Evolution of Amortizing Asset Securitization - Securitization.Net

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New issue volumes and spreads reflect investor sentiment Revolving pools of short-term assets are easily structured to fund in the semi-annual pay bullet ABS market… …and their desirability is reflected in tight spreads 2 Table #1 demonstrates the depth of the market for semi-annual pay bullet ABS, in which issuance since 1997 has exceeded $11 billion. Each of the deals shown in table #1 was backed by a revolving pool of short-term assets, allowing the structure to remain efficient for the originator while satisfying the expectations of investors. Chart #1 shows how spreads are wider for Pride Trust, a monthly-pay pool of high quality mortgages written by HSBC Bank of Canada, than they are for Golden Credit Card Trust, a semi-annual pay pool of credit card receivables generated by the Royal Bank of Canada. It appears that structure dictates spreads to a large degree. Table #1 - Chronology of Semi-Annual Pay Bullet Bonds Backed by Revolving Assets Since 1997 Issue Originator Asset Class Amount Master Credit Card Trust Bank of Montreal Credit card receivables 2,000mm Canadian Credit Card Trust National Bank of Canada Credit card receivables 700mm Cards Trust Canadian Imperial Bank Credit card receivables 1,325mm of Commerce York Receivables Trust Toronto Dominion Bank Credit card receivables 1,125mm Sears Canada Receivables Trust Sears Canada Inc. Credit card receivables 600mm Trillium Credit Card Trust Bank of Nova Scotia Credit card receivables 940mm Canadian Residential Mortgage Canada Trustco Six-month mortgages 257mm Trust (CRMT) Mortgage Company Golden Credit Card Trust Royal Bank of Canada Credit card receivables 1,100mm Canadian Tire Receivables Trust Canadian Tire Acceptance Limited Credit card receivables 200mm Hollis Receivables Term Trust Bank of Nova Scotia Personal lines of credit 2,090mm Genesis Trust Canada Trustco Mortgage Company Personal lines of credit 1,820mm Note : Sears total is 925mm, 600mm of which has been completed since 1997 Chart #1 - Spread Comparison Between Monthly-Pay Amortizer and Semi- Annual Bullet 63 58 53 48 43 38 33 Pride Trust Golden Credit Card Trust November-99 January-00 March-00 CIBC World Markets April 10, 2000
The challenge for structurers has been to satisfy the needs of both the originator and the investor • Cost efficiency versus cash flow certainty and liquidity Recent structures reflect the investor preference for semi-annual pay bullets 3 The structural evolution of funding of longer-term assets is shown in table #2. The structures have continued to reflect the trade-off between the needs of the originator, which can be summarized as “cost efficiency” and those of the investors, which boil down to “cash flow certainty and liquidity”. Table #2 – Structural Evolution of Monthly Amortizing Structures Pay-Through with Accumulation Accounts – Ace Trust (1993) In this structure the term note repayment occurred according to a fixed amortization schedule, and a cash reserve account collected excess cash flow from assets. Term debt did not amortize until short-term debt was repaid. The pay-through structure gave investors certainty as to the timing of cash flows but was expensive for the originator who assumed the prepayment risk. Pass-Through Notes – Fairview Trust (1994) In the pass-through structure the prepayment risk was passed on to the investor. Excess cash was used to repay short-term debt, then the term notes. The defining feature was the absence of cash buildup in the accumulation account making the structure efficient for the originator. Liquidity was limited for this type of structure given the small group of investors willing to assume the uncertain timing of cash flows. Sequential-Pass-through Notes – Case Canada Receivables Inc. (1995) A series of three issues of senior and subordinated co-ownership certificates, each of which was effectively a pass-through note. The cash accumulation problem was remedied for the originator but investors bore some of the prepayment risk. Pay-Through/Pass-Through – Pride Trust (1999) This issue amounted to a hybrid of the two structures with 70% of the pool funded with pay-through notes and the remaining 30% funded with a pass-through offering. The pay-through notes marketed to investors were monthly-pay amortizing notes. The fixed amortization schedule for the pay-through notes was protected from prepayments by the pass-through notes which absorbed all incremental principal payments until they were paid down, and a swap with a “AA” counter party. As the frequency of semi-annual pay bullet ABS issuance has increased over the last two years, capacity for monthly-pay amortizing structures has contracted and spreads continue to be wide relative to the more liquid semi-annual pay bullet ABS issues. In order to return greater efficiency to the funding of longer-term monthly-pay amortizing assets, structures can be created that protect investors from prepayments and retire maturing semi-annual pay bullet bonds with asset-backed commercial paper. These structures maximize the portion of total funding that enjoys the liquidity of the bullet bond market and minimize the negative carry associated with the amortizing nature of the assets. One such example is the HART issue described in the next section. Structures such as HART should be as attractive to investors as the revolving pool semi-annual pay bullet ABS structures. Both are high quality (“AAA”) and will benefit from the increasing demand for highly rated semi-annual pay bullet bonds. Despite having the highest credit rating available, revolving semi-annual pay bullet ABS structures trade at a yield spread over Government of Canada benchmarks. This reflects a structuring premium that arises, at least in part, from the interest rate risk introduced by the presence of the early amortization mechanism required for a “AAA” rating. Longer-term monthly-pay amortizing structures cannot accommodate, nor do they require, early amortization. Accordingly, assuming identical credit quality as reflected by the identical ratings and the development of market liquidity at least equal to bank-originated, revolving pool semi-annual pay bullet ABS issues completed to date, it is plausible that these new semi-annual pay bullet structures could ultimately trade tighter than the revolving pool semi-annual pay bullets. CIBC World Markets April 10, 2000
Page 1: Canadian ABS/MBS Research www.cibcw
Page 5: This report is issued by (i) in Can

Evolution of Amortizing Asset Securitization - Securitization.Net

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