Investors are diving into the riskier waters of Canadian credit-card debt

By Allison McNeely Time of article published Oct 5, 2017

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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.”

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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.”

- BLOOMBERG

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