DBRS has placed a slew of asset-backed commercial paper issuers “Under Review with Developing Implications”, following the announcement earlier today that a consortium representing banks, asset providers and major investors in the ABCP issuers agreed in principle to take significant steps to establish “normal operations in the Canadian Third Party ABCP market.”

The segment of the market targeted by the consortium (which includes ABN AMRO, Barclays Capital, Caisse de dépôt et placement du Québec, Desjardins Group, Deutsche Bank, HSBC, PSP Investments, Merrill Lynch, National Bank and UBS) generally excluded ABCP issuers sponsored by banks.

Earlier this week, DBRS noted that in relation to volatility in global credit markets, certain ABCP issuers were unable to roll over their maturities, and had to issue requests to their liquidity providers or extend note maturities. These issuers were generally in a segment of the Canadian ABCP market that excluded ABCP issuers sponsored by banks.

The consortium proposed that steps would be taken such that these trusts, dealers and investors would work towards reducing the liquidity risk from assets held in such trusts, DBRS said. These ABCP issuers contain a wide variety of assets; for example, CDOs, mortgages, lines of credit and auto loan receivables.

“The unprecedented declaration of a market disruption by certain issuer sponsors, combined with certain liquidity draw requests that may not have been met, has left these ABCP issuers with strong underlying assets from a credit perspective (generally of credit quality consistent with the ratings originally assigned to such assets), but without an ability to continue to fund these assets,” it noted. “If such a situation were to continue beyond prescribed grace periods, the underlying assets would be liquidated and, depending on the individual issuer, it is likely that noteholders would experience a loss.”

“Due to global credit markets that have, in recent weeks, exhibited extreme levels of volatility, some of the underlying assets, although strong from a credit perspective, could fetch significantly less than par,” DBRS said, adding that it intends to comment on this scenario shortly.

Under the proposal set forth by the consortium, all investors in the affected ABCP issuers would exchange their holdings in each issuer for a long-term note on an individual issuer and series basis. “This would allow investors to isolate their risk under this proposal to the ABCP issuer in respect of which a particular investor participated. The term of the note would match the term of the assets within that ABCP issuer and series. This reduces the liquidity risk, while exposing the investor to the same amount of credit risk that the investor held prior to the exchange,” it explained.

Dealers that are part of the consortium also indicated that they intend to assist in making a market for such long-term notes, DBRS added. If noteholders were to liquidate their long-term notes, they would be subject to market risk.

Asset providers to these ABCP issuers have stated their intention, over the next 60 days, to waive collateral calls and to revisit, with the intent to provide additional stability and transparency, any collateral call provisions in any of the transactions, it noted.

Investors have given indications that they would not seek to enforce a default under individual issuer trust indentures. In addition, investors agreed that they would not be request liquidity for the next 150 days.

DBRS said it continues to monitor the situation closely and will be issuing additional comments as the situation develops.