DBRS Releases July 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 July 31, 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). 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.

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 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.

Canadian issuers continue to take advantage of the U.S. debt markets for a source of funding, with U.S.-dollar denominated covered bond issuances reaching $5.5 billion year-to-date. This accounted for 58% of total new covered bond issuances from Canadian financial firms in 2011. This trend is expected to continue in the near term as U.S. investors look to diversify into Canada’s solid financial institutions and residential real estate market. The Canadian covered bond programs consist entirely of prime residential mortgages, which are either insured by the Canada Mortgage and Housing Corporation or feature at least 20% equity.

There was one new issuance in the month of July. Canadian Imperial Bank of Commerce issued AUD 600 million in Series CB11 notes under its Global Covered Bond Programme. As of July 31, 2011, the total amount outstanding in the market was $34.3 billion (Canadian-dollar equivalent).