But when, in February, it became clear that the C$600bn statutory cap on CMHC insurance would not be raised, the scarcity value of deals backed by insured mortgages increased. Then on April 26 this year, the Canadian finance minister, Jim Flaherty, introduced an amendment to the National Housing Act to establish a legal framework for covered bonds. Consistent with an earlier consultation paper, the law set out to prohibit the use of CMHC-insured mortgage collateral.

This led to speculation that issuers might launch a flurry of CMHC-backed covered bonds before the ban became legally binding. But in fact, no new issue benchmark transaction has been executed since March 15 and future supply remains largely unclear.

From a collateral perspective the law introduces a potential credit consideration as the eligible, uninsured collateral is, some would argue, inferior to the insured collateral that had exclusively backed all programmes except Royal Bank of Canada’s.

On the other hand, the statutory framework enhances investors’ rights by preventing legal challenges to the cover pool, which is ring-fenced for their benefit. It also designates CMHC as the proficient regulator, an agency that has good specialist knowledge of Canadian housing market.

CMHC insures mortgages with an LTV of 80%, subject to an overall cap of $600bn. By capping that insurance, the number of high LTV mortgages should shrink. That should help to engineer a slowing of house prices, which, some would argue, are moderately overvalued. At the same time, the Canadian covered bond product will evolve from being viewed as one that is quasi agency product to one that is more in-line with other AAA rated, legislated international covered bond programmes. Funding levels are likely to somewhat increase. RBC’s covered bonds, which are not insured, currently trade 10bp-15bp wider than deals backed by insured mortgages. But the issuer trades tight in the senior unsecured market. Going forward the basis may vary as individual bank’s credit worthiness will play a larger role. In any event, with the scarcity value of insured deals likely to increase over time, the spread between the two types of covered bonds will inevitably widen. Aside from the absolute increase in the cost of funding, issuers will be obliged to increase the level of over-collateralisation as the uninsured mortgages are perceived as riskier. Because of that, the funding structures could become less efficient.

Canadian issuers will therefore seek to broaden the appeal of their new programmes and may consider following the lead of RBC which recently applied for full SEC registration.

Participants in the roundtable were:

Paras Jhaveri, director of corporate funding, Bank of Montreal

Peter Walker, associate vice president, treasury and balance sheet management, Toronto Dominion

Wojtek Niebrzydowski, vice president, treasury, Canadian Imperial Bank of Commerce

Ken Mason, managing director, corporate treasury, Royal Bank of Canada

Anguel Zaprianov, managing director, capital markets and treasury solutions, Deutsche Bank Capital Markets

Jeanmarie Genirs, managing director, global risk syndicate, US dollars, Deutsche Bank Capital Markets

EUROWEEK: Wojtek, what are the three principal reasons for establishing a Canadian covered bond legal framework?

Wojtek Niebrzydowski, Canadian Imperial Bank of Commerce: First and foremost, the original reason why the CBA initiated a discussion about setting up a Canadian covered bond legislative framework was to establish the exclusivity of claims on collateral, from the standpoint of bondholders.

This was something that was obviously missing from the pre-existing contractual set up. The second feature was to clarify the eligibility of collateral by restricting it to a narrow definition. And finally the law has declared that the CMHC will become the registrar administrator.

Paras Jhaveri, Bank of Montreal: I would also add that the law only allows covered bonds to be issued under the forthcoming legislation. This means that, once it is fully in place, a borrower would no longer be permitted to issue a covered bond outside the legislative framework.

EUROWEEK: Peter, are these the main points?

Peter Walker, Toronto Dominion: Yes, definitely, the backbone of the law certainly clarifies that the covered pool assets are set aside for covered bondholders. But I would also add that the law extends the range of eligible issuers from federal financial institutions, such as banks and insurers, to also include provincially regulated cooperative credit societies.

EUROWEEK: Is there any particular aspect of the draft law that you would like to highlight?

Ken Mason, Royal Bank Canada: Nominating CMHC as the administrator was a wise choice as it has a deep understanding of the Canadian mortgage market. We are quite pleased with the end result as I think it will serve all our programmes well.

EUROWEEK: What do you think was the main reason for proposing the covered bond framework?

Mason, RBC: It is good housing policy to provide banks with a diversified source of wholesale mortgage funding, away from the financial instruments that we in Canada have traditionally relied on. Legally enshrined covered bond regimes widely exist in other global mortgage markets, so to bring it to Canada was a good decision.

