2022 Year in Review – Structured Finance Canada
As the Canadian economy continued to recover from the effects of the COVID-19 pandemic, 2022 was a busy year in the Canadian structured finance market. Numerous asset-backed securities (“ABS”) transactions were completed by Canadian issuers across a variety of asset classes, including auto loans, credit card receivables and residential and commercial mortgages. While interest rates were on the rise in Canada in 2022, securitization market participants diversified their funding approaches through bespoke transactions with asset-backed commercial paper conduits and cross-border private placements.
Our Firm’s industry-leading national structured finance practice in Canada played key roles in many significant Canadian structured finance transactions in 2022. As we look back on a busy year, the following is a review of the Canadian structured finance market in 2022, including key legal developments that may be of interest to you.
Consumer based assets, such as auto loans and leases, credit card receivables, consumer loans, residential mortgage loans and home equity lines of credit, continued to be the primary asset classes securitized by Canadian issuers in 2022. Some of the ABS issuances involving these asset classes our Firm was involved in 2022 included issuances by issuers sponsored by Ford Credit Canada Company, General Motors Financial of Canada and Canadian Schedule I banks, including Bank of Montreal (“BMO”), Canadian Imperial Bank of Commerce (“CIBC”), Canadian Tire Bank, Equitable Bank (“EQB”), National Bank of Canada (“NBC”), Royal Bank of Canada (“RBC”) and The Toronto-Dominion Bank (“TD”).
We saw an increase in the securitization of esoteric assets in Canada in 2022. Our Firm was involved in a number of securitization transactions involving esoteric assets in 2022, such as data center revenues, energy performance contracts, sub-metering fees and music royalties. Our Firm also acted in several unique structured finance programs in 2022, including in the establishment of collateralized commercial paper and strategic risk transfer programs.
In 2022, the Canadian structured finance market also included the securitization of commercial mortgage-backed securities (“CMBS”) and numerous issuances of covered bonds by Canadian Schedule I banks, such as BMO, CIBC, EQB, NBC, RBC and TD, and others such as Desjardins Group and HSBC Bank Canada, with the covered bonds being offered in Australia, Canada, Europe, Switzerland, the U.K. and the U.S and other international jurisdictions. Our Firm’s structured finance group played a significant role in each of these CMBS and covered bonds offerings and is the market leader on global offerings by Canadian covered bond issuers.
Our Firm regularly acts for financial institutions, private equity firms, originators, issuers and sponsors in cross-border structured finance matters. We continued to be very active in a variety of cross-border securitizations of Canadian assets in 2022. Throughout the year, we were involved in numerous term ABS issuances in which the ABS was either privately placed exclusively in the U.S. or privately placed concurrently in Canada and the U.S. In recent years, issuers sponsored by Canadian Schedule I banks have privately placed credit card receivables backed term ABS primarily in the U.S., and this trend has continued in 2022.
U.S. and European banks and private equity firms continued to be active in financing Canadian financial assets in 2022. Our Firm acted on several cross-border transactions involving whole loan sale structures, warehouse funding structures and multi-jurisdictional securitization transactions in respect of a variety of asset classes, including handset receivables, consumer loans and trade receivables.
Cross-border securitization transactions give rise to unique Canadian tax and other Canadian regulatory, disclosure and legal issues, including as a result of differences in the legal regimes in the provinces of Canada, U.S. and European entities acquiring and/or funding Canadian assets need to be aware of Canadian regulatory requirements pertaining to various types of Canadian assets (including restrictions on banking activities and collection activities, licensing requirements, etc.). U.S. and European entities should also be aware of privacy requirements with respect to Canadian obligors, which in some cases differ materially from those in the U.S. and Europe, such as in the case of consumers. When structuring cross-border deals, it is imperative to ensure that the structure does not inadvertently result in the foreign entity being deemed to be doing business in Canada for Canadian income tax purposes and that cross border payments, to the extent possible, do not attract Canadian withholding or other taxes.
