DBRS — a major Canadian bond rating agency — is reviewingthe criteria it uses torate asset-backed commercial paper(ABCP) following two weeks of trouble with the specialized debt products.
DBRS had rated many of the troubled ABCP productsas R1-High — equivalent to a solidtriple-A bond rating.
Based on that rating status, many companies and pension fundsinvested cash in these instruments, which have become popular places to park short-term money because they yield a little more than treasury bills.
Coventree Inc. — a Toronto-based finance company — sponsors several ABCP "conduits" that began running into refinancing trouble last week. Beginning Aug. 13,some of its conduits weren't able to find buyers when the notes matured.
To make matters worse, Coventree found that emergency funding agreements that werein place with other financial institutions to deal with this kind of market disruption were sometimes not being honoured.
The fallout from the battered U.S. subprime mortgage market was making investors increasingly reluctant to hold non-conventional debt in Canada.
"In cases where liquidity was not advanced, investors may now be exposed to mark-to-market risk in the underlying assets," DBRS said.
Air Canada, NAV Canada, Transat AT, the Ontario government, the Greater Toronto Airports Authority, and the Ontario Teachers' Pension Plan are just some of the groups that have millions tied up in ABCP that is, in some cases, now completely illiquid.
While most holders of this debt express public confidence they'll eventually get their money back,it may take some time.
The situation has promptedcriticism of DBRS for assigning atop-grade ratingto these products. DBRS has said the underlying assets are of high quality and thesolid ratings were deserved. But the market's perception of risk has clearlychanged.
"In light of events in the Canadian financial markets over the last two weeks, we will be reviewing our criteria for rating Canadian ABCP," said Huston Loke, global head for structured finance at DBRS.
Morningstar Canada said late Friday that at least 60 mutual funds in Canada recently contained ABCP from issuers that are on the DBRS watch list.
That list includes 24 money market funds. The money market funds of the big five banks do not own any non-bank commercial paper.