By having a Canadian covered bond law we are coming into line with worldwide best practise. It’s a global product with deep pools of demand in the US and Europe, so it makes sense for Canadian banks to be in a position to access this interest.

EUROWEEK: But as far as I can see the existing contractual system has worked very well. Paras, why do you think Canadian banks need a law?

Jhaveri, Bank of Montreal: I would say the development of a legal framework was more an evolution of the market than a necessity, per se. I think there was a robust and strong foundation for the contractual framework that was being used. But legislation provides greater certainty and clarity, and I think that’s a big positive for investors.

There are many different investors and some will give more credit to having solid legislation framework than others. So I think, by having a law, it can only help grow the investor base for Canadian covered bonds.

Walker, Toronto Dominion: I agree with the view that the decision to proceed with a law is more borne out of evolution than necessity at this point in time. Obviously there are a number of jurisdictions in Europe that have long established legislative regimes. But, we’ve now seen legislation being introduced in Australia and they’re discussing it in the United States as well as other countries.

EUROWEEK: Are there any specific benefits to having a law as far as European investors are concerned?

Walker, Toronto Dominion: I expect you will see US banks issue covered bonds once US legislation is in place. It may be just a matter of time before US investors see legislation as a necessary and important pre-requisite to investing in the market — so it makes sense to have a solid framework in place sooner rather than later.

Niebrzydowski, CIBC: You would get access to certain investment pools that are allowed exclusively to invest in legislative frameworks.

When we first started discussing legislation in Canada, for all intents and purposes it was the mainland European investors who felt that having a law was materially important. But, as the market began to expand, it seemed this was not a necessity.

At this point, it is nice to have and ultimately we may find that it will become more important. With more and more jurisdictions developing their own covered bond laws, you could see that it might be wise to have a good law and avoid potentially becoming competitively disadvantaged versus other covered bond jurisdictions.

Anguel Zaprianov, Deutsche Bank: Wojtek is raising a good point. There is a strong preference from investors globally, and Europe in particular, for covered bonds issued under a legislative framework.

That is why countries like Australia and the UK put frameworks in place relatively recently and even France made some changes to its framework, introducing obligations a l’habitat.

EUROWEEK: But given the unfavourable basis swap between euros and dollars, selling into the European market is not economically viable. So getting access to European investors is a bit academic isn’t it?

Niebrzydowski, CIBC: From our standpoint, we don’t expect the basis swap to move to more manageable and less expensive levels until the well known problems in Europe are solved or contained. So for the time being it’s unlikely you will see issuance out of Canada into Europe, where the benefits of having legislation are likely to be the greatest.

EUROWEEK: Ken, do you think the US investors give much credence to the law? Or do they prefer to have exposure to nice, clean mortgages that are insured by an agency of the government?

Mason, RBC: US investors seem quite comfortable with the contractual arrangements that we’ve had in place. However, on our travels and visits with various investors, a few do value legislative frameworks. Some investors have looked to Europe and seen some of the approaches done there, and they have expressed a preference. I don’t think the US investors expressing a preference for a legislative framework are overwhelming and pervasive compared to European investors, but I do think that having a law is additive and is helpful for our programmes.

Jeanmarie Genirs, Deutsche Bank: We get asked all the time by investors about legislation in various jurisdictions. We have so many different banks and different covered bond programmes from all over the world. In the current environment, most of their actual trading values are closely tied to the health of their sovereign and in that context, the importance of legislation has become more critical.

I think it is especially important for Canada, as we move away from CMHC insured collateral to uninsured collateral. From a timing perspective, the combination of this legislation and the change in eligible collateral is critical. I think US investors have always had an understandable desire to see a Canadian covered bond legislative framework, but that desire was neutralised by the CMHC insured collateral. As we move forward with new programmes with new assets, the legislative frameworks becomes of far greater importance.

EUROWEEK: Paras, how are you preparing for the rules?

Jhaveri, Bank of Montreal: The major issue is with respect to the eligibility of assets. We presently use a programme backed by insured mortgages. But under the new law only uninsured mortgages are eligible so this may necessitate setting up a new programme.

In addition CMHC, as regulator, will come up with more detailed regulations. These will drive a lot of the disclosure and process points on any prospective new programme. We will need to understand those regulations before we can determine exactly how to move forward with any new programme.

Genirs, Deutsche Bank: Even without the CHMC insured collateral, the fact remains that Canada, broadly as a sovereign region, is likely to remain in high demand by US investors. The banks at the senior unsecured level trade extremely well with tight spreads relative to many other similarly rated non-Canadian banks. And currently, and for the foreseeable future, the markets are in great need of high quality fixed income assets coupled with the need for a geographic diversity of those assets. So of course investors will need some time to get up to speed on the new programmes, but they will do the work because they need the asset.