On May 16, 2022, Refinitiv Benchmark Services Limited, the administrator of the Canadian Dollar Offered Rate (“CDOR”), announced that the calculation and publication of all tenors of CDOR will permanently cease immediately following a final publication on Friday, June 28, 2024 (the “CDOR Cessation Date”). On the CDOR Cessation Date, the key Canadian dollar interest rate benchmark replacing CDOR will be the Canadian Overnight Repo Rate Average (“CORRA”). In support of this transition, the Canadian Alternative Reference Rate Working Group (“CARR”) published its recommended fallback language for loans referencing CDOR as the benchmark interest rate. This recommended language provides for an automatic transition from CDOR to CORRA on the CDOR Cessation Date.
While the CDOR Cessation Date is still over a year away, in 2022 participants in the Canadian securitization market began updating documents that reference CDOR as a benchmark interest rate with the CARR recommended fallback language. For Canadian federally regulated financial institutions, the Office of the Superintendent of Financial Institutions stated that it expects all new derivative contracts and securities to transition to CORRA by June 30, 2023, with no new CDOR exposures being booked after that date, with limited exceptions, which will require the inclusion of CORRA provisions into new transaction documents related thereto a year before the CDOR Cessation Date. Our Firm has advised a number of Canadian and cross-border clients on integrating CDOR benchmark replacement language into their structured finance documentation.
French Language Laws in the Province of Quebec
On May 24, 2022, the National Assembly of Quebec passed Bill 96: An Act respecting French, the official and common language of Quebec (“Bill 96”). Bill 96, most of which came into force on June 1, 2022, makes several amendments to the Charter of the French Language to affirm that the only official language of the Province of Quebec is French. While some key amendments will only come into force on June 1, 2023, Bill 96 achieves its purpose by strengthening provisions relating to the use of French as the language of commerce in the Province of Quebec. Most notably for the structured finance industry, Bill 96 amended the Civil Code of Quebec to require that certain registrations filed in Quebec be filed only in French. As of September 1, 2022, applications for the registration of security in the Register of Personal and Movable Real Rights in Quebec (the “RPMRR”, which is equivalent to the personal property security registries in other Canadian provinces) or in Land Registers in Quebec must be submitted in French. Our Firm has assisted clients with RPMRR registrations filed under this new regime in numerous securitization transactions which include assets originated in Quebec. Our Firm’s structured finance group in our Montreal office is well-positioned to advise securitization market participants on navigating the legal landscape in the Province of Quebec.
Hybrid Mismatch Rules
On April 29, 2022, the Department of Finance Canada released draft legislative proposals that address “hybrid mismatch arrangements”. Generally, hybrid mismatch arrangements entail using the differences in the income tax treatment between two or more countries, to claim a deduction in one country in respect of a cross-border payment, while not including the corresponding receipt in the recipient’s income in the other country. Such mismatches could result in double non-taxation, meaning certain income would not be subject to tax in any jurisdiction. The Government of Canada’s federal budget 2021 proposed to address these arrangements in two separate legislative packages. The second legislative package is expected to be released at a later date.
Overview and Outlook
2022 marked another busy year in the Canadian structured finance market. Market activity remained robust in 2022 for ABS issuers across a range of asset classes. Although the continued rise of interest rates in Canada and abroad may present some challenges in the Canadian structured finance market, including by increasing borrowing costs for originators and issuers and potentially reducing asset originations in certain asset classes, we believe that the Canadian structured finance market will continue to be active in 2023, particularly in the second half of 2023 as the market adjusts to a higher interest rate environment. We look forward to advising originators, issuers, dealers, lenders, purchasers and other parties within the structured finance industry in 2023.
Clients regularly turn to McCarthy Tétrault for assistance with structured finance and securitization transactions. If you have any questions about the legal developments outlined above, please reach out to any member of our Structured Finance & Securitization Group .