Asset-backed securities offer an attractive alternative to money market instruments such as guaranteed investment certificates and government bonds.
They are debt investment vehicles issued against a pool of assets such as trade receivables, loans, leases and mortgages.
They typically contain credit quality enhancements, such as a letter of credit from a highly rated financial institution, that protect the investor.
Asset-backed securities are issued by trusts, known as conduits. They exist only to purchase assets, usually accounts receivable, from financial institutions or other corporations.
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The trust raises funds to pay for these purchases by issuing asset-backed commercial paper or asset-backed medium term notes.
Asset-backed commercial paper is issued by either a single-seller or multi-seller conduit. Single-seller trusts buy assets from a single entity, while multi-seller conduits buy assets from a number of sources.
The asset-backed commercial paper market has grown significantly over the last several years.
In 1999, Canadian asset-backed commercial paper increased by about 29 percent to $53 billion.
In that year, 49 percent of all non-government money market issuance, and 20 percent of all short-term debt came from the asset-backed commercial sector.
Asset-backed commercial paper offers the investor typically five to 15 basis points in higher yield over bankers acceptances for R1 high-rated paper. Credit ratings for issuance in this sector range from R1Low to R1High.
Investors who must limit their level of exposure to one issuer might take advantage of asset-backed commercial paper as a way to diversify portfolio holdings.
As with all investments, there are risks.
While credit enhancements do provide some protection, the terms covering default vary by issue and should be individually reviewed.
That said, the success of asset-backed commercial paper has been due partly to absence of credit problems.
Asset-backed medium term notes, or ABMTNs, are sometimes called receivables-backed securities. They are the bond market equivalent of asset-backed commercial paper.
Like asset-backed commercial paper, these securities represent the securitization of receivables owned by banks and trust companies, including credit card debt, mortgages and personal lines of credit.
ABMTNs typically carry an AAA rating because of the credit enhancement provided by over-collaterization of receivables, letters of credit, subordinated debt and-or cash reserves.
Like the asset-backed commercial paper sector, ABMTN issuance is experiencing significant growth.
In 1999, issuance increased to $13 billion, up from $8 billion the previous year.
With ever-increasing assets on bank and trust balance sheets, the ABMTNs market is set for continued growth.
Since government fixed-income issuance has been on the decline in recent years, conservative investors seeking highly rated securities have experienced a shrinking investment arena.
ABMTNs provide not only an equally rated substitute, but a significant yield pick-up as well.
Like asset-backed commercial paper, these investments have some risk; individual terms of issuance should be understood.
ABMTNs are not registered retirement savings plan eligible, although this may change in the future.
Ian Morrison is a financial consultant with Wood Gundy Private Client Investments in Calgary and is licensed to sell insurance products. His views do not necessarily reflect those of CIBC World Markets Inc. This article is for information only. Morrison can be reached at 800-332-1407 or by e-mail at ian.morrison@cibc.ca.
