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Two years after being demonized for its association with the credit crisis, asset-backed commercial paper has re-emerged as a credible investment alternative.

The acronym "ABCP" rarely shows up in the news media these days, but in 2008 its Canadian market nearly imploded and companies could not issue any new paper. Today, Canada's securitization market is stable and some securities are trading at levels better than pre-crisis rates.

The news might surprise the average investor, especially after Canadian banks endured the lengthy ABCP settlement that compensated unsophisticated buyers. But people who work in securitization often refer to Canadian products as being "plain vanilla" - simple and straightforward.

Now that the dust has settled and investors can decipher between risky securitized pools and safer investments, demand is reviving. In some cases, ABCP now trades below the Canadian dealer offered rate (CDOR) - the average rate of Canadian bankers' acceptances - which is used as a benchmark for floating rate issues. Securitized longer-term debt is also trading close to benchmark deposit notes issued by Canadian banks.

Investors appreciate that they now have a second option for short-term money. "Instead of putting it in a bank and earning effectively a zero[per cent] yield, they look to ABCP," said Kevin Chiang, a senior vice-president who covers asset-backed securities at bond-rating agency DBRS Ltd.





Trading levels indicate how secure the market feels. Some three-month ABCP hovers around 10 basis points below CDOR, and public bond issues have also seen spreads narrow dramatically. The average of five-year Canadian bank credit-card asset-backed securities (ABS) sat around 13 basis points above bank deposit notes at the start of July, much tighter than in January, 2009, when that same spread was about 100 basis points.

Despite the tight spreads, there has been limited product. Before the ABS market came to life in May, "it was well over a year before you saw a credit-card deal," said Trevor Bateman, a corporate debt analyst at BMO Nesbitt Burns who specializes in credit-card ABS.

Because investors like the product, the problems rests with supply. Issuers are happy to securitize their loans but banks are timid to back the deals. After the ABCP market blew up, there was a fight between banks about who would support their paper. Now, new rules make them all liable for stepping in during a market disruption.

Large securitization players such as Royal Bank of Canada and Bank of Montreal, each of which held about a 25-per-cent Canadian ABS market share at the end of May, need to make sure they do not overexpose themselves to one issuer. "Now their own money is on the hook," Mr. Chiang said.

Like investors, Canadian banks appear to be getting more comfortable with asset-backed securities. ABS made up 14 per cent of new debt issuance in the second quarter, more than double the 6 per cent in the first quarter, according to BMO Nesbitt Burns.

The new debt was "easily absorbed by the market," Mr. Bateman said, adding that it's a good sign for auto companies. "Certainly with auto sales up there's motivation for those issuers to look for financing," he noted.

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