Credit Comment
Canadian ABS – A whole new landscape
January 31, 2008
All figures in C$ unless otherwise
stated.
Global Credit Research, Canada
RBC Dominion Securities Inc.
Altaf Nanji, CFA
Sr. Credit Research Analyst
1-416-842-6462
altaf.nanji@rbccm.com
Edward Martinez
Jr. Credit Research Analyst
1-416-842-5165
edward.martinez@rbccm.com
Highlights
•
The elimination of withholding tax on interest paid for arm’s-length cross-border financing is
a significant development for the Canadian ABS market. The change removes a tax-related
structural impediment to tapping foreign debt markets for financing. Given the spread discrepancies
between Canadian and U.S. ABS (particularly for credit cards and auto loan/lease deals), there is
clear incentive for Canadian ABS issuers to tap the U.S. market for more cost effective funding.
•
New issue pricing for U.S. credit card deals and indicative pricing for Canadian deals
highlight the relative value gap. A recent three-year deal in the U.S. priced at a level that would
swap back to Libor +58. In contrast, a new Canadian bank three-year card deal would price closer
to Libor +85.
•
The rapid growth of the Canadian market suggests Canadian ABS issuers will continue to
need access to markets that offer cost effective funding. While the Canadian ABS market is
relatively modest by global standards, growth has been significant. Over the past decade,
outstanding asset-backed paper has increased at an annual rate of 21%; growth in the ABCP space
has averaged 19%, while the term market has grown at a rate of 28%.
•
Credit performance is a differentiating feature of the Canadian market. Delinquency, default,
underwriting and overall asset quality generally compares favourably to comparable U.S. deals.
Very conservative consumer borrowing practices and prudent transaction structures help underpin
the favourable asset quality.
•
Four asset classes continue to dominate the Canadian asset-backed market. Together, auto
loans/leases, credit cards, residential mortgages and commercial mortgages underlie over 75% of
total outstanding paper. That said, diversity of the market beyond the larger asset classes is
considerable.
Exhibit 1: Canadian bank ABS new issue spreads; (bps over GoC curve)
165
150
135
120
105
90
75
60
45
30
15
Nov-03
Jun-04
Jan-05
Aug-05
AAA 5 Year
Mar-06
Sep-06
Apr-07
Nov-07
AAA 3 Year
Source: DBRS
RBC Capital Markets * Royal Bank Plaza * North Tower * 2nd Floor * Toronto, Ontario * M5J 2W7 * credit-research@rbccm.com * www.rbccm.com
Priced as of prior trading day’s market close, ET (unless otherwise stated). For Required Disclosures, please see page 16.
Credit Comment
January 31, 2008
Elimination of withholding tax opens new doors for ABS issuers.................................3
Tapping the U.S. market – a matter of time....................................................................3
Market Overview – Size, Scope, Credit Quality and Maturity .....................................4
Scope – autos, cards, mortgages and the kitchen sink .............................................5
Credit performance is a differentiating factor – particularly for term deals ............5
Maturity – a well-established legal, regulatory and accounting backdrop ..............5
Key asset classes – an overview.........................................................................................6
Autos ........................................................................................................................................6
Assets and outstanding issues................................................................................6
Typical structure - public issues ...........................................................................7
Issuance / performance data...................................................................................8
Credit Card Receivables........................................................................................9
Asset Composition ...................................................................................................9
Master Trust Structure ............................................................................................9
Card Issuer Trusts: ...................................................................................................9
Equipment Receivables and Wholesale Loans ..................................................11
Typical Structure - Public ABS Bonds ..............................................................12
Issuers and Issue Volumes ...................................................................................12
Commercial Mortgage Backed Securities .........................................................13
Description of Structure........................................................................................13
Pass-through Structure ..........................................................................................13
Commercial Mortgage Originators and CMBS Issuance Trusts..................13
Performance ............................................................................................................14
2 Global Credit Research, Canada
Credit Comment
January 31, 2008
Elimination of withholding tax opens new doors for ABS issuers
•
Effective January 1, 2008 the Canadian Income Tax Act was amended to eliminate withholding tax
on interest paid on arm’s-length cross-border financing.
•
What does this mean for Canadian debt issuers? The changes remove a tax-related structural
impediment to tapping foreign debt markets for shorter-term financing – i.e. non-Canadian
residents will not face a tax hit when buying shorter-term debt securities sold by Canadian
corporate and asset backed issuers.
o
Prior to the change, tax rules required a 10% withholding tax for cross-border interest
payments on debt with an initial term of less than five-year or on any debt not issued by a
corporation (i.e., all asset-backed issuers were subject to withholding tax, regardless of the
term of the issue).
o
The rule effectively impeded sub-five year issuers and all ABS issuers from funding
outside the domestic market.
•
What does this mean for Canadian asset backed issuers? ABS issues are typically terms of 5years and under. Given the spread discrepancies between Canadian and U.S. ABS (particularly for
credit cards and auto loan/lease deals), there is clear incentive for Canadian ABS issuers to tap the
U.S. market for more cost effective funding.
•
As such, it is our view that:
o
Large ABS issuers will likely tap U.S. investors through stand-alone U.S. placements or
U.S. private placements bolted onto Canadian public ABS issues.
o
Issuers that avoided the Canadian ABS market because of the limited pass/pay through
market and an investor penchant for bullet structures can now avail themselves of broader
structuring options in non-Canadian markets.
o
The U.S./Canadian border will become less relevant to the ABS market as Canadian and
U.S. ABS spreads begin to converge.
Tapping the U.S. market – a matter of time
•
To illustrate the relative value gap, we reference recent new issue pricing in the U.S. where a threeyear WAL Bank of America card deal (BACCT) recently priced at 58bps over Libor. Also, a 1.96
WAL CHAIT (JPMorgan Chase) deal came at 45bps over Libor.
•
Our indicative pricing shows that a new Canadian bank three-year ABS deal would currently be
priced at Libor +85bps or +140bps on a fixed basis.
•
This gap exists despite the fact that credit metrics for Canadian card collateral tends to outperform
that of U.S. portfolios (Exhibit 1).
