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Securitization market returns to 'new normal' Add to ...

Securitization got a bad name during the financial crisis, blamed as it was for all sorts of evils.

But the fact is that the financial markets require securitization, the practise of packaging up assets like loans and mortgages to create new securities.

There are investors who want the product, so long as its safe, and there are issuers who need the funds to enable them to offer credit cards, home equity lines of credit, mortgages and other financing.

So it's good to see the securitization market in Canada settling into what Jerry Marriott, a managing director at rating company DBRS, calls a "new normal" after a very quiet year for issuance in 2009.

"It's a big reversal from 2009," Mr. Marriott said.

That new normal will create about $20-billion of new securities a year, helping to keep the amount outstanding around about $90-billion, according to the DBRS year in review for the market (see the attached PDF). The composition of that new issuance is very different than pre-crisis, however.

Then, most of the paper would have been asset-backed commercial paper. In that market, there was money to be made taking advantage of the yield curve, funding long term loans and short-term prices. However, investors have seen the downside of that mismatch, and are now much more interested in matched-term financing. So the issuance we're seeing today is more like two thirds longer-term asset-backed securities and one third ABCP, the reverse of the old setup.

There's also much more disclosure on what's behind the assets so there are no nasty surprises. Such things as collateralized debt obligations -- the CDOs that proved so toxic for many investors -- are not likely to show up in Canada again.

There are some areas of the market that have yet to fully come back that may yet. Mortgage-backed securities are one. While Canadian mortgages have been performing, the spectre of the U.S. mortgage market has spooked investors, Mr. Marriott said.

The new normal at this point for pricing also isn't what it once was for issuers. In some cases the securitization market for sellers isn't as attractive economically, but issuers still want to make sure they don't ignore it. That's because, Mr. Marriott notes, if the issuers don't give investors product, the investors will go away.

"The economics are coming back but there will be issuance just to make sure that option is there," he said.

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