TORONTO -- Fallout from the U.S. subprime mortgage meltdown spread to Canada Tuesday with a rating agency warning of possible defaults in the C$116 billion ($109 billion) market for asset-backed commercial paper, and one issuer saying it couldn't repay paper that is falling due.
Dominion Bond Rating Services, Canada's main rating agency, said 17 issuers of asset-backed commercial paper were seeking cash. The 17 had C$26.6 billion of asset-backed commercial paper (ABCP) outstanding, or almost a quarter of Canada's C$116.2 billion market, it said.
"Failure to receive funding in a timely manner through the placement of ABCP, or funding under the MDE (market disruption event) liquidity facilities may result in an event of default under the ABCP issuers' trust indenture after applicable grace periods have expired," DBRS said.
One issuer named by DBRS was MMAI-I Trust, which said in a statement with Global Diversified Investment Grade Income Trust Tuesday that it couldn't find funds to repay outstanding asset-backed commercial paper.
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The warnings, following one Monday from structured-finance firm Coventree Inc. , knocked the Canadian dollar lower and put Canadian stocks under pressure for a fourth successive day.
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 Tuesday.
It declined all 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, noting that bank stocks were likely to remain "very choppy" until the impact is clear.
The Canadian dollar, already under pressure from falling energy prices, fell to C$1.0643 to the U.S. dollar, or 93.95 U.S. cents, from C$1.0532 to the U.S. dollar, or 95.37 U.S. cents, early in the day.
"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."
Toronto's main stock index fell as much as 160 points before recovering somewhat. At 1:40 p.m. EDT (1740 GMT) it was down 90.31 points at 13,337.14.
Tuesday's biggest Toronto stock market loser in percentage terms was Coventree, whose shares slumped 70 percent, down C$6 at C$2.50.
Coventree stock fell 34 percent Monday after the company said it couldn't place C$250 million in new asset-backed commercial paper because of "unfavorable conditions" in the market, and was seeking C$700 million in backup funds.
"Certain liquidity providers have advanced funding, some have disagreed that they have an obligation to fund, some are in discussions with the company and some have not responded," the company said Tuesday.
Coventree sponsors and administers about C$16 billion in various commercial paper vehicles.
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