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Canadian bank to offer 1st auto ABS deal with $500M in US dollar-denominated tranches

Monthsafter Bank of NovaScotia re-entered the Canadian credit card ABS market, the companyis sponsoring its first term auto loan securitization and, in both cases, incorporatinglarge U.S. dollar-denominated tranches.

Materialsfiled Oct. 4 with the SEC and several rating agency presale reports publishedOct. 5 herald the forthcoming Securitized Term Auto Receivables Trust, orSTART, 2016-1, a rare issuance of term auto loan ABS in the Canadian market bya sponsor other than an automaker's captive finance company.

S&PGlobal Ratings said in a presale report that Scotiabank has a "longhistory" of originating consumer loans in Canada. But it has no trackrecord in terms of issuing auto ABS deals.

Thedeal includes $500 million in U.S. dollar-denominated class A notes as well asC$24.5 million in class B notes and C$21 million in class C notes. S&PGlobal Ratings assigned preliminary ratings of A-1+(sf) to the class A-1 notesand AAA(sf) to the class A-2a, A-2b, A-3 and A-4 notes. Moody's and DBRS issuedprovisional ratings to the senior and subordinated classes of START 2016-1notes. Scotiabank initially plans to retain the subordinated securities,S&P Global Ratings said.

TheSTART 2016-1 pool included loans with an aggregate initial outstanding balanceof C$739.9 million as of Aug. 31, a weighted-average borrower FICO score of 778and a weighted-average original term of 63 months, according to S&P GlobalRatings. New vehicles back approximately 71% of the loans.

Inanalyzing the pool, S&P Global Ratings compared the collateral to thatassociated with Ford Motor CreditCo. LLC's Ford Auto Securitization Trust Series 2015-R4, as well asa collection of U.S. issuers: AllyFinancial Inc.'s Ally Auto Receivables Trust 2016-3, Ford CreditAuto Owner Trust 2016-B and Hyundai Capital America Inc.'s Hyundai Auto ReceivablesTrust 2016-B. DBRS also used past Ford Auto Securitization Trust transactionsas a means for comparison of the START 2016-1 pool.

Otherissuers of Canadian auto ABS have included the likes of Ally and certaincaptive finance companies of foreign automakers, most recent among them aC$405.6 million deal sponsored by Mercedes-Benz Financial ServicesCanada Corp., for which Moody's and DBRS issued provisional ratings on Sept.29.

Scotiabank maintains auto lending relationships with morethan 4,100 dealerships in Canada and has strategic arrangements withoriginal-equipment manufacturers to facilitate subvented or subsidized loanfinancing for the dealers' customers, S&P Global Ratings said. Approximately 66% of theSTART 2016-1 pool consists of subvented loans or receivables withmanufacturer-based incentives, the rating agency added.

"Auto is a business we've been doing for, I'm told, 50years," James O'Sullivan, Scotiabank's group head of Canadian banking,said during a recent investorconference. "It's a business that we believe we're very goodat. We don't enjoy a No. 1 market share in a long list of things, but we doenjoy a No. 1 market share in auto."

Scotiabankestablished Trillium Credit Card Trust II in February 2016 for the purpose ofholding interests in a revolving pool of Visa, MasterCard and/or AmericanExpress credit card receivables. It issued $900 million in U.S.dollar-denominated credit card receivables-backed class A floating rate notesin June through a private placement. The original Trillium Credit Card Trustlast issued a DBRS-rated ABS deal in March 1999.

Othermajor Canadian banks that have sponsored credit card ABS in recent yearsinclude Canadian Imperial Bank ofCommerce through CARDS II Trust, Royal Bank of Canada through Golden Credit Card Trust,Bank of Montrealthrough Master Credit Card Trust II, and National Bank of Canada through Canadian Credit CardTrust II.

DBRSsaid that 92% of the total credit card ABS issued in the Canadian marketthrough the first seven months of 2016 had been placed in U.S. dollars, whichit attributed to the appeal of "excellent credit quality in Canadiancredit card portfolios" to foreign investors.

Theamount of credit card ABS issued and outstanding far exceeds that associatedwith auto loans and leases in the Canadian market, in stark contrast to thecircumstances in the U.S. market.

Statisticspublished by the Securities Industry and Financial Markets Association showthat auto-related ABS issuance has consistently outpaced credit card dealvolume, including by a margin of more than 3-to-1 through the first threequarters of 2016. The amount of auto-related ABS outstanding as of the end ofthe second quarter was $197.1 billion, compared with $125.6 billion of creditcard ABS outstanding.

Thedollar value of credit card ABS outstanding had regularly exceeded auto-relatedABS until the third quarter of 2012, reflecting resurgent auto ABS issuance.Credit card ABS issuance in the U.S. market has remained well below itsmid-2000s peak.