Bond rating agency DBRS is moving to require that the asset-backed commercial paper it rates uses the “global liquidity standard” rather than the uniquely Canadian arrangements that were identified as one of the culprits of the recent liquidity crisis in this segment of the market.

Many issuers in the Canadian ABCP market utilized a unique form of liquidity backstop facility, which includes a general market disruption clause (limiting the conditions under which liquidity support can be triggered).

However, DBRS decided to review and update its ABCP rating methodology after the market suffered a disruption that saw many issuers unable to secure financing. “Recent market conditions have clarified the benefits of strengthening the provisions of ABCP program documentation pertaining to the availability of contractual liquidity to ensure the full and timely payment of ABCP where the underlying assets are of good quality,” the rating agency says in a statement.

As a result, DBRS has updated its criteria for liquidity support arrangements to require contractual liquidity agreements that ensure repayment of ABCP where the credit quality of the underlying assets is still good. This new global liquidity standard removes any requirement for a “market disruption”.

DBRS will require that all new trusts issuing Canadian ABCP comply with these standards. And, it plans to work with the current trust administrators and sponsors to ensure that current trust documentation will be revised to achieve the global liquidity standard.

DBRS adds that it will be conducting reviews of all liquidity support agreements for the Canadian ABCP programs it rates and expects to have completed these reviews with conduit sponsors by Dec. 31. “If any liquidity arrangements supporting Canadian ABCP do not meet the Global Liquidity Standard within that time frame and if the program is neither wound up nor amortizing assets in an orderly manner, this may lead to rating action on the part of DBRS,” it says.