•
o
For illustrative purposes we looked at a 2001 BACCT deal, with historical payment rates
in the high-teens, rising delinquency rates in the 5% range and charge-offs hovering
steadily in the area of 5.5%.
o
This compares to a typical Canadian credit card deal for which monthly payment rates
register consistently close to 40%, total delinquencies less than 2% and with charge-offs in
the 2% range.
Given the pricing/performance dichotomy, it is our view that ABS issuance in Canada will remain
constrained until comparative pricing improves.
3 Global Credit Research, Canada
Credit Comment
January 31, 2008
Exhibit 2: Typical Canadian credit card deals have outperformed their U.S. peers
US Yields
25%
40%
Canadian Yields
US Net Losses
20%
35%
Canadian Net Losses
30%
15%
25%
Canadian Payment Rates
20%
US Payment Rates
10%
5%
15%
10%
0%
Jan-99
Feb-00
Mar-01
Apr-02
May-03
Jun-04
Jul-05
Aug-06
Sep-07
Jan-99
Feb-00
Mar-01
Apr-02
May-03
Jun-04
Jul-05
Aug-06 Sep-07
Source: Moody’s
Market Overview – Size, Scope, Credit Quality and Maturity
Size and liquidity – issuers need cost effective funding
•
At C$170bn of total ABCP and term notes outstanding as of October 2007, the Canadian market is
relatively modest by global standards.
•
Absolute size notwithstanding, growth had (until recently) been an impressive underlying theme for
the market – over the past decade, outstanding asset-backed paper has increased at an annual rate of
21% (Exhibit 2).
o
Gross issuance has grown at a compounded annual rate of 19% in the ABCP space and
28% in term ABS over that time frame (Exhibit 3).
o
The growth has made for a deeper and, in less stressed times, more liquid market.
•
ABCP currently accounts for approximately 60% of total outstanding securitizations, with term
paper representing 25% and CMBS 15% of the total.
•
While ABCP is the largest and, for the last several years, fastest growing segment of the market, in
our view the ongoing turmoil in the credit markets will likely curtail new issuance materially –
particularly as recent growth was largely a function of out-of-favour arbitrage-CDO type deals.
Exhibit 3: ABCP and Term ABS Outstandings, Dec. 1996 to Oct. 2007; (C$ Billion)
Term
ABCP
D
ec
-9
Ju 6
n9
D 7
ec
-9
Ju 7
n9
D 8
ec
-9
Ju 8
n9
D 9
ec
-9
Ju 9
n0
D 0
ec
-0
Ju 0
n0
D 1
ec
-0
Ju 1
n0
D 2
ec
-0
Ju 2
n0
D 3
ec
-0
Ju 3
n0
D 4
ec
-0
Ju 4
n0
D 5
ec
-0
Ju 5
n0
D 6
ec
-0
Ju 6
n07
200
180
160
140
120
100
80
60
40
20
0
Source: DBRS
4 Global Credit Research, Canada
Credit Comment
January 31, 2008
Scope – autos, cards, mortgages and the kitchen sink
•
Four asset classes continue to dominate the Canadian asset-backed market. Together, auto
loans/leases, credit cards, residential mortgages and commercial mortgages underlie over 75% of
total outstanding paper (Exhibit 4).
•
The diversity of the market beyond the larger asset classes is considerable. Assets as diverse as
water heater rentals, reverse mortgages and U.S. student loans have all been well received by the
Canadian investor base.
Credit performance is a differentiating factor – particularly for term deals
•
Credit performance for the term market and most of the ABCP market remains pristine (see
performance data in the more detailed description of asset classes). Delinquency, default,
underwriting and overall asset quality generally compares favourably to comparable U.S. deals.
•
A supportive economic backdrop over the last several years has much to do with the unblemished
credit history, however the influences of very conservative consumer borrowing practices and
prudent transaction structures cannot be underestimated.
•
Canadian asset-backed spreads have ebbed and flowed with movements in the broader credit
market, and have not had to contend with a lasting spread back-up due to a negative credit related
event. Nevertheless, market sentiment remains challenged and risk perceptions are elevated,
resulting in some compelling relative value opportunities.
•
The one exception to the favourable performance was the arbitrage-CDO segment of the ABCP
market. Due to the sudden and dramatic drying-up of liquidity in the short-end of the market,
issuers were unable to roll their maturing commercial paper. The absence of robust liquidity
facilities has resulted in a situation where investors will have their ABCP restructured into term
FRNs, thereby technically avoiding asset liquidations and default.
Exhibit 4: ABCP and Term Net New Issue Volume; (C$ Billion)
25
20
ABCP
15
10
Term
5
0
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Oct-07
-5
Source: DBRS
Maturity – a well-established legal, regulatory and accounting backdrop
•
The concept of a true sale on a bankruptcy remote basis was tested and affirmed in the 1990’s after
the insolvency of a national department store chain, Eaton’s, which had an active credit card
securitization program.
•
Noteholders of Eaton Credit Card Trust were repaid in full notwithstanding an insolvency of the
retailer. Just as importantly, the courts acknowledged the bankruptcy remote nature of the assets
and allowed for the securitization to continue through the winding-up of Eaton’s without any
interference.
5 Global Credit Research, Canada
Credit Comment
January 31, 2008
Exhibit 5: 2007 (a) Term/ABCP Asset Makeup; (b) Term Asset Makeup/Growth; (C$ Billion)
Ins. Res
Mort.
3%
Personal
Non- CDO
Credit
2%
Conv.
7% Equip.
Res Mort.
Finance
4%
Trade
4%
Rec.
4%
Franchise
2%
Conv.
Res Mort.
9%
Floorplan
3%
25
20.1
20
10.0 10.1
10
5.4
Auto
28%
7.1
5.6
5.3
'01
'02
7.0
5
0
CMBS
14%
Cards
18%
13.2
15
'99
'00
'03
Auto Loans / Leases
Cards
Lines of Credit
Residential Mortgages
Other
2%
'04
'05
'06
'07
CMBS
Equipment
Other
Reverse Mortgages
Source: DBRS, RBC Capital Markets
Key asset classes – an overview
Autos
Assets and outstanding issues
•
Auto ABS is the largest asset class in the Canadian term ABS sector.
