The Canadian asset backed securities (ABS) market enjoyed solid growth during 2006, and ratings agency DRBRS predicts that trend to continue in the year ahead.

Total ABS outstandings rose nearly 30% to more than $167.1 billion as of Dec. 31, 2006, compared with $129.1 billion at the end of 2005, DBRS says. Growth was fuelled by increases in both the asset backed commercial paper (ABCP) and the public term ABS markets.

“The term ABS market was driven primarily by the assets derived from captive auto financiers, commercial mortgage backed securities (CMBS) originators and credit card issuers,” says DBRS analyst Scott Bridges. “The ABS term market continued to have a strong appetite for consumer related obligations such as those backed by auto finance or credit card receivables. As well, the market for CMBS has continued to evolve and grow.”

The rating agency says its research shows that the big Canadian banks were very active in monetizing credit card balances through the issuance of asset backed term notes. Credit cards from Canadian issuers continue to be highly sought after by investors as a result of the strong credit profile offered by the underlying pool of assets and the attractive yields, it adds.

“In addition, there were a number of reverse inquiries which resulted in tranches of credit card debt being sold to ABCP issuers to form the collateral in a structured financial asset or collateralized debt o bligation (CDO) transaction,” adds Bridges. “The credit card backed notes are an ideal form of collateral due to their high credit quality, market liquidity and minimal correlation to the referenced names in the CDO transaction.”

Within the ABCP sector, three asset classes dominated, representing over 70% ABCP notes issued, it says. CDO outstandings of $28.9 billion for year end 2006 represented the largest single asset class (28.4%), auto loan and lease receivables finished a close second, totalling $26.2 billion (24.5%) while residential mortgages rounded out the top three with $21.3 billion and 20.2% of ABCP outstandings. This is the first time that CDOs have represented the largest asset class in the Canadian ABCP market, it notes.

DBRS anticipates that 2007 will continue to see strong asset performance, as well as a healthy level of new issuance and new participants. While year-over-year dollar volumes may not match the high levels experienced in 2006, DBRS anticipates that issuers will continue to access the securitization market with great regularity.

“Although some concerns exist regarding the potential downturn in the U.S. economy and that country’s overall consumer debt levels, the Canadian consumer has shown certain levels of constraint relating to their debt levels, which should ensure continued robust performance of the securitized assets,” DBRS predicts.