Yield hunters drawn to riskier waters of Canada’s credit-card debt

The riskier waters of Canada's market for bonds backed by credit-card debt are drawing yield-hungry investors – even as household borrowing is at record levels.

In one asset-backed security (ABS) deal this week sold by Eagle Credit Card Trust, the lower-rated portions received about double the number of typical buyers, according to people with knowledge of the transaction that totalled $250-million.

The riskiest notes, backed by credit-card loans made by a Canadian bank, yield about 2.3 percentage points more than comparable government securities, according to data compiled by Bloomberg. Meanwhile, similarly rated corporate bond yield about 1.45 percentage points more than equivalent government debt, Bank of America Corp. data show.

"People are now looking for yield," Rohan Thiru, a fixed-income portfolio manager at Canoe Financial LP, said by phone from Toronto.

"It's more of a recent phenomenon where every other credit has rallied so much, they're saying, 'Where can we find value?' And they're finding value in credit-card asset-backed securities." It was the first Canadian credit-card asset-backed sale since May.

The demand for the securities comes as Canadian central bankers remain concerned about record consumer debt levels, which totals around $2.1-trillion.

The ratio of debt to disposable income is also at an all-time high, at about 170 in the second quarter.

Late last month, Bank of Canada Governor Stephen Poloz cited high household indebtedness as a reason to proceed "cautiously" in raising rates further.

So far, Canadians continue to pay their bills. About 45 per cent of Canadian credit-card receivables get repaid in full every month, based on asset-backed securities data, according to Fitch Ratings. For the United States, that figure is closer to 30 per cent.

Those kinds of figures may be encouraging investors looking at Canadian credit-card asset-backeds. The triple-B portion of Eagle Credit Card Trust deal found around five buyers, where one or two would be more typical, according to people familiar with the transaction.

The credit-card loans in the deal were made by President's Choice Bank, which is also collecting payments. A spokeswoman did not immediately comment.

For the top-rated portion, 36 investors bought in, creating so much demand that most money managers only got about 5 per cent to 10 per cent of the securities they ordered, said the people, who asked not to be identified because they are not authorized to speak publicly about the transaction.

Canadian Imperial Bank of Commerce, Bank of Montreal and Royal Bank of Canada were lead managers on the deal. All three declined to comment.

Another reason for the securities' higher yield may be that they are less liquid than corporate bonds, said Jeff Sujitno, a portfolio manager at IA Clarington Investments Inc.

"We're more than happy to pick up that lack of liquidity because you're getting paid for it," Mr. Sujitno said. "We think there's tremendous value in ABS."

Mr. Sujitno has invested in lower-rated structured credit this year, expanding the weight of asset-backed securities in his investment grade corporate bond strategy to 20 per cent from 7.5 per cent at year end, he said.

Liam O'Sullivan, a portfolio manager for RP Investment Advisors, said that they purchased some of the top-rated debt because it is more easily traded than the lower-rated tranches, and offered an attractive yield for a triple-A-rated credit. The fact that Eagle's deal was the first credit-card ABS in months also helped fuel demand, he said. RBC Dominion Securities estimates $10-billion to $11-billion of total securitization issuance in 2017, in line with last year's supply, according to a report this week.

"Clearly there's demand out there for issuance, so to the extent that these programs need to syndicate deals, I think the demand for sure is there," Mr. O'Sullivan said.