DBRS Releases October 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 October 31, 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 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.

Covered bond issuance continues to be on a roll. After the six new series issued in September, three issuers (TD, CIBC and CCDQ) came to market in October with a new series of EUR 1 billion each. New issuance has not slowed down in November either, with three new series issued so far. TD issued series CBL5 for AUD 1 billion and BNS issued series CBL4 and CBL5 for EUR 1.24 billion and GBP 250 million, respectively.

New covered bond issuance has reached a record level as of the report date in 2014. Total new volume amounts to $27.6 billion (Canadian dollar equivalent), $1.9 billion higher than the previous record level set in 2011 ($25.7 billion Canadian dollar equivalent). The majority of the issuance this year is denominated in EUR (66.3%), followed by USD (19.8%), GBP (7.5%) and AUD (6.3%).

U.S. dollar outstanding issuance is at $51.0 billion (Canadian dollar equivalent), or 58.8% of total covered bonds outstanding of $86.8 billion (Canadian dollar equivalent). As of October 31, 2014, the total amount outstanding of structured (legacy) covered bonds decreased to $38.6 billion (Canadian dollar equivalent) as BMO Series 4 matured and was fully repaid during the month. Legislative covered bonds increased to $48.2 billion (Canadian dollar equivalent).

DBRS published a commentary on November 4, 2014, discussing in detail the nature of the overcollateralization (OC) for Canadian covered bonds. The commentary is intended to help market participants to sort through the jargon and program structures and better understand the investor’s entitlement to OC, specifically following an issuer default. For more information about this commentary, please click on the link under Related Research at the right of the screen.

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.