TORONTO – Toronto-Dominion Bank, which has four branches in Rhode Island, agreed to buy Bank of America Corp.’s C$8.5 billion ($8.7 billion) Canadian credit-card unit as rising employment bolsters payment rates and reduces losses while U.S. economic growth slows.
The Bank of America Merrill Lynch Canadian Asset-Backed Securities Index is poised to rally for a sixth-straight month, having gained 1.04 percent in August. The Gloucester Credit Card Trust that TD Bank is buying has gained 0.95 percent this month. Returns on the Canadian index have outstripped those of similar U.S. securities, which have lost 0.1 percent.
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TD Bank said it’s “comfortable with the risk” of the portfolio that has a loss rate that’s 2.2 percentage points higher than its own credit-card assets as Canada benefits from lower deficits and quicker economic growth than its Group of Seven peers. Loss rates, or ratios of credit-card receivables written off by issuers, have dropped along with delinquency rates while payment rates are rising.
“Asset-backed securities should perform well,” said Trevor Bateman, a credit analyst in Toronto at Bank of Montreal’s BMO Capital Markets, which has a “market perform” rating on credit-card asset-backed securities. “Unemployment is still elevated but has improved, and we think will get better. That trend should bode well for the loss rates that drive the underlying fundamentals for” asset-backed securities, he said.
Canada has led the Group of Seven countries in recouping employment lost during the global recession, adding about 25,000 jobs on average each month since August 2009. The nation’s economy benefited from rising prices for commodities and a buoyant real estate market propelled by low borrowing costs.
‘Strategic Plan’
TD will pay C$7.5 billion in cash for Bank of America’s MBNA Canada unit and assume about C$1.1 billion in liabilities, the Toronto-based bank said in an investor presentation on its website. The Canadian bank paid what it called a “modest premium.”
“This is retail, so it fits their strategic plan,” Marc-Andre Gaudreau, senior vice president of fixed income at Natcan Investment Management in Montreal, which manages about C$14 billion in Canadian bonds and asset-backed securities, said of the acquisition. “From the bank’s standpoint, it’s a good asset.”
Elsewhere in credit markets, the extra yield investors demand to own the debt of Canadian investment-grade corporations rather than the federal government slipped by two basis points yesterday, or 0.02 percentage point, to 152 basis points from 154 on Aug. 12, according to a Bank of America Merrill Lynch index. Yields rose to 3.36 percent from 3.32 percent.
Two-Year Auction
Canada’s federal government bonds yielded 1.81 percent yesterday, from 1.67 percent on Aug. 10, the lowest level in Merrill’s records dating to 1985. Government bonds have returned 1.79 percent this month, compared with 1.48 percent for provincials and 0.83 percent for corporates, the data show. U.S. government bonds have returned 2.46 percent.
Canada will sell C$3.5 billion of 1.5 percent bonds tomorrow maturing in November 2013, according to a statement on the Bank of Canada’s Web site. The previous auction of two-year bonds, on July 13, drew an average yield of 1.58 percent and a bid-to-coverage ratio of 2.5 times, versus a five-auction average ratio of 2.55 times.
Government bonds rose today, pushing the benchmark two-year note yield down two basis points to 0.99 percent. The yield touched 0.783 percent on Aug. 9, the lowest in Bloomberg records dating to 1989. The price of the 2 percent security due in August 2013 climbed 4 cents to C$101.96.
Sino-Forest Debt
The Canadian two-year yield narrowed two basis points to 80 basis points above the equivalent-maturity U.S. security. The so-called spread narrowed last week to 55 basis points, the tightest since February 2010.
Sino-Forest Corp., the tree-plantation operator accused by short-seller Carson Block of overstating its timberland holdings, said an independent investigation into the allegations will take longer than previously expected.
The independent committee set up by the company to conduct the probe presented an interim report to the board on Aug. 11 and expects to complete its review by year-end, Hong Kong- and Mississauga, Ontario-based Sino-Forest said in a statement yesterday.
Sino-Forest, which has denied the allegations, hired PricewaterhouseCoopers LLP to assist the review and said June 14 the process would take two to three months. The company said yesterday it will repay $87.7 million of its 9.125 percent notes, including accrued interest, maturing tomorrow.
Provincial Debt
Yields on Canada’s provincial bonds ended yesterday at an average 62 basis points above benchmarks, according to the Merrill data, down from 64 basis points on Aug. 12. Spreads reached 66 basis points on Aug. 10, the widest since June 2010. Yields rose to 2.74 percent, from 2.7 percent last week.
Ontario, Quebec and Alberta issued C$1.75 billion in fixed- rate bonds on Aug. 12, the largest single day of domestic, fixed-rate provincial issuance since September 2006, according to Warren Lovely, a governments strategist at Canadian Imperial Bank of Commerce in Toronto.
Moody’s Investors Service will likely have a “positive resolution” of its review for possible downgrade of Gloucester Credit Card Trust after the acquisition as TD Bank is a “more stable and committed” sponsor, Altaf Nanji, senior credit analyst at RBC Capital Markets, the investment-banking arm of Royal Bank of Canada, wrote yesterday in a research report.
Canadian MasterCard
“We expect loss rates to decline as the bank will be using its own underwriting standards post acquisition on new originations,” Nanji wrote. “This is expected to improve credit quality in the long run.”
Toronto-Dominion, Canada’s second-largest bank, said it will become the largest issuer of MasterCard in Canada. Previously, the lender issued only Visa cards.
TD had about C$8 billion in outstanding credit-card balances at the end of 2010, and that figure that would have been more than twice as large at the end of the second quarter with the Bank of America purchase, according to its investor presentation.
Moody’s put Gloucester Credit Card Trust on review on June 22, reflecting a similar move to put the debt of the trust’s parent, Bank of America, on review for downgrade on June 2.
Loss rates in June were 5.02 percent, lower than the 5.8 percent rate in June 2010, according to Bateman’s research. Average delinquencies have dropped from year-earlier levels for 14 straight months. Consumer bankruptcies fell 14 percent in May, and have declined for 18 straight months, Bateman wrote.
“Certainly in Canada we’ve seen some gains in employment that bodes well for the credit-card” backed securities market, said Heather McOuatt, a fund manager at Bissett Investment Management in Calgary, which oversees about C$4 billion in bonds, including asset-backed securities. “Generally speaking, the Canadian issuers have done very well.”
