DBRS Releases December 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 December 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, the 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, followed by 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.

New covered bond issuance has reached a record level in 2014. Total year-to-date new volume amounts to $27.6 billion (Canadian dollar equivalent), $1.9 billion higher than the previous record level set in 2011 for the entire year ($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%).

New issuance in 2015 started strong, with three deals closed in the first three weeks. BNS issued Series CBL5 (Tranche 2) for GBP 300 million and Series CBL6 for AUD 600 million and BMO issued Series CBL2 for EUR 1.5 billion. Three other series from BMO, NBC and CIBC were also announced, pending closing.

DBRS expects registered Canadian covered bond issuance will continue growing in 2015 as a result of the repayment of older series and the benefit registered covered bonds enjoy from a broader investor base and hence, larger liquidity, as some international investors are restricted from purchasing bonds without a legislation. New issuance will, however, be subject to the cap where total outstanding amount cannot exceed 4% of the financial institution’s assets.

U.S. dollar outstanding issuance is at $47.0 billion (Canadian dollar equivalent) or 55.2% of total covered bonds outstanding of $85.3 billion (Canadian dollar equivalent). As of December 31 2014, the total amount outstanding of structured (legacy) covered bonds decreased to $34.6 billion (Canadian dollar equivalent) as CIBC Series 13 was fully repaid during the month. In the meantime, legislative covered bonds remained at $50.6 billion (Canadian dollar equivalent).

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.