On February 23, 2009, two initiatives were announced in the context of the Government of Canada's Extraordinary Financing Framework which supports financing for Canadian businesses and consumers. First, the Government launched a consultation on how best to implement the Canadian Secured Credit Facility ("CSCF"). Secondly, the Bank of Canada announced that it will seek the views of market participants on a new Term Purchase and Resale Agreement ("PRA") facility for private sector instruments.
Canadian Secured Credit Facility: The Government announced the creation of the CSCF as part of Canada's Economic Action Plan and allocated up to $12 billion of financing to eligible entities. The CSCF is being established to purchase term asset-backed securities ("ABS") backed by loans and leases on vehicles and equipment. The object of the CSCF is to help businesses and consumers access financing for these products.
The CSCF will be managed by the Business Development Bank of Canada ("BDC") and will be established pursuant to parameters which will be jointly developed by BDC and the Department of Finance. BDC is seeking views on the principles and preliminary parameters of the CSCF, including what structure would best facilitate the restarting of the term ABS market in Canada, how funds should be allocated among eligible participants and how purchases should be priced. Comments are invited to be made by March 6, 2009.
The announcement of the consultation process sets out certain principles and preliminary terms of the CSCF. One of the principles is that the CSCF is expected to generate positive returns for BDC in that financing will be provided on a commercial basis using market rates for securities of similar risk profile and liquidity characteristics. Additional principles are outlined to minimize the risk to Canadian taxpayers, including the establishment of credit standards, both on the participants in the market place and the assets being secured.
Eligible sponsors of ABS and originators of assets would include federally regulated financial institutions or special purpose entities managed by them, and may include, with the approval of the Minister of Finance, provincially regulated financial institutions or special purpose entities managed by them. Other sponsors or originators interested in participating must work with the Office of the Superintendent of Financial Institutions and/or other government agencies as appropriate to establish a plan to become subject to federal regulation. Individual loans and leases to be included in the programme must also meet certain criteria, including a minimum credit (or FICO) score.
It is proposed that, for ABS to be sold into the CSCF, the ABS must meet the following criteria:
- Canadian dollar denominated cash (i.e. not synthetic) ABS;
- backed by vehicle and equipment loans and leases; and
- AAA rated by at least two recognized credit rating agencies at the time of purchase.
The announcement sets out additional eligibility requirements that are being considered, including:
- minimum acceptable rating requirements on the ABS, sponsor, originator and servicer;
- robust monthly reporting requirements; and
- a mechanism for cost sharing between BDC and eligible participants of rating agency costs.
Term Purchase and Resale Agreement Facility: The Bank of Canada announced a new Term Purchase and Resale Agreement Facility for private sector instruments. The new facility will include eligible corporate bonds and will replace the existing Term Purchase and Resale Agreement Facility for private sector money market instruments. The views of market participants on this proposal were sought by the Bank through consultations conducted the week of February 23, 2009. Final details of the facility, including the schedule of operations to be conducted up to June 2009, will be announced following this consultation process.
The eligible securities for the facility transactions will consist of Canadian dollar denominated:
- banker's acceptances, promissory notes and commercial paper, including those of foreign issuers, with a minimum issuer credit rating of R1(low) by Dominion Bond Rating Service ("DBRS"), A-1(mid) by Standard and Poor's ("S&P") or P1 by Moody's Investors Service ("Moody's);
- asset-backed commercial paper of eligible programmes with a minimum of two credit ratings, at least two ratings that are either R1(high) by DBRS, A-1(high) by S&P, P1 by Moody's or F1+ by Fitch Ratings; and
- corporate bonds with a minimum long term issuer credit rating of A(low) by DBRS, A- by S&P or A3 by Moody's.
The facility will be transacted with eligible market participants on an indirect basis through primary dealers. Eligible indirect bidders will consist of institutions which are subject to federal or provincial regulations and which can demonstrate significant activity in the Canadian dollar private sector money and/or bond markets. In addition, consideration will be given to extending eligible securities for all Bank of Canada Term PRAs to include, in due course, corporate bonds with a minimum rating of BBB and term asset-backed securities.
The full text of the announcement can be found here.