Northern Exposure: A Look at Canadian CMBS


CanadaThere are a lot of differences between Americans and our gentle neighbors to the north. We’ve chosen different parliamentary systems. We feel differently about gravy on fries. And one of us (hint: not the U.S.) was recognized for having the most stable banking system in the world following the 2008 financial crisis. This was likely for a reason—a totally different ethos surrounds lending for real estate in Canada.

Few things make it more clear how differently the lending communities in the two countries behave than a panel on the Canadian CMBS business at the recent Commercial Real Estate Finance Council conference in Miami Beach did.

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The conference brought together a crop of CMBS lenders and execs whose pronunciation of the word “about,” set them apart from the mostly American audience. The takeaway? Not only is the Canadian CMBS space much smaller than that in the U.S., but as one panelist put it, “as conservative as American CMBS is aggressive.”

Ticking in at about $1.2 billion last year, the Canadian CMBS landscape may seem so small as to not merit mention in an American publication—but that would be overlooking a steadily growing, increasingly important sector, bankers said. Next year, issuance could reach $2 billion, panelists predicted, a massive jump year-over-year.

The major ways the Canadian CMBS market differentiates itself from the American version include 1) no interest-only lending, 2) almost all CMBS is recourse, 3) almost no borrowers use special purpose vehicles to obscure their identity, and 4) there is almost no difference in LTV between balance-sheet and CMBS lending.

Indeed, while an American B-piece buyer at another, unrelated panel at the CREFC conference declared, “the business operates exactly as it did in [CMBS] 1.0,” the Canadian CMBS players sang a different tune. While you could draw a comparison between the American loan repackaging scene right now and a relatively risky year like 2006, in Canada “this is 2003 all over again,” one Canadian panelist said.

And with delinquency hovering around 2 percent (and never topping 3 percent, even in 2011, a peak year for delinquency here), according to CREFC estimates, Canadian CMBS is clearly more effective at hedging risk than the same business in the states.

“We look at the last cycle, where is the floor, and we make loans to survive that floor,” said an executive with a major Canadian lender and servicer. He also said he would rather do a recourse loan and take a lower spread, almost always.

So … where are the returns?

“We have a sweet spot at 10-year fixed-rate,” the executive said. The flexibility in terms—and sheer length of terms—gives the small but agile Canadian CMBS industry an edge with borrowers who want to lock in historically low rates.

For would-be investors, CREFC also touts the quicker workout process in Canada, and “quicker control of cash flows during the realization process.”

And for now, executives agreed that growth is steady and moving up. Issuance surged more than 100 percent between 2012 and 2013, according to CREFC numbers, and panelists agreed they see growth into 2016. As the condominium sector in Toronto in particular expands, lenders see opportunities for increased business. The one thing holding up the whole show? Only one major Canadian bank, Royal Bank of Canada, is currently doing CMBS deals there.

“It would be great if there were another [large] bank that could throw their hat in the ring,” one panelist said.