•
All three auto sub-asset classes are represented – retail loans, leases and wholesale dealer floorplan
loans.
•
Currently there are five issuers and the current outstanding ABS bonds by series are summarized in
the table below.
Exhibit 6: Autos – Assets, issuers and deals
Asset Type
Retail Loans
($MM)
Chrysler
(WAT / CRAFT)
*2004-A: $23
Ford
(FFAST)
GMAC
(CCARAT)
2005-1: $180MM
Nissan
(NIF-T)
2006-1: $517MM
2006-2: $422MM
2007-1: $752.4
2005-1: $221.3
Retail Leases
($MM)
Wholesale / Dealer
Floorplan Loans
($MM)
2006-1: $633
**2003-1: $300
2006-1: $208
2007-1: $900
2006-2: $624
2006-3: $260
Source: RBC Capital Markets; *WAT; **CRAFT
6 Global Credit Research, Canada
Credit Comment
January 31, 2008
Exhibit 7: Key contract characteristics by asset sub-class
Contract
Characteristics
Obligors
Retail Loans
Consumers
36 / 48 / 60 mths
Term
Retail Leases
Consumers
36 / 48 mths
Wholesale / Dealer
Floorplan Loans
Auto Dealers
Due upon sale of
vehicle inventory;
advances generally
required if vehicle not
sold starting at 90 to
180 days
small 72 mth amount
small 60 mth
amount
Average Life
2 years
2 years
45 days
Geography
Concentrations in
largest provinces
Ontario, Quebec and
Alberta
Concentrations in
largest provinces
Ontario, Quebec
and Alberta
Concentrations in
largest provinces
Ontario, Quebec and
Alberta
Rate
Fixed rate contracts
are discounted to
yield a market rate
Fixed rate contracts Floating rate,
are discounted to
typically Prime based
yield a market rate plus a spread
New / Used Vehicles
Primarily new
Primarily new
Credit Quality of
Obligor
Concentrated in the
Concentrated in the
highest categories
highest categories per
per company
company rankings
rankings
Concentrated in the
highest categories per
company rankings
Payment Frequency
Monthly and biweekly
Monthly
On average between
30% to 40% monthly
payment rate
Payment Amount
Typically monthly or
bi-weekly even
amounts; nominal
amount of balloons
Monthly even
Depends on portfolio
amounts with a
residual amount at of accounts
maturity of contract
Payment Method
Pre-Authorized
Payment (greater
than 90%)
Pre-Authorized
Payment (greater
than 90%)
Primarily new
Electronic Funds
Transfer
Source: RBC Capital Markets
Typical structure - public issues
•
While the assets amortize on a monthly basis and are subject to prepayments, the public ABS bond
structure in Canada for auto securitization is bullet bonds.
•
Typically the maturities are 1, 2 and 3 year fixed rate bonds for retail and lease assets and 2, 3 and 5
year fixed or floating rate bonds for wholesale assets.
•
For retail and lease structures, there is a conduit companion bond that is available for the
refinancing of each public bond at maturity. For wholesale structures, there is an accumulation
account that typically starts 5 to 6 months prior to the maturity of each bond and accumulates cash
to repay the bonds holders at maturity.
•
To date, all Canadian auto ABS transactions have used a bullet bond structure with the exception of
Windsor Auto Trust 2004-A (WAT 2004-A), which uses a scheduled amortizing bond structure for
the public ABS bond.
•
The scheduled amortizing bond market or the pass-through bond market is not as developed in
Canada and therefore, the size of this market tends to be limited.
7 Global Credit Research, Canada
Credit Comment
January 31, 2008
Issuance / performance data
Exhibit 8: Typical issue volumes
Auto
Company
GMAC
Chrysler
Chrysler
Ford
Nissan
Issuer
CCARAT
WAT
CRAFT
FFAST
NIF-T
Asset Class
Frequency of Issue
Typical Issue Volume
Auto Loans
Auto Loans
Wholesale
Wholesale
Auto Leases
Twice a year
Once a year
As bonds mature
As bonds mature
Once a year
$600MM - $700MM ABS bonds
$300MM - $400MM
$200MM - $500MM
$200MM - $600MM
$500MM – $600MM
Exhibit 9: Net Loss Ratio (where data are available)
Oct-07
Sep-07
Aug-07
Jul-07
Jun-07
May-07
NIF-T
2005-1
NIF-T
2006-1
CCARAT
2004-2
CCARAT
2005-1
CCARAT
2006-1
CCARAT
2006-2
CCARAT
2007-1
WAT
2003-A
WAT
2004-A
CRAFT
2003-1
0.24%
0.16%
0.16%
0.12%
0.16%
0.20%
0.20%
0.16%
0.16%
0.12%
0.12%
0.12%
0.21%
0.19%
0.07%
0.08%
0.16%
0.15%
0.25%
0.13%
0.14%
0.18%
0.15%
0.09%
0.09%
0.12%
0.11%
0.15%
0.08%
0.11%
0.25%
0.24%
0.32%
0.27%
0.13%
0.20%
0.19%
0.22%
0.21%
0.11%
0.11%
0.05%
0.33%
0.28%
0.20%
0.25%
0.31%
0.18%
0.63%
0.62%
0.61%
0.59%
0.57%
0.57%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
Exhibit 10: Delinquency Ratio (where data are available)
CCARAT
2004-2
0.10%
0.11%
0.08%
0.10%
0.06%
0.05%
Oct-07
Sep-07
Aug-07
Jul-07
Jun-07
May-07
CCARAT
2005-1
0.13%
0.09%
0.09%
0.10%
0.06%
0.03%
CCARAT
2006-1
0.08%
0.07%
0.06%
0.07%
0.05%
0.05%
CCARAT
2006-2
0.18%
0.14%
0.16%
0.15%
0.13%
0.11%
CCARAT
2007-1
0.11%
0.08%
0.07%
0.06%
0.08%
0.04%
Exhibit 11: Residual Loss Ratio (Lease)
Oct-07
Sep-07
Aug-07
Jul-07
Jun-07
May-07
NIF-T 2005-1
7.10%
6.54%
4.05%
3.66%
3.54%
2.64%
NIF-T 2006-1
0.45%
0.32%
0.18%
-0.44%
-0.29%
0.03%
CRAFT 2003-1
36.77%
33.86%
35.34%
35.29%
35.91%
40.10%
FAST 2006-1
47.25%
42.87%
56.93%
51.80%
49.50%
53.67%
Exhibit 12: Payment Yield (Wholesale)
Oct-07
Sep-07
Aug-07
Jul-07
Jun-07
May-07
Source: DBRS
8 Global Credit Research, Canada
Credit Comment
January 31, 2008
Credit Card Receivables
Asset Composition
•
Credit Card ABS are backed by revolving pools of credit card receivables originated by a number
of entities operating in Canada, the majority of which are banks.
