Evolution of Product Distribution: Private Placements ABS 2010 Canadian Structured Finance Forum June 2010 Yatendra Killer HONDA CANADA FINANCE INC. Mark

Evolution of Product Distribution: Private Placements

ABS 2010 Canadian Structured Finance Forum

June 2010

Yatendra KillerHONDA CANADA FINANCE INC.

Mark McElheranSTIKEMAN ELLIOTT LLP

Marie-Claude MorrissetteNISSAN CANADA INC.

Jonathan ZamirBANK OF AMERICA MERRILL LYNCH

STIKEMAN ELLIOTT LLP | SLIDE 2

Trends in Public and Private OfferingsMarket Share (by %)

As At Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Feb-10 Mar-10

Term ABS (incl. CMBS) 25.8% 27.4% 27.6% 30.9% 33.6% 32.3% 31.9% 32.3% 35.9% 40.3% 41.8% 44.9%

ABCP - Bank Sponsored 61.1% 58.4% 57.5% 55.7% 49.9% 47.2% 40.6% 43.6% 36.0% 29.8% 28.6% 28.3%

ABCP - Non Bank Sponsored 13.0% 14.2% 14.9% 13.3% 16.4% 20.6% 27.5% 3.2% 1.2% 0.1% 0.2% -

Affected ABCP 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 19.7% 23.0% 0.0% 0.0% -

Structured Notes 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.3% 0.6% 22.3% 22.5% 22.8%

Private Placements 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 1.0% 3.3% 7.5% 6.9% 4.0%

Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Market Size (in billions of CAD$) 79.9 84.5 88.8 94.3 102.3 127.7 166.0 164.3 141.4 107.4 105.6 104.5

Note: Private Placements includes On Balance Sheet as well as ABS Private Placements.

Canadian Securitization Market Size (Jan 1995 - Feb 2010, in billions of C$)

-

20

40

60

80

100

120

140

160

180

200

Term ABS (incl. CMBS) ABCP - Bank Sponsored ABCP - Non Bank Sponsored Affected ABCP Structured Notes Private Placement

Source: DBRS


Trends in Public and Private Offerings

>Apart from the significant contraction of the ABS market generally, what can be discerned from these figures?

– High water mark for public ABS in 2006 and 2007– Total term ABS (public and private combined) relatively stable since then

– Private ABS picked up most of the slack in public issuance after 2007

– From 2007 to 2009 public ABS outstanding shrunk (by 2.3B and 7.5B respectively) while private issuance of ABS grew (by 3.1B and 3.4B respectively)


Trends in Public and Private Offerings– From 2009 to 2010 public ABS grew by 0.8B and private ABS shrunk by

0.8B, however– Public distribution under the BDC program was limited to the BDC– Although public disclosure was a requirement of BDC involvement, in substance

these transactions were rated private transactions (and in fact private placement investors participated in a number of these transactions outside of the prospectus)

– ABCP market has steadily declined both in absolute terms and as a percentage of the total ABS market– High of approx $113 billion in Dec ’06 to low of approx $30.4 billion in Feb ’10– Capital constraints on banks means smaller bank-sponsored conduits going

forward– Conclusion

– Private term issuance is becoming a significantly greater proportion of a smaller Canadian ABS market


Use of Private Placements Versus Public Transactions Going Forward

>Regulatory environment may be a significant determining factor

>Rule changes proposed in the U.S. by the SEC

– Comment period remains open

– Open question as to the nature and extent of the reform that will result

– Enhanced accountability and transparency requirements in SEC proposals all based on eligibility for short form public issuance– Only material change to private placement protocols is to require that

investors be expressly offered prospectus-level disclosure

– By and large, Canadian-style OM already meets this standard



>Benefits of public ABS in terms of pricing and market depth appear to be far less compelling in Canada

> If Canadian regulations follow the same model, may spur further increase in rated private placements

>Recent trends indicate that even in the U.S. there has been a recent movement from public to private issuance– According to data compiled by Asset-Backed Alert, public ABS

issuance in the US consistently exceeded private placement issuance from 2005 to 2007 (over eight times more in 2005, over four times more in 2006 and just under three times more in 2007)



– Public and private ABS issuance reached virtual parity in 2008 and in 2009 private 144A ABS issuance exceeded public ABS issuance by 15%

– For the first quarter of 2010, Asset-Backed Alert has reported over US $21 billion of 144A ABS issuance vs. $9 billion of US public ABS issuance


Benefits of Private Placements

>Originator’s Perspective

– Timing– No regulatory review or delay

– Easier to hit market windows

– Flexibility– No mandatory form of offering document

– Although OM disclosure is typically “prospectus-like”

– Fewer rules governing the process in the exempt market (restrictions on marketing, etc.)