EUROWEEK: Peter, presumably the regulatory overlay is going to be key, and there’s nothing you can do until you get visibility on that?

Walker, Toronto Dominion: Yes, we will need to know a little more on those secondary rules. Though one would hope they’re going to be consistent with the programmes that are out there, we don’t yet know for sure. So I think it is perhaps a bit premature to be fully switched to structuring mode at this stage.

Paras is hitting on the key point for us regarding the actual assets that are eligible to put in the programme. We have a lot less uninsured mortgages on our balance sheet than we do insured. So we will need time to originate enough suitable assets to back the new programme and get to a collateral pool size that makes economic sense.

EUROWEEK: What about CIBC, have you got plenty of eligible uninsured collateral, or would you need to build a new pool?

Niebrzydowski, CIBC: We’ve got a C$145bn mortgage book excluding home equity loans and 22% are uninsured. But, since we are already close to reaching the regulatory cap on covered bond issuance, which stands at 4% of total assets, the potential size of the prospective uninsured asset pool is not material to our issuance capacity.

Unfortunately it’s not as simple to search and delete CMHC insured references from your documentation. The process is going to be quite involved but at this stage it would be premature to go into structuring mode without knowing the regulatory details.

EUROWEEK: If we look at the global framework for covered bond regimes some jurisdictions don’t have any limits at all. Others, such as the UK, decide on a case-by-case basis, and in Australia the regulator moved the issuance cap from 4% of total assets to 8%. Is the Canadian regulator overly restrictive by comparison?

Mason, RBC: That decision sits with our regulator, the Office of the Superintendent of Financial Institutions (OSFI), Canada. As an industry we do have the view that it is low based on global comparisons. Certainly, as a prudential matter, it makes sense to have some limits around the use of secured funding but we believe it could be pushed a little bit higher. We have had some dialogue with various government officials including OSFI and we hope that, at some point, they will address that.

EUROWEEK: Are all Canadian banks on side with that move?

Niebrzydowski, CIBC: Yes and the reasonably good outcome from our standpoint is that there should not be a hard baked number into the legislation which may otherwise take two years or more to change.

Zaprianov, Deutsche: Ultimately the market should take into account covered bond and other secured issuance that encumbers the balance sheet and, all things being equal, this should be reflected in the overall cost of funding. If there is too much reliance on covered bonds then I would expect to see it reflected in the senior unsecured spreads that the borrower pays. We would hope that the regulator takes a holistic approach to secured funding and the issue of balance sheet encumbrance in general.

Niebrzydowski, CIBC: From a prudential perspective it is inconsistent to set a ceiling on covered bond issuance when there is no such restriction in place for the securitisation market. Since securitisations can no longer qualify for off-balance sheet treatment they effectively also encumber the balance sheet in the same way as covered bonds.

EUROWEEK: Now the draft law has been published, what do you think is the regulator’s view on continued issuance from existing programmes?

Niebrzydowski, CIBC: We are led to believe the banks should refrain from new issuance under existing insured programmes.

EUROWEEK: Ken, your position is unique, as RBC has already issued deals that not backed by insured mortgages. Will the law affect your existing programme?

Mason, RBC: It won’t have a material effect as our collateral is aligned with the legislation. However, there may well be further regulatory oversight from CMHC that needs to be considered. So there may be some compliance issues that lead to minor amendments to the existing programme, but overall we’re well placed. We have the capacity and interest to issue from the existing programme this year.

EUROWEEK: What will that depend on?

Mason, RBC: A separate initiative that we undertook was to register our programme with the SEC in the US. We set up an offering statement in the US that was filed with the SEC and we hope to be able to use that offering statement to issue another dollar benchmark in the US market this year. We have interest in other markets too, but the focus right now is on the dollar market.

EUROWEEK: How long would it take to set up a new programme?

Niebrzydowski, CIBC: If we had full and complete information in terms of what the new requirements will be from the registrar, I would say on the low side it could be done within two to three months, if this were to be given a high priority.

EUROWEEK: But what if it’s not a high priority?

Niebrzydowski, CIBC: Well, that could take three years!

Walker, Toronto Dominion: It’s hard to pin down a time on it because there’s still some uncertainty around what’s going to be required.