•
Each entity has its own issuing trust for the credit card accounts that they maintain. The trusts hold
the receivables and the sponsoring entity has the ability to designate additional receivables into the
trust from time to time.
•
The receivables comprise MasterCard, Visa and/or retail credit card accounts originated by the
sponsor.
•
The major Canadian banks along with a few subsidiaries of international banks and local retailers
(Canadian Tire and PC Financial) have been active in issuing credit card ABS.
Master Trust Structure
•
Credit Card ABS in Canada use a Master Trust structure similar to that used in the U.S. The trust
holds an ownership interest in a revolving pool of credit card receivables and issues bullet notes
from time to time backed by a percentage share of those receivables.
•
Additional receivables may be sold into the trust from time to time to maintain a specified
allocation of principle respective of the bonds.
•
Credit enhancement is provided by any combination of subordination, over-collateralization and
cash reserve accounts. Subordinate notes are issued at the same time as the senior notes they
support as there are no de-linked structures yet in Canada.
•
Prior to the scheduled maturity of a bullet note, the trust must deposit all payments received in
respect of principal and interest and accumulate them in a cash account so that sufficient balance is
available to retire the note at its maturity.
•
In the event that not enough cash is available, the applicable series will enter an amortization period
in which the overdue bullet note will amortize and all cash received will be applied to pay down the
notes in order of seniority.
•
A number of other performance measures may also trigger amortization including net excess
spread, payment rate and charge-offs.
Card Issuer Trusts:
Canadian Subsidiaries of U.S. Financial Services Institutions
•
•
A number of U.S. institutions are active issuers in the credit card securitization market. Some
examples include:
o
Citibank (Broadway Credit Card Trust),
o
MBNA (Gloucester Credit Card Trust) and
o
Capital One (Algonquin Credit Card Trust).
o
JP Morgan (SCORE Credit Card Trust – formerly a Sears Canada portfolio)
Each issues through its own single seller trust typically on an annual basis.
RBC – Golden Credit Card Trust
•
RBC is the largest bank in Canada as measured by assets and market capitalization. It also has a
significant presence in the U.S. and select international markets.
TD Securities – York Receivables Trust
•
TD Bank Financial Group is one of the six largest Canadian banks.
Canadian Imperial Bank of Commerce – CARDS TRUST / CARDS II TRUST
9 Global Credit Research, Canada
Credit Comment
January 31, 2008
•
CIBC is one of the six largest Canadian banks.
National Bank – Canadian Credit Card Trust
•
National Bank is the smallest of Canada’s six large banks
Canadian Tire Financial Services – Glacier Credit Card Trust
•
Canadian Tire is a leading Canadian general merchandise retailer.
•
Canadian Tire Financial Services offers a variety of financial products, primarily branded credit
cards and also markets a variety of insurance and warranty products.
PC Financial – Eagle Credit Card Trust
•
Loblaw Companies Limited is Canada's largest food distributor and a leading provider of general
merchandise products, drugstore and financial products and services, operating across the country.
•
Loblaw operates PC Financial, a financial services business segment offering core banking,
MasterCard, insurance, and a loyalty points program.
Exhibit 13: Deal Descriptions
Issuance Trust
Seller
Net Spread Trigger
Gloucester
Broadway
Algonquin
Glacier
Eagle
Golden
CARDS II
CCCT
York
MBNA Canada
Citibank
Capital One
Canadian Tire
PC Financial
RBC
CIBC
National Bank
TD Bank
0.00%
0.0%
0.0%
2.0%
0.0%
2.0%
2.0%
2.5%
0.0%
Payment Rate Trigger
N/A
N/A
N/A
8-10%
N/A
10%
N/A
10%
10%
Charge-Off Trigger
Minimum Seller Interest (%
of Ownership Inerest)
N/A
N/A
N/A
10.00%
N/A
N/A
N/A
N/A
N/A
AAA Portion
A Portion
105
107
105
108
107
107
107
107
107
86.0%
91.0%
79.5%
94.5%
93.0%
95.0%
94.5%
95.0%
5.5%
N/A
3.5%
95.5%
N/A
2.0%
2.8%
2.0%
3.5%
4.5%
3.0%
2.8%
3.0%
N/A
5.0%
10.0%
BBB Portion
14.0%
4.0%
10.5%
Cash Reserve Account
1.25%
1.50%
2.50%
N/A
0.00%
Not funded
Not funded
Not funded
Not funded
N/A
N/A
N/A
5.5%
N/A
N/A
N/A
N/A
N/A
Issue Volume (2004-2007)
$1,700
$1,450
$1,500
$1,560
$500
$2,400
$4,280
$756
$0
Frequency of Issue
Transaction Size
Annually
2-3 years
Annually
Annually
Overcollaterlization
Annually
Bi-Annually
$500 - $1,000 million
No recent issues No recent issues No recent issues
Source: RBC Capital Markets. With the exception of Glacier Credit Card Trust, all the trusts listed above must maintain a certain percentage of cash in a reserve
account based on the level of excess spread in the transaction. More information can be found in each trust's respective prospectus.
