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May 01, 2020  

Canadian Banks Ready Credit-Card Issues

Get ready for a flurry of Canadian credit-card bonds.

With the new-issue market for asset-backed securities beginning to show signs of life, Bank of Montreal, CIBC, RBC, Scotiabank and TD Bank are preparing to offer securities to U.S. investors. The transactions, backed by Canadian receivables, are expected to start hitting the market in the coming weeks.

Sources point to RBC as likely to be first out of the gate with a $700 million deal. The bank last tapped the market on Oct. 16, selling $600 million of bonds while serving as its own bookrunner.

TD Bank and CIBC are expected to follow. Bank of Montreal and Scotiabank will probably offer deals by late next month. TD’s last offering, a $534.8 million transaction, priced on Oct. 22. The bank teamed up with J.P. Morgan and Bank of America to run the books. CIBC, meanwhile, handled sole bookrunning duties when it priced its last transaction on Nov. 7, issuing $569 million of bonds.

Bank of Montreal priced its last deal on Jan. 16, running the books on $529.1 million of paper with J.P. Morgan and Wells Fargo. Scotiabank’s last deal, a $489.1 million transaction, priced on Jan. 13 with the bank handling bookrunning with BofA and J.P. Morgan.

Sources say the initiatives to sell new bonds are in part the result of the banks seeing increased demand for their paper on the secondary market over the last couple of weeks. Case in point: On April 27, $20 million of triple-A-rated bonds with 2.9-year lives issued via RBC’s Golden Credit Card Trust changed hands, according to Finra’s Trade Reporting and Compliance Engine.

A $5 million batch of similar bonds from TD’s Evergreen Credit Card Trust traded on April 24. And a day before that, $5 million of top-rated bonds from CIBC’s Card II Trust changed hands. While bonds backed by U.S. credit-card accounts often trade on the secondary market, Canadian credit-card paper doesn’t move nearly as much.

The uptick in activity stems partly from efforts by investors to specifically seek out Canadian bonds because they typically trade at discounts to similar credit-card paper issued by their peers in the U.S. The batch of RBC bonds that sold on April 27, for instance, went out the door at 98 cents on the dollar. By comparison, a similar batch of securities from Citigroup changed hands on the same day for 103 cents on the dollar.

Canadian credit-card accounts have always had a reputation for strong performance. That’s in part because borrowers in that nation are less likely to rely on credit cards for long-term financing and are more likely to pay off their balances in full each month. On average, 70% of Canadian credit-card accounts maintain zero balances, versus 49% in the U.S., according to Wells.

Canadian banks completed 10 credit-card bond deals in the U.S. last year, totaling $6.1 billion, according to Asset-Backed Alert’s ABS Database. That represented 24.3% of the total credit-card bond market in the States in 2019. So far this year, they’ve completed two deals totaling $1 billion.

The Canadian banks’ disproportionate share of the market in part reflects the fact that their U.S. peers have been relying more heavily on lower-cost financing through deposits.