– Lower Cost– Additional costs in a public transaction

– Prospectus

– Translation

– Continuous disclosure obligations (AIF, annual and interim financials, MD&A, material change reports)

– Filing fees


Drawbacks of Private Placements


– Higher price– Potential of tighter spreads on public offering

– Market Depth and Breadth– Potential of access to investors who can’t buy private or are limited in size

of private book

– Finite Nature of the Canadian Market– Potential investors for private and public offerings can be one and the

same


Key Drivers in the Choice of Distribution Channels

Driver Public Private

All-in Cost Market Pricing

Cost

Liquidity Premium

Lower Cost

Nature of the Assets/Structure

Simple

Well Understood

Higher Complexity

New

Evolving Investor Demand Large

Certain

Low

Uncertain


Key Drivers in the Choice of Distribution Channels

Driver Public Private

Market Sentiment Risk Taker

Stable

Risk Averse

Volatile

Existence of Public Platform

Required Indifferent

Ongoing Funding Needs Frequent Less Frequent

Diversification


Differences in the Market for Loans vs. Leases

>Demand for loan securitization product is larger and more stable

>Leases add complexity with residual value risk

– Internal (originator) factors:– Manufacturer price setting behavior

– Introduction of new models

– Remarketing management

– External factors:– Canadian $

– Oil price

– Overall level of economic activity



> Investor’s Perspective

– Customization– Details of issues are negotiated directly

– More likely to fit specific investment needs




– Lack of Secondary Market Liquidity– Although benefits of public offering may be more theoretical than real due

to limited size of investor base– Public ABS also has wide bid-offer spreads

– Secondary trades in private placements are between institutional investors without intervention of market making dealers




– Lower standard of disclosure– Appearance of less transparency

– Statutory liability for underwriters may result in more rigorous due diligence and disclosure in public transaction


Private vs. Public - Conclusion

>While there are a number of variables to consider, achieving optimal pricing is a very significant consideration

>Where investor demand for ABS exceeds supply, potential for better pricing in public market is low

– Cost and flexibility advantages will favour private placement


Private Placements Going Forward

> Public markets will likely continue to be the preferred channel for programmatic issuers with traditional asset classes

> Private placements may make sense for transactions that are new or unique– First time issuer or new asset class (student loans, trade receivables…)

> Private placements offer investors an opportunity to perform a more thorough and tailored credit analysis– Flexible timeline– Access to more information/documents– Scenario analysis

> Issuers have the opportunity to test the market and pull back if needed with no public consequences

> Another leg down in the world economy could bring private placements to the forefront again


Domestic Versus Cross-Border Transactions> Cross-border vs. domestic could be as important a consideration as public vs. private

> Removal of withholding tax has opened up cross-border possibilities

– US funding of Canadian assets

– US funding of assets transferred from Canada to US

> There has been some cross-border activity but difficult to get true measure of the potential as the elimination of withholding tax coincided with slowdown in the securitization market and the broader economy

> For a 144a offering, investors are generally indifferent to whether the transaction is public or private in Canada

– No impact on pricing

– No impact on eligibility

> Not necessary to have deal fully public in the US


Domestic Versus Cross-Border Transactions

> US participation is expected in most deals going forward> Canadian ABS spreads still lag the US by a considerable margin

– Top tier credit card names are approximately 15bps wider in Canada– Differential widens further out the credit curve

> US investors see significant value in Canadian portfolios– Better performance

– Diversification> In other words – Better assets at a better price> One or two cross border investors can be enough to introduce noticeable price

tension into a deal– For example, a large anchor order from the US can provide the backstop

needed for tight price guidance when marketing in Canada


Hedging Cross-Border Transactions

Hedging considerations:

> US domiciled CAD funds are a natural fit because no hedge is required

> Bullet maturities are simpler to hedge because balance guaranteed swap is not required

> Pass through structures face an uncertain amortization schedule due to unscheduled prepayment

> Investors can enter into a swap based on the expected amortization and face a potential mismatch if prepayment is faster or slower than expected

> Investors can pay for the optionality of a balance guaranteed swap

– Cost of this optionality becomes uneconomic for longer tranches

> Some issuers are willing to issue USD debt directly and enter into a balance guaranteed swap at the Trust level

QUESTIONS & ANSWERS

Yatendra [email protected]

Mark [email protected]

Marie-Claude [email protected]

Jonathan [email protected]

STIKEMAN ELLIOTT LLP | www.stikeman.com

Documents

Evolution of Product Distribution: Private Placements ABS 2010 Canadian Structured Finance Forum June 2010 Yatendra Killer HONDA CANADA FINANCE INC. Mark