10 Global Credit Research, Canada
Credit Comment
January 31, 2008
Exhibit 14: Credit Card Performance Data
Payment Rates
1999
2000
2001
2002
2003
2004
2005
Algonquin CCT
Broadway CCT
Gloucester CCT
2006
2007
9.0%
9.9%
14.6%
15.8%
17.5%
15.2%
12.8%
12.9%
13.7%
13.1%
13.9%
14.7%
15.0%
15.2%
Glacier CCT
22.3%
21.2%
23.1%
21.5%
22.6%
23.4%
23.5%
27.8%
25.0%
SCORE
23.2%
23.7%
25.1%
20.2%
16.6%
16.3%
16.2%
18.1%
17.7%
RBC - Golden
46.1%
42.4%
39.0%
38.9%
38.4%
38.7%
39.4%
36.7%
37.0%
37.9%
38.7%
39.2%
39.2%
40.6%
41.9%
41.6%
42.0%
BMO - Master
Toronto Dominion - York
37.7%
38.1%
38.2%
40.6%
42.5%
42.8%
43.6%
CIBC - CARDS
40.0%
39.1%
39.4%
42.0%
41.5%
43.0%
43.7%
42.7%
41.9%
National (CCCT)
Eagle CCT
29.9%
30.3%
27.5%
26.2%
27.4%
26.5%
24.8%
24.2%
43.8%
24.7%
43.1%
Net Losses
1999
2000
2001
2002
2003
2004
2005
2006
2007
Algonquin CCT
Broadway CCT
Gloucester CCT
4.9%
4.5%
4.3%
3.4%
5.5%
4.8%
4.5%
3.2%
3.6%
3.9%
4.2%
4.4%
4.7%
4.4%
4.5%
Glacier CCT
6.0%
5.8%
4.7%
5.1%
5.8%
5.6%
6.1%
6.1%
5.7%
SCORE
2.7%
3.4%
3.9%
3.5%
3.1%
3.6%
3.1%
2.9%
3.2%
RBC - Golden
1.3%
1.7%
1.7%
1.7%
1.6%
2.0%
2.3%
2.3%
BMO - Master
1.9%
2.4%
2.2%
2.2%
2.1%
2.0%
1.9%
2.2%
Toronto Dominion - York
2.8%
3.3%
3.2%
2.8%
2.8%
2.1%
2.1%
CIBC - CARDS
3.1%
3.3%
3.5%
3.6%
3.6%
3.4%
3.5%
3.1%
3.6%
3.1%
3.9%
3.9%
4.1%
4.1%
3.5%
4.3%
3.6%
2000
2001
2002
2003
2004
National (CCCT)
Eagle CCT
Yield
1999
2005
2006
2007
14.1%
14.9%
15.5%
16.6%
17.7%
17.7%
17.4%
Algonquin CCT
Broadway CCT
Gloucester CCT
14.8%
15.7%
15.1%
17.6%
19.2%
20.3%
22.3%
21.6%
Glacier CCT
22.3%
20.6%
20.8%
17.6%
17.5%
16.8%
16.6%
18.6%
15.9%
SCORE
22.2%
23.5%
20.3%
16.7%
17.1%
16.4%
16.8%
17.7%
19.3%
RBC - Golden
14.2%
13.6%
13.3%
13.2%
12.9%
13.1%
13.7%
13.6%
BMO - Master
15.2%
15.6%
16.8%
18.8%
18.8%
19.5%
20.4%
21.2%
Toronto Dominion - York
19.9%
19.3%
19.8%
20.0%
20.5%
20.7%
21.1%
CIBC - CARDS
16.7%
16.8%
16.9%
17.4%
17.1%
17.0%
17.3%
19.5%
19.3%
18.9%
18.9%
18.5%
18.6%
17.9%
19.3%
18.4%
National (CCCT)
Eagle CCT
19.2%
Source: DBRS
Equipment Receivables and Wholesale Loans
•
Equipment ABS comprises approximately 7% of all non-affected multi-and-single-seller trusts in
the Canadian ABS sector.
•
Currently, there is only one public issuer in this space, Case New Holland (“CNH”), which operates
both a commercial and wholesale trust. These trusts are summarized in the table below.
11 Global Credit Research, Canada
Credit Comment
January 31, 2008
Exhibit 15: CNH – Deals and sizes
Receivables Trust*
CNH CCRT
2004-1: $295MM
2005-1: $300MM
2006-1: $450MM
Wholesale Trust
CNH CCWT
2004-1: $162MM
2004-2 $189MM
2006-1: $190MM
Source: RBC Capital Markets; *data presents only the three most recent CNH CCRT deals
•
Other potential equipment ABS issuers include Caterpillar, Deere, GE, and CIT. Of these, only
Deere has previously accessed the Canadian term market, but has not done so since July 1997.
Exhibit 16: Key contract characteristics – CNH
Contract Characteristics
Obligors
Bullet Maturities
Geography
Rate
Payment Frequency
New/Used
Receivables Trust
Commercial – typically 80%
agricultural and 20% construction
6 / 24 months
Primarily concentrated in Ontario,
Quebec, Alberta, Saskatchewan
Variable – 3-month BA + spread
Fixed – disc. to yield market rate
Monthly, semi-annually, annually
50-60% new / 40-50% used
Wholesale Trust
Equipment dealers – typically 80%
agricultural, 12% construction, 8%
other
24 or 36 months
Primarily concentrated in Ontario,
Alberta, Saskatchewan, Manitoba
Typically prime-based + spread
Monthly – approx. 20%
70% new / 20% used / 10% other
Source: RBC Capital Markets
Typical Structure - Public ABS Bonds
•
The Canadian public ABS bond structure for equipment securitization comprise both fixed and
variable rate bullet bonds that typically mature in one and two years. These bonds are accompanied
by a conduit structure that repays principal on a monthly basis.
•
Wholesale trusts also comprise of both bullet bonds and a conduit, but both repay principal
monthly. For wholesale structures, there is an accumulation account that typically starts six months
prior to the maturity of each bond and accumulates cash to repay the bonds holders at maturity. To
date, all Canadian equipment ABS transactions have used a bullet bond structure.
