DBRS Releases June 2011 Monthly 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, 2011. The report provides detailed information on this debt market, which was previously included in the Monthly Canadian ABS Report.

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).

Unlike many European countries, there is no explicit legislation in Canada for covered bonds at this point that prescribes asset segregation upon an issuer’s insolvency without having to transfer assets off balance sheet. Following the federal government’s announcement in the 2010 budget to create a covered bond legislative framework (the Proposed Legislation), a consultation paper was released by the federal Department of Finance on May 11, 2011.

DBRS views the Proposed Legislation as generally positive. DBRS seeks clarification as to whether the issuers will be permitted to issue outside of the legislative framework, whether there will be a restriction on the assets included in the cover pool and whether the 4% asset limit will be changed. Another area of concern is the proposal of standardizing the asset valuation method, which may be different from the current valuation method used in Canada. In addition, the proposed overcollateralization cap of 10% may pose problems if the program requires further overcollateralization to maintain an AAA rating. However, all existing programs rated by DBRS currently require less than 10%.

DBRS notes that building a legislative landscape in Canada that is free of conflicts, inconsistencies or ambiguities would help promote the health and resiliency of financial markets generally.

There was one new issuance in the month. RBC re-opened Series CB7 under its EUR 15 billion Global Covered Bond Programme, issuing CHF 225 million of Series CB7 (Tranche 2). As of June 30, 2011, the total amount outstanding was $33.7 billion (Canadian-dollar equivalent).

The full report is available by clicking on the link below or by contacting us at info@dbrs.com.