DBRS Releases March Canadian Covered Bond Report

DBRS Limited (DBRS) has today released the Monthly Canadian Covered Bond Report, which provides an overview of the Canadian covered bond market for the month ending March 31, 2015, 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 does 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 because the implementation of the Guide and the enactment of covered bond legislation would protect the cover pool upon the bankruptcy of an issuer and are expected to increase the investor base and 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 after the release of the Guide until July 2013, when CMHC announced the registration of Royal Bank of Canada (RBC), Canadian Imperial Bank of Commerce (CIBC) and Bank of Nova Scotia (BNS) and RBC issued Series CB10. National Bank of Canada (NBC) registered in November 2013, Caisse centrale Desjardins du Quebec (CCDQ) in January 2014 and Bank of Montreal (BMO) in April 2014. Toronto-Dominion Bank (TD) registered in June 2014. Now, all seven covered bond issuers existing prior to the introduction of the Legislation have registered their programs.

During March 2015, RBC issued Series CB19 and CB20 for CAD 1.5 billion and CAD 700 million, respectively. Thus far in April, TD issued CBL6 and CBL7 for USD 1.75 billion and GBP 500 million, respectively, while BNS issued CBL7 for USD 1.1 billion and NBC issued CBL4 for USD 750 billion. New issuance in 2015 has been strong as 14 series have been issued so far, totalling Canadian-dollar equivalent 17.6 billion.

DBRS expects that registered Canadian covered bond issuance will continue growing in 2015 as a result of the repayment of older series and the benefit that registered covered bonds enjoy from a broader investor base and, hence, larger liquidity because some international investors are restricted from purchasing bonds without legislation. New issuance will, however, be subject to the cap where total outstanding amount cannot exceed 4% of the financial institution’s assets.

U.S.-dollar outstanding issuance is at $48.3 billion (Canadian-dollar equivalent) or 51.2% of total covered bonds outstanding of $94.3 billion (Canadian-dollar equivalent). As of March 31, 2015, the total amount outstanding of structured (legacy) covered bonds decreased to $32.4 billion (Canadian-dollar equivalent). On the other hand, legislative covered bonds increased to $62.0 billion (Canadian-dollar equivalent) from more RBC issuances during the month.

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.