DBRS puts the bullet in Coventree

So many metaphors come to mind, but the news that the Dominion Bond Rating Service (“DBRS”) has recognized the error of its ways signals the end of Coventree (COF:TSX). According to a report, DBRS will no longer give an R-1 rating for asset-backed commercial paper (“ABCP”) that involves liquidity agreements with the requirement for a “general market disruption” before the backstop bank funding flows. Assuming that every non-bank ABCP vehicle had this provision, that’s $35 billion of paper about to be downgraded.

As I think about our own limited partnership agreement, we can’t temporarily put cash anywhere that doesn’t have an R-1 rating. Assuming DBRS drops the rating to R-2, Coventree’s $15 billion of ABCP will now be ineligible for most of the investors they relied upon to build their business. Without investors, Coventree can’t continue.

And without Coventree, billions of dollars of underlying paper that has yet to be issued (to support individual loans, mortgages, leases, etc.) will need to find a home with the oligopolist bank conduits (see “Banks agree to support each other; what of the rest?“, August 21-07).

To blame DBRS for the end of Coventree isn’t entirely fair, as few corporate Treasurers would want to buy new paper issued by Coventree next year, regardless of the rating or yield. Like most markets, once the confidence is gone the business goes with it.

But DBRS’ move is the final straw, and Coventree’s $1.50 quote can’t be sustained in the wake of this news. It is poetic that DBRS is the one to administer the last rites. Without their original support, Coventree’s business couldn’t have gotten off the ground.

MRM