DBRS Releases April 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 April 30, 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 the registration of Royal Bank of Canada (RBC), Canadian Imperial Bank of Commerce (CIBC) and Bank of Nova Scotia (BNS). 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. DBRS understands that one more issuer is actively pursuing registration.

On April 25, 2014, DBRS published its updated methodology “Rating Canadian Covered Bonds.” The updated version adopts the covered bond rating tables used in the European methodology, which generally provide more rating uplifts for lower-rated issuers or cover pool assessment. Following the release of the updated methodology, DBRS reduced the overcollateralization levels on legislative Canadian covered bonds as follows:

-- Bank of Montreal (Global Registered Covered Bond Program): 6% OC (or an asset percentage of 94.3%)
-- Bank of Nova Scotia (Global Registered Covered Bond Program): 5.5% OC (or an asset percentage of 94.8%)
-- National Bank of Canada (Legislative Global Covered Bond Programme): 7% OC (or an asset percentage of 93.5%)
-- Royal Bank of Canada (Global Covered Bond Programme): 5% OC (or an asset percentage of 95.2%)

There was one new issuance in April. BNS issued its first covered bond, Series CBL1, under the Global Registered Covered Bond Program for EUR 1.0 billion. In addition, DBRS assigned a provisional rating of AAA to the BMO Global Registered Covered Bonds, Series CBL1 in April. The transaction closed on May 7, 2014, for EUR 1.0 billion.

U.S. dollar issuance remains at $51.5 billion (Canadian dollar equivalent), or 70.6% of total covered bonds outstanding. However, the new issuance since July 2013 has been mostly in Euros, totalling $12.3 billion (Canadian dollar equivalent). As of April 30, 2014, the total amount outstanding of structured and legislative covered bonds was $44.6 billion and $28.4 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.