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ALLAN ROBINSON

Tuesday, February 28, 2006

Moody's Investors Service Inc. said Tuesday that it will be the first foreign-controlled credit rating agency to provide ratings for Canadian asset-backed commercial paper, a market previously serviced only by Toronto-based Dominion Bond Rating Service Ltd.

Commercial paper consists of debt securities with maturities of one year or less, but they can be backed by assets, such as mortgages, with maturities scheduled for repayment over several years.

The 17-year-old market with assets of about $80-billion differs from similar markets in the United States and Europe because of restrictions the Office of the Superintendent of Financial Institutions places on banks that provide back-up lines of liquidity to the issuers, said Andrew Kriegler, managing director of the structured finance group for Moody's Canada Inc.

Canada's federal regulator restricts the ability of financial institutions to provide temporary support to individual issuers or special-purpose entities in the commercial paper markets in instances when at maturity the commercial paper can not be refinanced by the issuance of new commercial paper. That contractual support by banks provides for prompt repayment of the principal and interest to the holders of the commercial paper.

“People kept asking us when [we] were going to rate the commercial paper,” Mr. Kriegler said. “It's a huge market.”

Moody's said that its ratings will reflect the credit quality of the underlying assets as well as the quality of the management and their strategy.

The rating symbols that Moody's will use are identical to those used to indicate the credit quality of long-term fixed income obligations rather than the short-term rating symbols that are more commonly used for asset-backed commercial paper and corporate commercial paper programs used in some other countries, Mr. Kriegler said.

The contract between banks and the special entities are not as strong in Canada as the United States because the OSFI did not want the bank's liquidity lines being used as credit support for an individual issuer, he said.

In Canada, banks can only provide liquidity support in cases where general market disruptions affect several investment entities and not simply the loss of creditworthiness of an individual investment conduit or the underlying assets of the issuer or the sponsor.

During the past two years, the market has grown by 33 per cent in part as a result of the growth in loan pools known as collateralized debt obligations.

Standard & Poor's is currently looking into the possibility of rating various forms of commercial paper and other short-term debt instruments in Canada said Tom Connell, managing director of Standard & Poor's in Canada.

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