Issuers and Issue Volumes
Exhibit 17: Performance Statistics
Cumulative Losses (Receivables)
Oct-07
Sep-07
Aug-07
Jul-07
Jun-07
May-07
Delinquencies (Receivables)
CCRT 2004-1 CCRT 2005-1 CCRT 2006-1 CCRT 2004-1 CCRT 2005-1 CCRT 2006-1
0.71%
0.61%
0.30%
1.01%
0.52%
0.27%
0.69%
0.65%
0.26%
0.97%
0.50%
0.20%
0.67%
0.63%
0.24%
1.17%
0.41%
0.20%
0.68%
0.62%
0.22%
0.94%
0.36%
0.13%
0.66%
0.58%
0.19%
1.03%
0.39%
0.10%
0.62%
0.58%
0.16%
0.96%
0.27%
0.13%
Source: RBC Capital Markets
12 Global Credit Research, Canada
Payment
Rate
CCWT
19.75%
19.75%
22.39%
21.31%
22.78%
21.14%
Credit Comment
January 31, 2008
Commercial Mortgage Backed Securities
Description of Structure
•
CMBS in Canada are dominated by large conduit transactions that are comprised of fixed rate
commercial mortgages backed by a diverse pool of Canadian commercial properties.
•
Mortgages are originated by a number of different sellers, including the large Canadian banks, and
sold into an issuing trust. Typically three to five different originators participate in a transaction.
•
Only three single asset transactions have been completed to date. A small number of fusion
transactions have also been completed to date.
•
Collateral pools are well diversified by geography and industry and typically comprise loans with
five to ten-year terms and balloon payments at maturity.
Exhibit 18: Recent Deal Descriptions
Conduit Deal
MLFA - CAN 23 Conduit
REAL-T 2007-2
Schooner Trust 2007-8
MLFA - CAN 22 Conduit
REAL-T 2007-1
Schooner Trust 2007-7
MLFA - CAN 21 Conduit
REAL-T 2006-3
MLFA - CAN 20 Conduit
MLFA - CAN 23 Conduit
# of Loans
50
48
68
66
76
72
41
58
66
50
Recourse
Level
66.50%
66.80%
56.30%
67.30%
75.00%
55.10%
65.20%
62.30%
58.20%
66.50%
Cut-Off
Date LTV
67.88%
66.30%
68.30%
72.60%
64.30%
69.50%
68.60%
65.30%
69.50%
67.88%
Balloon
LTV
59.07%
53.70%
56.00%
62.60%
50.60%
55.30%
55.30%
50.10%
57.90%
59.07%
NCF
DSCR
1.55x
1.42x
1.40x
1.52x
1.45x
1.39x
1.39x
1.54x
1.47x
1.55x
WAL (yrs.)
28.3
27.1
27.8
28.3
26.2
26.2
27.6
25.1
28.3
28.3
AAA
Subordination*
20.00% / 12.50%
20.00% / 11.38%
20.00% / 11.75%
12.25%
11.00%
10.89%
11.63%
10.49%
11.88%
20.00% / 12.50%
Source: RBC Capital Markets; *Super Senior / Senior
Pass-through Structure
•
Canadian CMBS employ a pure pass-through structure whereby all scheduled and unscheduled
principal payments received are applied to pay down the notes. Principal payments are applied
sequentially based upon the seniority of the tranches.
•
Increases in credit enhancement and ratings upgrades will occur as a result of the paydown of the
senior bonds. Losses are applied in order of reverse seniority and serve to decrease the credit
support offered by the subordinate notes.
•
Investment grade bonds are sold publicly while non-investment grade bonds are offered through
private transactions.
•
Excess interest is structured as an interest only (IO) certificate, which is either sold publicly or
privately. In recent transactions, the IO certificate has been split into two components - a planned
amortization class (PAC IO) and an excess interest class comprising of any excess interest
remaining in the deal (Support IO).
•
Recent transactions have employed a super senior structure to further enhance AAA rated bonds,
similar to CMBS transactions in the United States. Credit enhancement for super senior bonds is
typically in the 20% range.
Commercial Mortgage Originators and CMBS Issuance Trusts
Canadian Bank Programs and Canadian Subsidiaries of U.S. Mortgage Underwriters
•
A number of U.S. Mortgage originators are active in the Canadian market either through their own
trusts or selling into 3rd party trusts. Currently, Merrill Lynch and Colliers are expected to continue
commercial mortgage underwriting activity.
13 Global Credit Research, Canada
Credit Comment
January 31, 2008
o
Colliers International Mortgage Corporation issues through Real Estate Asset Liquidity
Trust, Schooner Trust
o
Merrill Lynch Financial issues through Merrill Lynch Financial Assets
o
RBC issues through Real Estate Asset Liquidity Trust
o
TD issues though Schooner Trust
o
CIBC issues through ClareGold Trust
o
Laurentian Bank issues through Schooner Trust. Laurentian Bank of Canada is a financial
institution based in the province of Quebec. It operates the third largest branch network in
Quebec.
o
First National Financial issues through Real Estate Asset Liquidity Trust and Schooner
Trust. First National Financial is a non-bank provider of single family residential
mortgages and commercial mortgages in Canada
Exhibit 19: Issue Volumes
Issuer Trust
Credit Enhancement
Sponsor
Assets
Frequency (issues /year)
Issue Volume
Total Volume 2004-2007
Merrill Lynch
Financial Assets
Merrill Lynch
3
$5,507.64MM
Solar / Schooner Real Estate Asset
Trust
Liquidity Trust
Typically 10% to 13% enhancement to AAA
TD
RBC
Multi-Seller Conduit
3
3
$400-$600MM
$3,571.99MM
$3,470.86MM
ClareGold
Trust
CIBC
2
$300-$500MM
$854.90MM
Source: RBC Capital Markets
Performance
•
CMBS performance in Canada has been very strong. Loans have been underwritten to strict
standards and the performance of the collateral has been very good so far. Delinquency ratios have
remained low and only a small number of loan level defaults have been realized to date.
