U.S. Buyers Snap Up Credit-Card Debt of Prudent CanadiansBy
Higher payment rate than Americans drives record ABS issuance
Why banks go south to sell: ‘Plain and simple, it’s cheaper’
The prudent Canadian consumer who pays off her credit-card bill has become a star of the U.S. debt markets.
Canada’s banks are increasingly heading south to fund their credit-card programs, issuing a record $6.8 billion in such asset-backed securities this year, according to data compiled by Bloomberg. They’re drawn by lower borrowing costs in the larger U.S. market. And they’re finding enthusiastic buyers thanks to the thrifty Canadians backing the debt, who even with historically high household debt pay off their cards at higher rate than their spendthrift American counterparts.
“Payment rate is a huge thing, because if you’re an investor in that product and there’s a problem, you go through 2008 again and suddenly all the delinquencies start spiking,” Jamie Feehely, a structured-finance analyst at DBRS Ltd., said by phone from Toronto. With this debt, “You’re going to get paid out.”
Bonds backed by customers’ credit-card balances are attractive to fixed-income investors for the relative reliability of the cash-flow stream they provide, which means for borrowers, issuing the securities is often cheaper than selling corporate bonds. Issuance for credit-card bonds, which reached $117 billion in 2008, is still climbing back after cratering during the financial crisis. It reached around $24 billion in 2015, according to the Securities Industry and Financial Markets Association.
And the market is growing. Sales are $29.9 billion so far this year, and may reach $40 billion in 2017, according to JPMorgan Chase & Co.
Bank of Nova Scotia and Toronto-Dominion Bank are among Canadian financials helping push up those figures. It’s more expensive to borrow in Canada’s smaller securitized credit-card market -- C$34 billion ($26 billion) versus the U.S.’s $134 billion -- even when factoring in the cost of swapping proceeds back to Canadian dollars. Canadian banks sold only C$566 million of credit-card ABS this year, according to BMO’s September ABS data report.
“Plain and simple, it’s cheaper to fund” in the U.S., Kris Somers, a fixed-income analyst at Bank of Montreal’s BMO Capital Markets, said by phone. “It’s a much larger market down there and it tends to attract larger pools of liquidity.”
Canadian issuers selling credit card ABS can pick up about 10 to 15 basis points in savings in the U.S. market, pricing around 78 to 80 basis points on an asset-swapped basis, Somers said. The five-year securities in Canada trade at a level similar to five-year bank deposit notes, which trade around 92 to 95 basis points, he said.
What makes the debt attractive to U.S. investors is that Canadian consumers are more likely to pay off their bills in full every month than their American counterparts. In the third quarter, the average monthly payment rate for Canadians was 47 percent, versus 29 percent for Americans, according to Fitch Ratings. A similar payment gap has been in evidence for since 2012, even as the rates climbed in both nations from crisis lows.
To be sure, credit-card backed securities, being unsecured by collateral, are only worthwhile as long as the customers keep the checks coming, and even cautious Canadians have taken on historically high levels of debt, exceeding the country’s gross domestic product for the first time. Bank of Canada Governor Stephen Poloz has warned that high levels of debt could magnify any economic shocks, and Finance Minister Bill Morneau has introduced a number of mortgage rule changes designed to cool the nation’s red-hot housing market.
Yet even as Canadians take on bigger mortgages, there’s no evidence that it’s affecting their ability to pay down their credit-card bills. That creditworthiness will keep their debt in demand by American investors, and the U.S.’s lower borrowing costs will keep Canadian banks heading south to sell it.
“I don’t think banks have turned their backs on the Canadian credit-card ABS market,” BMO’s Somers said. “What we’re seeing is a pause based on a rational judgment on their part to issue where they can get the best cost of funding.”
— With assistance by Nathan Booe