DBRS Releases January 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 January 31, 2014, 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 are expected to increase the investor base and the liquidity of Canadian covered bonds globally. For detailed comments, please refer to “Covered with Maple: DBRS Comments on Canadian Covered Bond Programs Guide” (December 2012).

The new issuance of covered bonds was dormant until July 2013, when CMHC announced that Royal Bank of Canada (RBC), Canadian Imperial Bank of Commerce (CIBC) and Bank of Nova Scotia (BNS) had registered their programs. National Bank of Canada (NBC) also registered in November 2013, and Caisse centrale Desjardins du Québec (CCDQ) in January 2014. DBRS understands that other issuers are actively pursuing registration.

Following the registration of their new programs, RBC, CIBC and NBC came to market issuing a combined $13.2 billion, through eight separate series denominated in U.S. dollars, Australian dollars and euros. Total issuance during 2013 was substantially below the $17.0 billion issued in 2012 and the $25.7 billion issued in 2011. Given the delays in funding covered bond programs, DBRS does not expect the remaining three banks to issue until the spring of 2014.

In the month of January, two series of notes were fully repaid: Covered Bonds, Series 3 issued under the BNS Global Public Sector Covered Bond Programme for AUD 1.0 billion, and Covered Bonds, Series 1 issued under the NBC Global Public Sector Covered Bond Programme for USD 1.0 billion. The Programme asset percentage for CIBC’s covered bond program was increased to 95.1% from 92.7%.

The U.S. debt markets remain an important source of funding for Canadian financial institutions, with total U.S. dollar issuances outstanding currently at $51.5 billion (Canadian dollar equivalent), or 75.4% of total covered bonds outstanding. As of January 31, 2014, the total amount outstanding of structured and legislative covered bonds was $44.6 billion and $23.8 billion, respectively.

Notes:
All figures are in Canadian dollars unless otherwise noted.

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.