Canadian securitization 2000: Current trends and developments.

• Author: Fingerhut, Martin

If you were looking for two words to describe the current state of Canadian securitization, they would be Growth and Change.

1. INTRODUCTION

   If you were looking for two words to describe the current state of Canadian securitization, they would be Growth and Change.

   Outstanding asset-backed commercial paper grew from $41 billion at the end of 1998 to $53 billion at the end of 1999--and represented almost 50% of all non-government Canadian short-term debt. Outstanding term ABS grew from $8 billion to $13 billion, a record-breaking increase. All in all, Canadian ABS has increased at an annualized rate of 56% since October 1997.

   As to NHA mortgage-backed securities, 1999 saw an all time record of $13 billion in new issuance, up by 42% over the previous year. Outstanding MBS volume at yearend totaled $28 billion, up from $20 billion at the end of 1998. While a number of new corporate sellers did begin to securitize last year, Canada's significant ABS growth continued to be driven by banks and trust companies whose securitized assets grew from $27 billion to $36 billion at the end of 1999, amounting to more than 50% of the entire ABS market. We also saw growth in the volume of non-standard assets being securitized, such as mutual fund deferred sales charges, insurance premiums, and credit tenant lease payments.

   In addition to Growth, the other major theme this past year has been Change, or the promise of imminent Change.

   1999 saw the first public securitization of bank assets in the Canadian capital markets. Change was also seen in the nature of the assets being securitized. Personal lines of credit were securitized for the first time. And CIBC originated and securitized over $500 million of sub-prime residential mortgages.

   The accounting rules, however, did not change. The delay this time had more to do with waiting for the U.S. Financial Accounting Standards Board ("FASB") to complete its revisions to FAS 125 (now FAS 140), which we will likely adopt before the end of 2001, to create a harmonized Canadian version.

   One more Personal Property Security Act holdout-Newfoundland--joined Canada's modern personal property security regime in 1999, leaving only 2 common law jurisdictions--the Northwest Territories and Nunavut -- in the old document registration system.

   1999 also saw the ABS market welcome a new form of credit enhancement -- transactions are now being backed by financial guarantee insurance provided by off-shore special purpose insurance vehicles.

   Perhaps it is not surprising that the new Internet-based economy has already had a significant effect on the securitization industry, just as it has on most other industries. In the first place, new virtual lenders as well as traditional old economy lenders are beginning to securitize loans originated on the Web. It remains to be seen how PC to PC originated loans will perform as compared to the more traditional face to face variety. As well, the Web is being utilized by Wells Fargo to provide bond and collateral level information to Canadian CMBS investors for the first time.

   Growth and Change are two signs of a maturing market which promises to play an ever-increasing role in the process of raising funds on a cost-efficient basis and managing corporate Canada's balance sheets.

2. THE NEW $25,000 ARC FEE UNDER THE COMPETITION ACT

   After almost three years of proposals and discussions, the Competition Act and its Notifiable Transactions Regulations were finally amended on December 27, 1999 to exempt the basic securitization transaction from the Notifiable Transactions provisions. Under these provisions, certain transactions which exceed two monetary thresholds -- in terms of the size of the parties, and the size of the transaction -- cannot close before the Commissioner of Competition is given certain specified information, and the statutory waiting period passes. The process is commonly referred to as "merger prenotification", and is intended to allow the Competition Bureau to assess the competitive impact of these transactions. While traditional securitizations clearly raise no competitive issue, they often technically meet the threshold for notification, and most practitioners have made it a standard practice to apply for and obtain an Advance Ruling Certificate, or ARC, confirming that the pre-notification requirements do not apply.

   One of the proposed amendments to the competition legislation was to exempt securitization transactions from the pre-notification requirements, since they amounted to about 15% of all transactions examined by the Competition Bureau. The scope of the exemption was critical since a $25,000 ARC application fee was also to be introduced. Apart from this significant fee, each securitization is accompanied by a legal opinion to the effect that the transaction complies with all applicable legislation. To ensure the exemption was broad enough to avoid the fee and support their opinion, a working group of Toronto law firms that practise in the area was assembled to review the proposed exemption and make recommendations to the Competition Bureau for the purpose of expanding and clarifying its scope.

   A number of the working group's recommendations were adopted, and the exemption as enacted appears broad enough to cover most traditional securitizations of consumer and corporate receivables.

   It is important to note that the exemption may not extend to certain non-standard structured finance transactions. For example, in two transactions, involving the sale of leases together with the underlying leased equipment, the Competition Bureau has taken the position that the exemption...