Bank of Montreal 2013 Annual Report Download - page 55

MD&A
MANAGEMENT’S DISCUSSION AND ANALYSIS
BMO-Sponsored Securitization Vehicles
BMO sponsors various vehicles that fund assets originated by either
BMO (through a bank securitization vehicle) or its customers (several
Canadian customer securitization vehicles and one U.S. customer
securitization vehicle). We earn fees for providing services related to the
securitizations in the customer securitization vehicles, including liquidity,
distribution and financial arrangement fees for supporting the ongoing
operations of the vehicles. These fees totalled approximately $53 million
in 2013 and $38 million in 2012.
Canadian Customer Securitization Vehicles
The customer securitization vehicles we sponsor in Canada provide our
customers with access to financing either directly from BMO or in the asset-
backed commercial paper (ABCP) markets. Customers sell their assets into
these vehicles, which then issue ABCP to either investors or BMO to fund
the purchases. In all cases, the sellers continue to service the transferred
assets and are first to absorb any losses realized on the assets.
Our exposure to potential losses relates to our investment in ABCP
issued by the vehicles, derivative contracts we have entered into with
the vehicles and the liquidity support we provide to ABCP purchased by
investors. We use our credit adjudication process in deciding whether to
enter into these agreements just as we do when extending credit in the
form of a loan.
Two of these customer securitization vehicles are funded in the
market, while a third is funded directly by BMO. BMO consolidates the
assets of the customer securitization vehicles that BMO is deemed to
control. Further information on the consolidation of customer securitiza-
tion vehicles is provided in Note 9 on page 145 of the financial state-
ments. There were no mortgage loans with subprime or Alt-A
characteristics held in any of the customer securitization vehicles at
year end. No losses have been recorded on any of BMO’s exposures to
these vehicles.
BMO’s investment in the ABCP of the market-funded vehicles
totalled $13 million at October 31, 2013 ($20 million in 2012).
BMO provided liquidity support facilities to the market-funded
vehicles totalling $3.9 billion at October 31, 2013 ($3.7 billion in 2012).
This amount comprised part of other credit instruments outlined in
Note 5 on page 141 of the financial statements. All of these facilities
remain undrawn. The assets of each of these market-funded customer
securitization vehicles consist primarily of diversified pools of Canadian
automobile-related receivables and Canadian insured residential mort-
gages. These two asset classes represent 77% (83% in 2012) of the
aggregate assets of these vehicles.
U.S. Customer Securitization Vehicle
We sponsor a U.S. ABCP multi-seller vehicle that we consolidate under
IFRS. This customer securitization vehicle assists our customers with the
securitization of their assets to provide them with alternative sources of
funding. The vehicle provides funding to diversified pools of portfolios
through 47 (57 in 2012) individual securitization transactions with an
average facility size of US$94 million (US$73 million in 2012). The size
of the pools ranged from US$2 million to US$500 million at October 31,
2013. There were no residential mortgages classified as subprime or
Alt-A held in this ABCP multi-seller vehicle.
Approximately 49% of the vehicle’s commitments have been rated
by Moody’s or S&P, and 52% of those are rated A or higher. The vehicle
holds exposures secured by a variety of asset classes, including mid-
market corporate loans, commercial real estate and auto loans.
The vehicle had US$3.4 billion of commercial paper outstanding at
October 31, 2013 (US$3.1 billion in 2012). The ABCP of the vehicle is
rated A1 by S&P and P1 by Moody’s. BMO has not invested in the vehi-
cle’s ABCP. BMO provides committed liquidity support facilities to the
vehicle, with the undrawn amount totalling US$4.5 billion at October 31,
2013 (US$4.1 billion in 2012).
Credit Protection Vehicle
We also sponsor Apex Trust (Apex), a Canadian special purpose vehicle
that has exposure to tranches of diversified corporate credits, each of
which has the benefit of first-loss protection. We consolidate Apex under
IFRS. Seven tranches matured in 2013 without loss. The two remaining
tranches have notional amounts totalling $7.8 billion and significant
first-loss protection, ranging from 12% to 28% of the notional
exposures, with a weighted average of 25%. The longest-dated tranche
matures in 2016 and has first-loss protection of 28%. Approximately
65% of the corporate credits are rated investment grade. Apex has
$1.4 billion of notes outstanding (Apex Notes), with $1.05 billion having
an expected maturity date in the first quarter of 2014 and the remainder
in 2016. BMO has hedged its exposure to its holdings of Apex Notes.
BMO has entered into credit default swap contracts on the net notional
positions in the structure with the swap counterparties and into off-
setting swaps with Apex.
Given the level of first-loss protection supporting the tranches, the
hedges in place on BMO’s Apex Note holdings and the protection pro-
vided by third-party noteholders, BMO is extremely well protected from
losses in relation to Apex.
Structured Investment Vehicle
In 2013, we provided senior funding through a loan facility to a London-
managed BMO structured investment vehicle (SIV), Links Finance Corpo-
ration (Links). We consolidated the SIV under IFRS. Our exposure to
potential losses in the SIV related to the loan facility that was put in
place in order to fund the repayment of its senior notes and to allow for
the orderly sale of its assets. In the third quarter of 2013, our loan
facility was repaid in full. In the fourth quarter, all of the remaining
assets of the SIV were sold. Links is currently in the process of being
wound up.
Exposure to Other Select Financial Instruments, including
Collateralized Debt Obligations (CDOs) and Collateralized
Loan Obligations (CLOs)
BMO’s trading and available-for-sale portfolios contain CLOs, all of which
are in run-off mode. The underlying securities consist of a wide range of
corporate assets. Unhedged exposures to CLOs totalled $278 million and
had credit ratings of AA- to AAA at year end. Hedged CLO exposures of
$571 million had a carrying value of $560 million at year end, with
$11 million recoverable on associated hedges with a monoline insurer
that is rated A3 by Moody’s.
The portfolio also contains a credit default swap (CDS) transaction
referencing CDO instruments where we do not hold the underlying
derivative asset. The CDS protection outstanding is on a notional amount
of $500 million, and had a carrying value of ($2) million at year end.
66 BMO Financial Group 196th Annual Report 2013