have deal fully public in the US
STIKEMAN ELLIOTT LLP | SLIDE 18
Domestic Versus Cross-Border Transactions
> US participation is expected in most deals going forward
> Canadian ABS spreads still lag the US by a considerable margin
– Top tier credit card names are approximately 15bps wider in Canada
– Differential widens further out the credit curve
> US investors see significant value in Canadian portfolios
– Better performance
– Diversification
> In other words – Better assets at a better price
> One or two cross border investors can be enough to introduce noticeable price
tension into a deal
– For example, a large anchor order from the US can provide the backstop
needed for tight price guidance when marketing in Canada
STIKEMAN ELLIOTT LLP | SLIDE 19
Hedging Cross-Border Transactions
Hedging considerations:
> US domiciled CAD funds are a natural fit because no hedge is required
> Bullet maturities are simpler to hedge because balance guaranteed swap is not
required
> Pass through structures face an uncertain amortization schedule due to
unscheduled prepayment
> Investors can enter into a swap based on the expected amortization and face a
potential mismatch if prepayment is faster or slower than expected
> Investors can pay for the optionality of a balance guaranteed swap
– Cost of this optionality becomes uneconomic for longer tranches
> Some issuers are willing to issue USD debt directly and enter into a balance
guaranteed swap at the Trust level
STIKEMAN ELLIOTT LLP | SLIDE 20
QUESTIONS & ANSWERS
Yatendra Killer
Yatendra_Killer@ch.honda.com
Mark McElheran
mmcelheran@stikeman.com
Marie-Claude Morrissette
marie-claude.morrissette@nissancanada.com
Jonathan Zamir
jonathan.zamir@baml.com