Fallout from the global credit crunch spread to Canada on Tuesday with a rating agency warning of possible defaults in the C$116 billion ($109 billion) market for asset-backed commercial paper, one issuer saying it couldn't repay paper that is due, and a mortgage lender saying its profits could be hurt.
Dominion Bond Rating Services, Canada's main rating agency, said 17 issuers of asset-backed commercial paper were seeking cash, citing market disruption. The 17 had C$26.6 billion of asset-backed commercial paper (ABCP) outstanding, or almost a quarter of this market, it said.
It said their failure to receive funding in a timely manner could result in defaults.
One issuer named by DBRS was MMAI-I Trust, which said in a statement with Global Diversified Investment Grade Income Trust (DG_u.TO: Quote, Profile, Research) on Tuesday that it couldn't find funds to repay outstanding asset-backed commercial paper.
Those warnings, combined with one on Monday from structured-finance firm Coventree Inc., knocked the Canadian dollar lower and pressured Canadian stocks for the fourth day in a row.
Xceed Mortgage, a small Canadian alternative mortgage provider, said Coventree was the securitization agent for its medium-term commercial paper funding facility. Wider credit spreads in the asset-backed paper market could hurt its profits and cash flows, Xceed said, but the effect will depend on how wide spreads go and on how long they stay wide.
Xceed shares fell 28 percent to C$3.25 on the Toronto Stock Exchange on Tuesday, after a 20 percent decline on Monday.
The subprime crisis has already sparked fears about credit shortages around the world, prompting central banks to inject billions of dollars into the market. The Bank of Canada has injected extra cash over the last three days, but it stayed on the sidelines on Tuesday.
It declined comment on the problems in the commercial paper sector.
DBRS said there was no standard definition of a market disruption event in Canada's commercial paper market, and some banks clearly don't think that point has been reached. MMAI-I said it had asked Deutsche Bank for additional liquidity, and that Deutsche had declined.
Genuity Capital analyst Mario Mendonca said Canada's big banks are the main providers of emergency funding with Bank of Montreal and Royal Bank of Canada at the top of the list.
We believe the banks have sufficient excess capital to cope with amounts potentially drawn under the facilities, he wrote, but noted that bank stocks were likely to remain very choppy until the impact is clear.
The asset-backed side may be less of an issue than the market thinks, but it's enough that the market is kind of second-guessing the Bank of Canada, said Shaun Osborne, chief currency strategist at TD Securities in Toronto.
It's not a good backdrop for the Canadian dollar anyway.
The Canadian dollar closed at C$1.0667 to the U.S. dollar, or 93.75 U.S. cents, on Tuesday, down sharply from C$1.0532 to the U.S. dollar, or 94.95 U.S. cents, on Monday.
Toronto's main stock index tumbled 184.83 points, or 1.4 percent, to close at 13,242.62, its fourth straight decline.
The biggest stock market loser in percentage terms was Coventree, whose shares slumped 72 percent, down C$6.13 at C$2.37, before trading was halted.
Coventree stock fell 34 percent on Monday after the company said it couldn't place C$250 million in new asset-backed commercial paper because of unfavorable conditions and was seeking C$700 million in backup funds.
Coventree sponsors and administers about C$16 billion in various commercial paper vehicles.
(Additional reporting by New York treasury team)