BLOOMBERG - The riskier
waters of Canada’s
market for bonds backed by credit-card debt are drawing yield-hungry investors
even as household borrowing is at record levels.
In one asset-backed security
deal this week sold by Eagle Credit Card Trust, the lower-rated portions
received about double the number of typical buyers, according to people with
knowledge of the transaction that totalled C$250 million ($200.4
million).
The riskiest
notes, backed by credit card loans made by a Canadian bank, yield about
2.3 percentage points more than comparable government securities, according to
data compiled by Bloomberg. Meanwhile, similarly rated corporate bond
yield about 1.45 percentage points more than equivalent government debt, Bank
of America Corp. data show. “People are now looking for
yield,” Rohan Thiru, a fixed-income portfolio manager at Canoe Financial LP,
said by phone from Toronto.
“It’s more of a recent phenomenon where every other credit has rallied so much;
they’re saying where can we find value? And they’re finding value in credit
card asset-backed securities.” It was the first Canadian credit card
asset-backed sale since May.
The demand for the
securities comes as Canadian central bankers remain concerned about record
consumer debt levels, which totals around C$2.1 trillion. The ratio of
debt to disposable income is also at an all-time high , at around 170 in
the second quarter. Bank of Canada
Governor Stephen Poloz late last month cited high household indebtedness
as a reason to proceed “cautiously” in raising rates further.
FILE PHOTO: View shows various credit cards So far, Canadians continue
to pay their bills. Around 45 percent of Canadian credit-card receivables get
repaid in full every month, based on asset-backed securities data, according to
Fitch Ratings. For the US
that figure is closer to 30 percent. Those kinds of figures may be encouraging
investors looking at Canadian credit card asset-backeds.
The BBB portion of Eagle
Credit Card Trust deal found around five buyers, where one or two would be more
typical, according to people familiar with the transaction. The credit
card loans in the deal were made by President’s Choice Bank, which is also
collecting payments.
A spokeswoman did not
immediately comment. For the top-rated portion, 36 investors bought in,
creating so much demand that most money managers only got about 5 to 10 percent
of the securities they ordered, said the people, who asked not to be identified
because they are not authorized to speak publicly about the transaction. Canadian Imperial Bank of
Commerce, Bank of Montreal, and Royal Bank of Canada were lead managers on the
deal. All three declined to comment. Another reason for the
securities’ higher yield may be that they are less liquid than corporate bonds,
said Jeff Sujitno, a portfolio manager at IA Clarington Investments, by phone
from Toronto.
“We’re more than happy to
pick up that lack of liquidity because you’re getting paid for it,” Sujitno
said. “We think there’s tremendous value in ABS.”
Read also:
Sujitno has invested in
lower-rated structured credit this year, expanding the weight of asset-backed
securities in his investment grade corporate bond strategy to 20 percent from
7.5 percent at year end, he said. Liam O’Sullivan, a portfolio
manager for RP Investment Advisors, said that they purchased some of the
top-rated debt because it is more easily traded than the lower-rated tranches,
and offered an attractive yield for a AAA-rated credit. The fact that Eagle’s
deal was the first credit card ABS in months also helped fuel demand, he said.
“Clearly there’s demand out
there for issuance, so to the extent that these programs need to syndicate
deals, I think the demand for sure is there.”