TD Bank 2005 Annual Report Download - page 58

TD BANK FINANCIAL GROUP ANNUAL REPORT 2005 Management’s Discussion and Analysis
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For the securitization of real estate secured personal loans the
Bank provides credit enhancement through its retained interest
in the excess spread of the QSPE and in some cases by providing
letters of credit. The Bank’s interest in the excess spread of the
QSPEs and the letters of credit is subordinate to obligations of
the holders of the asset-backed securities and absorbs losses
with respect to the real estate personal loans before payments to
noteholders are affected. As at October 31, 2005, the Bank had
outstanding securitized real estate personal loans of $4.8 billion
as compared with $4.0 billion in fiscal 2004. The carrying value
of our retained interests in securitized real estate personal loans
at October 31, 2005, was $32 million compared to $2 million
in 2004.
For credit card securitizations the Bank provides credit
enhancement to the QSPE through its retained interest in the
excess spread. The Bank’s interest in the excess spread of the
QSPE is subordinate to the QSPE’s obligations to the holders of
its asset-backed securities and absorbs losses with respect to the
credit card loans before payments to the noteholders are affect-
ed. If the net cash flows areinsufficient, the Bank’s loss is limited
to an interest-only strip that arises from the calculation of the
gain or loss at the time receivables are sold. As at October 31,
2005, the Bank had outstanding securitized credit card receiv-
ables of $1.3 billion as compared with $1.3 billion in fiscal 2004.
The carrying value of our retained interests in securitized credit
cardreceivables at October 31, 2005, was $24 million compared
to $24 million in 2004.
The Bank sells commercial mortgages in collateral pools, to
aSPE. The SPE finances the purchase of these pools by way
of issuing ownership certificates that carry varying degrees of
subordination and which, when rated, range from AAA to B-,
and unrated. The ownership certificates represent undivided
interests in the collateral pool, and the SPE, having sold all undi-
vided interests available in the pool, retains none of the risk of
the collateral pools. The sale of our commercial mortgages to
the SPE constitutes an accounting and true sale and since we
neither control the SPE nor carry any residual risks/returns in
the mortgages, we do not consolidate the SPE.
The Bank also securitizes commercial mortgages through sales
to VIEs. As at October 31, 2005, $55 million of our originated
commercial mortgages had been securitized through a VIE
sponsored by us, while $79 million of commercial mortgages
had been sold to a third-party sponsored VIE during the year.
The Bank’s interest in the excess spread, cash collateral account,
and the commercial mortgages of the VIE sponsored by us is
subordinate to the VIE’s obligations to the holders of its asset-
backed securities. The Bank’sinterest in the excess spread of the
third-party sponsored VIE is subordinate to the VIE’s obligations
to the holders of its asset-backed securities.
Total bank-originated securitized assets not included on the
Consolidated Balance Sheet amounted to $23.9 billion compared
with $20.2 billion a year ago. Further details are provided in
Note 4 of the Bank’s Consolidated Financial Statements. If
these securitizations wereto be terminated, the Bank would
experience capital implications of maintaining the assets on
the Consolidated Balance Sheet and be exposed to the assets’
full operational, financial and market risks.
CAPITAL TRUSTS
We sponsor two SPEs, TD Capital Trust and TD Capital Trust II, to
raise capital (TD CaTS) that qualifies as Tier 1 regulatory capital.
For further details on this capital trust activity and the terms of
the TD CaTS issued and outstanding, refer to Note 12 on page
85. We previously consolidated these SPEs under current
Canadian GAAP, however, certain changes to Canadian account-
ing guidelines have resulted in the classification of TD CaTS II as
aVIE and resulted in deconsolidation. OSFI has advised that
future capital issues by TD Capital Trust II will qualify as Tier 1
capital provided that the Bank has continued clear ownership
and control of the trust, evidenced by ownership of 100% of
the trust’s voting securities.
SECURITIZATION OF THIRD PARTY
ORIGINATED ASSETS
The Bank assists its clients in securitizing their financial assets
through SPEs administered by the Bank. The Bank may provide
credit enhancement, swap facilities or liquidity facilities to the
resulting SPEs as well as securities distribution services. Liquidity
facilities are only available in the event of a general market
disruption and the probability of loss is negligible. The Bank does
not provide employees to the SPEs, nor does it have ownership
interests in these SPEs and all fees earned in respect of these
activities are on a market basis. If these securitizations were
to be terminated, the Bank would experience a reduction in
securitization income.
Within our securitization group, our principal relationship
with SPEs comes in the form of administering multi-seller
asset-backed commercial paper conduit programs (multi-seller
conduits) totaling $9.7 billion as at October 31, 2005, and
$8.0 billion as at October 31, 2004. We currently administer
4 multiseller conduits. We are involved in the multi-seller conduit
markets because they generate a favourable risk-adjusted
return for us. Our clients primarily utilize multi-seller conduits
to diversify their financing sources and to reduce funding costs
by leveraging the value of high-quality collateral.
CREATION OF OTHER INVESTMENT
AND FINANCING PRODUCTS
The Bank sells trading securities to VIEs in conjunction with its
balance sheet management strategies. The Bank holds a signifi-
cant variable interest in these VIEs, but is not considered to be
the primary beneficiary, and as a result does not consolidate
these VIEs. Also, the Bank does not retain effective control over
the assets sold. Assets sold under such arrangements at October
31, 2005 amounted to $1.4 billion as compared with $3.0 billion
in fiscal 2004. The Bank enters into total return swaps with the
sale counterparties in respect of the assets sold. Market risk for
all such transactions is tracked and monitored.
The Bank is also involved in Collateralized Debt Obligation
vehicles (CDOs). In relation to these CDOs, the Bank may serve in
the capacity of an underwriter, a third party investor or a deriva-
tive counterparty. CDOs raise capital by issuing debt securities
and use their capital to invest in portfolios of securities and
derivatives. Any net income or loss is shared by the CDOs’ vari-
able interest holders. The CDOs we manage may from time to
time purchase collateral assets originated by us or third parties.
We do not consolidate these CDOs. We recognize fee income
from structuring and collateral management services and, where
indicated, interest income from investments in individual CDOs.
In addition, the Bank offers equity-linked notes, credit linked
notes, interest linked notes, and commodity linked notes to
various VIEs and thirdparty clients. The Bank’sexposureto risk
from these transactions is not significant.
The Bank through The Canada Trust Company acts as a
trustee for personal and corporate trusts. In the capacity as a
trustee, fees are earned.
The Bank also sponsors numerous mutual funds. The Bank
acts as the administrator of these funds and does not guarantee
the principal or return to investors on these funds.
The Bank also offers other financial products to clients.
These financial products are, on occasion, created using a VIE as
issuer or obligor of the financial products. The Bank may provide
certain administrative services and other financial products to the
VIEs in exchange for market rate compensation.