In response to the recent liquidity issues in the Canadian asset-backed commercial paper (ABCP) market, DBRS Limited (DBRS) has revised its ratings criteria for liquidity support in Canadian ABCP programs.
In an ABCP program, liquidity support typically takes the form of a commitment to lend to, or purchase assets or debt instruments of, an ABCP issuer in order to provide investors with assurance of timely payment of principal and interest.
Prior to DBRS’ recent revisions to its Canadian ABCP liquidity support criteria, DBRS could assign its highest ABCP credit rating to Canadian ABCP, having liquidity support that included the occurrence of a "general market disruption" as a condition precedent to a drawdown under the liquidity facility. The Office of the Superintendent of Financial Institutions Guideline B-5 — Asset Securitization defines a general market disruption as a disruption in the Canadian commercial paper market resulting in the inability of Canadian commercial paper issuers, including the ABCP issuer, to issue any commercial paper, and one where the inability does not result from a diminution in creditworthiness of the ABCP issuer or any originator or from a deterioration in the performance of the assets of the ABCP issuer.
The key revision to DBRS’ Canadian ABCP liquidity support criteria is that Canadian ABCP can no longer receive DBRS’ highest credit rating if the liquidity support for the ABCP contains a general market disruption clause as a condition precedent to a drawdown. Liquidity facilities that do not contain such a precondition to drawdown are commonly referred to in the ABCP market as "global-style liquidity" facilities.
The following is a summary of some of the other criteria in DBRS’ new "global liquidity standard" that are required to be met in order for Canadian ABCP to receive DBRS’ highest ABCP credit rating:
- the liquidity support must cover at least the face amount (including any interest) of all outstanding ABCP;
- prior to the issuance of the ABCP, the ABCP issuer must satisfy certain asset and liquidity tests;
- liquidity funding will be provided to the ABCP issuer if funds are required to pay maturing ABCP or any interest thereon or otherwise on the request of the ABCP issuer;
- same-day funding is required if a liquidity support provider receives notice of the funding request from the ABCP issuer prior to a specified time;
- liquidity support providers must be prescribed financial institutions meeting minimum credit rating standards; and
- events of default under the liquidity support are limited to the ABCP issuer’s failure to pay certain obligations or the ABCP issuer’s bankruptcy or insolvency.
On October 16, 2007, DBRS published a list of the Canadian ABCP issuers with ABCP rated by DBRS that are in compliance with this new global liquidity standard as of that date.