Why Canadian institutions leverage US auto ABS market

TORONTO - 

The U.S. financial market might become an even more important catalyst for car sales in Canada, too.

As Canadian auto sales have been on the rise, two of the Big Six Canadian banks have turned to the U.S. term asset-backed securities (ABS) market for additional fuel, according to a report published on Monday by S&P Global Ratings.

As in the U.S., S&P Global Ratings pointed out that Canadian banks are a major source of auto financing for consumers. Additionally, analysts noted the re-emergence of captives, which has accelerated the availability of vehicle leases, has been driving strong Canadian auto sales over the past few years.

Not only are annual vehicle sales up, but S&P Global Ratings said in the report titled, Canadian Auto Lenders Are Taking ABS on a Road Trip Across the Border, that many consumers have been opting for a brand new car rather than used. S&P Global Ratings tabulated that about 81 percent of total vehicle sales in 2017 were for new models, representing approximately 2 million units sold.

Since offering its first issuance in 2016, the Bank of Nova Scotia (Scotiabank) has completed four U.S. cross-border auto loan ABS transactions through its Securitized Term Auto Receivables Trust (START). In 2017, Bank of Montreal (BMO) established its auto loan ABS program, Canadian Pacer Auto Receivables Trust (CPART), and has since issued two U.S. cross-border transactions.

Through these transactions, S&P Global Ratings explained Scotiabank and BMO are essentially funding Canadian dollar-domiciled auto loan receivables by issuing U.S. dollar notes, which are swapped back into Canadian dollars.

Both programs have been well-received in the U.S. auto ABS market, according to S&P Global Ratings.

“They have offered the banks relatively cost-effective funding levels, which may encourage other Canadian banks with established auto loan lending programs to enter the market,” analysts said.

“Several Canadian auto captive finance companies have also issued auto ABS transactions in both the U.S. and Canadian markets in recent years,” analysts added.

From a U.S. investor’s perspective, in addition to issuer diversification, S&P Global Ratings indicated Scotiabank’s START series and BMO’s CPART series offer an increase in spread, with equal or better auto loan receivables relative to those backing similar auto ABS from U.S.-domiciled sponsors.

“In addition, the collateral pools for their issued transactions were generally comparable to those of established U.S. auto captives and non-captives,” analysts said.

“The report published today compares their transaction pools with those of U.S. auto captives and non-captives based on credit quality, vehicle type, average loan terms, geographic distribution and other characteristics,” analysts added.

With the auto finance market “stabilizing,” according to the latest analysis from TransUnion, what could additional U.S. influence mean to Canadian auto financing?

“In S&P Global Ratings' view, if Canadian auto lenders ensure performance volatility in their managed portfolios does not creep into their securitized portfolios, cross-border auto ABS should keep cruising right along,” analysts said.

“Only a rating committee may determine a rating action and this report does not constitute a rating action,” they went on to say.

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