DBRS Releases June Canadian Covered Bond Report

DBRS has today released the Monthly Canadian Covered Bond Report, which provides an overview of the Canadian covered bond market for the month ending June 30, 2013, along with detailed information on this debt market.

Canadian covered bond issuances began in 2007, following a letter issued by the Office of the Superintendent of Financial Institutions (OSFI), the regulator of Canadian financial institutions, permitting the issuance of covered bonds provided that the aggregate amount issued by any financial institution not exceed 4% of its total assets (as determined by the numerator of the asset-to-capital multiple). If at any time after issuance the 4% limit is exceeded, the covered bond issuer must immediately notify OSFI. OSFI further stated that the pledging policies of the issuing entity need to be amended prior to the issuance of the covered bonds.

On April 26, 2012, the Canadian federal government introduced covered bonds legislation (the Legislation), which received Royal Assent on June 29, 2012. On December 17, 2012, Canada Mortgage and Housing Corporation (CMHC) released the Canadian Registered Covered Bond Programs Guide (the Guide) as mandated by the Legislation. The Guide sets out, among other things, the terms of the Canadian covered bond registry and continuous disclosure requirements. DBRS views the Guide as positive, as the implementation of the Guide and the enactment of covered bond legislation would provide for the protection of the cover pool upon the bankruptcy of an issuer and is expected to increase the investor base and the liquidity of Canadian covered bonds globally. For detailed comment, please refer to “Covered with Maple: DBRS Comments on Canadian Covered Bond Programs Guide” (December 2012).

On June 13, 2013, DBRS announced that it will use an estimated market value spread to assess the asset percentage and corresponding overcollateralization (OC) for all Canadian covered bond programs. This revision has no rating impact as the OC amount expected by DBRS under the revised approach is lower than the available OC amount for each program. The asset percentage required by DBRS has changed for the following programs:

-- Bank of Montreal (Global Public Sector Covered Bond Programme)
-- Caisse centrale Desjardins du Québec (Global Covered Bond Programme)
-- National Bank of Canada (Global Public Sector Covered Bond Programme)

The revised asset percentage required by DBRS for the above programs has been reported in this month’s report.

On July 16, 2013, Royal Bank of Canada launched Series CB10 in U.S. dollars under its Global Covered Bond Programme, ending the Canadian covered bond issuance drought of more than six months. DBRS predicted in February 2013 (see the “Canadian Structured Finance: Big Wins, Notable Misses and the Great Unknown” industry study) that there would likely be no new covered bond issuance in the first half of 2013 due to the extensive amendments required in the CMHC guidelines.

The U.S. debt markets remain an important source of funding for Canadian financial institutions, with total U.S. dollar issuances outstanding currently at $51.3 billion (CAD equivalent), or 84.7% of covered bonds outstanding. As of June 30, 2013, the total amount outstanding in the market was $60.5 billion (CAD equivalent).

Notes:
The full report is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.

Ratings disclosed in this report are endorsed by DBRS Ratings Limited for use in the European Union.