Exhibit 20: Merrill Lynch Financial Assets Deal Descriptions
Deal Name
MLFA 2001-CAN5
MLFA 2001-CAN6
MLFA 2002-CAN7
MLFA 2002-CAN8
MLFA 2003-CAN9
MLFA 2003-CA10
MLFA 2003-CA11
MLFA 2004-CA12
MLFA 2004-CA14
MLFA 2005-CA15
MLFA 2005-CA16
MLFA 2005-CA17
MLFA 2006-CA18
MLFA 2006-CA19
MLFA 2006-CA20
MLFA 2007-CA21
MLFA 2007-CA22
MLFA 2007-CA23*
% Loans
Watchlist
22.73
4.97
1.17
17.78
72.54
10.95
19.57
21.75
3.11
0.96
4.93
1.81
6.61
4.09
15.07
3.87
0.41
0
Original
Subordination (%)
16.75
16.75
16.756
14.75
14.76
13.878
13.534
13.012
10.733
10.521
10.014
10.29
11.64
11.625
11.875
11.625
12.25
20
Current
Subordination
(%)
20.356
21.427
22.17
23.512
29.572
15.842
18.364
14.095
11.275
11.367
10.544
10.73
12.038
11.946
12.347
11.824
12.338
20.066
Source: RBC Capital Markets * Credit enhancement is to Super Senior AAA Notes
14 Global Credit Research, Canada
% of Loans
Defeased
1.64
4.18
10.47
10.37
6.84
5.08
9.39
4.58
0
4.83
11.02
0.94
1.61
0
1.65
0
0
0
Credit Comment
January 31, 2008
Exhibit 21: Solar / Schooner Trust Deal Descriptions
Deal Name
STST 2000-1
STST 2001-1
STST 2002-1
STST 2003-CC1
SCSC 2004-CCF1
SCSC 2004-CF2
SCSC 2005-3
SCSC 2005-4
SCSC 2006-5
SCSC 2006-6
SCSC 2007-7
SCSC 2007-8*
% Loans
Watchlist
5.38
9.21
14.95
12.67
10.42
0.64
-
Original
Subordination (%)
30.203
17
14.5
14.753
14.011
13.521
10.523
10.261
10.894
10.952
10.892
20.001
Current Subordination
(%)
34.867
28.284
18.767
17.966
15.777
14.404
11.203
10.8
11.348
11.242
11.071
20.112
% of Loans
Defeased
0
0
0
0
0
0
0
0
0
0
0
0
Exhibit 22: Real Estate Asset Liquidity Trust Deal Descriptions
Deal Name
REALT 2004-1
REALT 2005-1
REALT 2005-2
REALT 2006-1
REALT 2006-2
REALT 2006-3
REALT 2007-1
REALT 2007-2*
% Loans
Watchlist
Original
Subordination (%)
Current Subordination
(%)
% of Loans
Defeased
20.16
13.68
5.11
1.04
-
12.01
11.78
9.75
9.81
10.22
10.49
11
20
13.1
12.667
10.228
10.3
10.506
10.739
11.152
20.159
0
0
0
0
0
0
0
0
Original
Subordination (%)
8.375
10.3
Current Subordination
(%)
10.053
10.401
% of Loans
Defeased
2.04
0
Exhibit 23: ClareGold Trust Deal Descriptions
Deal Name
CLRT 2006-1
CLRT 2007-2A
% Loans
Watchlist
10.49
4.33
Source: RBC Capital Markets; * Credit enhancement is to Super Senior AAA Notes
15 Global Credit Research, Canada
Credit Comment
January 31, 2008
Required Disclosures
This product constitutes a compendium report (covers six or more subject companies). As such, RBC Capital Markets chooses to
provide specific disclosures for the subject companies by reference. To access current disclosures for the subject companies,
clients should refer to <http://www7.rbccm.com/GLDisclosure/PublicWeb/DisclosureLookup.aspx?EntityID=1> or send a request to
RBC CM Research Publishing, P.O. Box 50, 200 Bay Street, Royal Bank Plaza, 29th Floor, South Tower, Toronto, Ontario M5J
2W7.
Explanation Of RBC Capital Markets Ranking System For Global Credit Research (Canada)
(Note: Our risk-reward assessment is based, in part, on a comparison of the spread of a particular bond to the spread interpolated
by a credit ratings-derived relative value curve for a given maturity.)
Top Pick (TP): Represents the analyst’s best ideas in the Outperform category; provides best relative risk-reward ratio and/or is
expected to significantly outperform the RBC CM Canadian corporate bond index over 12 months.
Outperform (O): Provides superior relative risk-reward ratio and/or is
R B C C a p it a l M a rk e t s L im it e d
expected to materially outperform the index over 12 months.
IB S e rv ./ P a s t 12 M o s .
Index Perform (IP): Provides an adequate relative risk-reward ratio and/or
R a n k in g
C o u n t P e rc e n t
C o u n t P e rc e n t
the spread performance is expected to be in line with index average over
[T P /O]
53
25.24
33
62.26
B UY
12 months.
[IP ]
118
56.19
72
61.02
H O LD
Underperform (U): Provides an inferior relative risk-reward ratio and/or
[U]
39
18.57
19
48.72
S E LL
the spread performance is expected to be materially below the index over
12 months.
Risk Qualifiers: Average Risk: Volatility and risk expected to be comparable to universe of issuers followed; average revenue
and earnings predictability; no significant cash flow/financing concerns over coming 12-24 months; and/or fairly liquid.
Above Average Risk: Volatility and risk expected to be above universe of issuers followed; below average revenue and earnings
predictability; may not be suitable for a significant class of individual fixed-income investors; may have negative cash flow; and/or
low market liquidity.
Speculative: Risk consistent with venture capital; potential low market liquidity; potential balance sheet concerns.
For purposes of disclosing ratings distributions, regulatory rules require member firms to assign all rated stocks to one of three
rating categories--Buy, Hold/Neutral, or Sell--regardless of a firm's own rating categories. Although RBC Capital Markets' stock
ratings of Top Pick/Outperform, Sector Perform and Underperform most closely correspond to Buy, Hold/Neutral and Sell,
respectively, the meanings are not the same because our ratings are determined on a relative basis (as described above).
Analyst Certification
All of the views expressed in this report accurately reflect the personal views of the responsible analyst(s) about any and all of the
subject securities or issuers. No part of the compensation of the responsible analyst(s) named herein is, or will be, directly or
indirectly, related to the specific recommendations or views expressed by the responsible analyst(s) in this report.
