DBRS Releases August 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 August 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.

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, Canadian Imperial Bank of Commerce and Bank of Nova Scotia (BNS). National Bank of Canada registered in November 2013, Caisse centrale Desjardins du Quebec in January 2014 and Bank of Montreal (BMO) in April 2014. Toronto-Dominion Bank registered in June 2014. Now, all seven covered bond issuers existing prior to the introduction of the Legislation have registered their programs.

During August 2015, there were new covered bond issuances from BMO and BNS. BMO issued EUR 1.5 billion, and BNS issued GBP 400 million. New issuances since January have reached $31.2 billion (Canadian-dollar equivalent).

DBRS expects that registered Canadian covered bond issuance will continue growing in the second half of 2015 as a result of the expected repayment of $4.1 billion (Canadian-dollar equivalent) from an 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 a legislation.

New issuance, however, is subject to a cap where the total outstanding amount cannot exceed 4% of the financial institution’s assets. As of August 31, 2015, the regulatory limit stood at $180.8 billion (Canadian-dollar equivalent).

U.S. dollar outstanding issuance is at $47.7 billion (Canadian-dollar equivalent), or 45.2% of total covered bonds outstanding of $105.7 billion (Canadian-dollar equivalent). As of August 31, 2015, the total amount outstanding of structured (legacy) covered bonds remained at $26.3 billion (Canadian-dollar equivalent) as there was no repayments this month. However, legislative covered bonds increased to $79.4 billion (Canadian-dollar equivalent) as there were two new series issued.

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.