Dissemination of Research
RBC Capital Markets endeavours to make all reasonable efforts to provide research simultaneously to all eligible clients, having
regard to local time zones in overseas jurisdictions. RBC Capital Markets' equity research is posted to our proprietary websites to
ensure eligible clients receive coverage initiations and changes in rating, targets and opinions in a timely manner. Additional
distribution may be done by the sales personnel via email, fax or regular mail. Clients may also receive our research via third party
vendors. Please contact your investment advisor or institutional salesperson for more information regarding RBC Capital Markets
research.
Conflicts Disclosure
RBC Capital Markets Policy for Managing Conflicts of Interest in Relation to Investment Research is available from us on request.
To access our current policy, clients should refer to http://www.rbccm.com/cm/file/0%2C%2C63022%2C00.pdf or send a request to
RBC CM Research Publishing, P.O. Box 50, 200 Bay Street, Royal Bank Plaza, 29th Floor, South Tower, Toronto, Ontario M5J
2W7. We reserve the right to amend or supplement this policy at any time.
Important Disclosures
The analyst(s) responsible for preparing this research report received compensation that is based upon various factors, including
total revenues of the member companies of RBC Capital Markets and its affiliates, a portion of which are or have been generated
by investment banking activities of the member companies of RBC Capital Markets and its affiliates. The author(s) of this report
are employed by RBC Dominion Securities Inc., a securities broker-dealer with principal offices located in Toronto, Canada.
Additional Disclosures
RBC Capital Markets is the business name used by certain subsidiaries of Royal Bank of Canada, including RBC Dominion Securities Inc., RBC Capital Markets
Corporation, Royal Bank of Canada Europe Limited and Royal Bank of Canada - Sydney Branch. The information contained in this report has been compiled by RBC
Capital Markets from sources believed to be reliable, but no representation or warranty, express or implied, is made by Royal Bank of Canada, RBC Capital Markets, its
affiliates or any other person as to its accuracy, completeness or correctness. All opinions and estimates contained in this report constitute RBC Capital Markets'
judgement as of the date of this report, are subject to change without notice and are provided in good faith but without legal responsibility. Nothing in this report
16 Global Credit Research, Canada
Credit Comment
January 31, 2008
constitutes legal, accounting or tax advice or individually tailored investment advice. This material is prepared for general circulation to clients and has been prepared
without regard to the individual financial circumstances and objectives of persons who receive it. The investments or services contained in this report may not be suitable
for you and it is recommended that you consult an independent investment advisor if you are in doubt about the suitability of such investments or services. This report is
not an offer to sell or a solicitation of an offer to buy any securities. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss
of original capital may occur. RBC Capital Markets research analyst compensation is based in part on the overall profitability of RBC Capital Markets, which includes
profits attributable to investment banking revenues. Every province in Canada, state in the U.S., and most countries throughout the world have their own laws regulating
the types of securities and other investment products which may be offered to their residents, as well as the process for doing so. As a result, the securities discussed in
this report may not be eligible for sale in some jurisdictions. This report is not, and under no circumstances should be construed as, a solicitation to act as securities
broker or dealer in any jurisdiction by any person or company that is not legally permitted to carry on the business of a securities broker or dealer in that jurisdiction. To
the full extent permitted by law neither RBC Capital Markets nor any of its affiliates, nor any other person, accepts any liability whatsoever for any direct or consequential
loss arising from any use of this report or the information contained herein. No matter contained in this document may be reproduced or copied by any means without
the prior consent of RBC Capital Markets.
Additional information is available on request.
To U.S. Residents: This publication has been approved by RBC Capital Markets Corporation, which is a U.S. registered broker-dealer and which accepts responsibility
for this report and its dissemination in the United States. Any U.S. recipient of this report that is not a registered broker-dealer or a bank acting in a broker or dealer
capacity and that wishes further information regarding, or to effect any transaction in, any of the securities discussed in this report, should contact and place orders with
RBC Capital Markets Corporation.
To Canadian Residents: This publication has been approved by RBC Dominion Securities Inc. Any Canadian recipient of this report that is not a Designated Institution
in Ontario, an Accredited Investor in British Columbia or Alberta or a Sophisticated Purchaser in Quebec (or similar permitted purchaser in any other province) and that
wishes further information regarding, or to effect any transaction in, any of the securities discussed in this report should contact and place orders with RBC Dominion
Securities Inc., which, without in any way limiting the foregoing, accepts responsibility for this report and its dissemination in Canada.
To U.K. Residents: This publication has been approved by Royal Bank of Canada Europe Limited ('RBCEL') which is authorized and regulated by Financial Services
Authority ('FSA'), in connection with its distribution in the United Kingdom. This material is not for distribution in the United Kingdom to private customers, as defined
under the rules of the FSA. RBCEL accepts responsibility for this report and its dissemination in the United Kingdom.
To Persons Receiving This Advice in Australia: This material has been distributed in Australia by Royal Bank of Canada - Sydney Branch (ABN 86 076 940 880,
AFSL No. 246521). This material has been prepared for general circulation and does not take into account the objectives, financial situation or needs of any recipient.
Accordingly, any recipient should, before acting on this material, consider the appropriateness of this material having regard to their objectives, financial situation and
needs. If this material relates to the acquisition or possible acquisition of a particular financial product, a recipient in Australia should obtain any relevant disclosure
document prepared in respect of that product and consider that document before making any decision about whether to acquire the product.
To Hong Kong Residents: This publication is distributed in Hong Kong by RBC Investment Services (Asia) Limited, a licensed corporation under the Securities and
Futures Ordinance. This material has been prepared for general circulation and does not take into account the objectives, financial situation, or needs of any recipient.
Hong Kong persons wishing to obtain further information on any of the securities mentioned in this publication should contact RBC Investment Services (Asia) Limited at
17/Floor, Cheung Kong Center, 2 Queen's Road Central, Hong Kong (telephone number is 2848-1388).
®Registered trademark of Royal Bank of Canada. RBC Capital Markets is a trademark of Royal Bank of Canada. Used under license.
Copyright © RBC Capital Markets Corporation 2008 - Member SIPC
Copyright © RBC Dominion Securities Inc. 2008 - Member CIPF
Copyright © Royal Bank of Canada Europe Limited 2008
Copyright © Royal Bank of Canada 2008
17 Global Credit Research, Canada