Niebrzydowski, CIBC: The requirements may be easy to meet but they are not known. If it’s a question of developing IT systems’ ability to conform with those requirements, then obviously it will take much longer to set up the new programme.

EUROWEEK: Is it possible that the regulator might require you to put in place some measure of risk on the underlying loans that you have not collected?

Niebrzydowski, CIBC: We hope not, as we believe we have very robust systems in place, but you can never be sure.

EUROWEEK: Let’s move on to SEC registration. Peter, are you planning on SEC registration at some point in the future?

Walker, Toronto Dominion: There’s some clear benefits from having SEC registration. With 144A there are restrictions on trading. Though we have had a lot of success issuing under that format to date, certain investors have put internal limits on the amount of 144A that they’re holding. I’m not sure that we’ve reached that limit yet, but if you take a long term view, the market probably does need to evolve towards full SEC registration.

EUROWEEK: Why is that do you think? Is 3(A)(2) cheaper and less onerous?

Walker, Toronto Dominion: We’ll certainly look at SEC registration, but there’s also an exemption from registration under Rule 3(A)(2), that we’ll also take a close look at. And it may in fact be that 3(A)(2) is the structure that makes more sense for TD.

You get the main benefits, in terms of index inclusion and TRACE eligibility, from both full SEC registration and 3(A)(2), though there are additional benefits to full SEC registration, in terms of access to the retail market. But I think the primary advantages are accessible in both formats. I believe 3(A)(2) is a little bit less onerous in terms of the disclosure obligation versus a full SEC registration.

EUROWEEK: How about the Bank of Montreal, Paras? Are you weighing up the different options between SEC, 144A and 3(A)(2)?

Jhaveri, Bank of Montreal: We don’t have a definitive plan. I think both the SEC route or the 3(A)(2) exemption are options we would consider in terms of taking our programme forward.

EUROWEEK: And what’s the view at CIBC? Are you going to wait and see how full SEC registration helps RBC?

Niebrzydowski, CIBC: At this point we’re looking at all options. I’m not convinced that there are material benefits in terms of either pricing or investor access by getting full SEC registration versus going the 3(A)(2) route.

EUROWEEK: Do you have an SEC registered senior unsecured programme?

Niebrzydowski, CIBC: It’s the Canadian MJDS platform, which provides the SEC passport. I believe out of the five Canadian issuers, two are directly SEC registered and three are MJDS registered.

EUROWEEK: So apart from RBC, which other Canadian bank has an SEC registered senior unsecured programme?

Jhaveri, Bank of Montreal: Bank of Montreal has an SEC registered programme.

EUROWEEK: So does that make it an easier cross for you to extend registration to your covered bond programme?

Jhaveri, Bank of Montreal: I think it’s certainly a factor in the decision and probably helpful, but the pros and cons of the different alternatives will still need to be considered.

EUROWEEK: Ken, can you tell me why you put in place SEC registration?

Mason, RBC: We felt it was the next logical step for our programme. We have analogous registrations for our programme in other jurisdictions in Europe where we have a sort of full passport programme; we’ve got a full securities filing registration in Canada and we’ve got SEC registration for our unsecured US programme — so SEC registration seemed like the logical evolution for the covered bond programme.

In terms of process, it did take some time. Conceptually you don’t have an active issuing community in the US as yet, so covered bonds are something very new for the SEC to look at. Obviously they’re familiar with covered bonds, in terms of the large 144A market, so that was helpful for them to observe and become more familiar with the structures.

The SEC also had other priorities, so it was a bit of a stop and start process. But they were quite co-operative working with us and quite astute at identifying some of the considerations around disclosure and understanding a lot of the subtleties of the structure.

EUROWEEK: Were there any bottlenecks that you came up against, how long did it take?

Mason, RBC: The push to the finish line probably lasted six months or so, but I think we have engaged with them for upwards of a year and a half. I wouldn’t say we hit any bottlenecks. It was more a case of letting matters sit with them and giving them time to elevate this as a priority. There’s been a lot of regulatory change in the US around the securitisation market, Reg AB and Dodd Frank. They also had to give careful consideration because they were setting a precedent for the product.

EUROWEEK: One of the supposed benefits of full SEC registration is that you can distribute to a wider audience, and that in theory you should be able to get greater price tension. Is that something you have experienced in the senior market?

Mason, RBC: With the SEC registration it really does broaden the scope of the buyer base and open demand to certain investors who can’t buy private placements. There is a retail buyer base we can theoretically issue into but that wasn’t really the driver. The decision was driven more by the need to satisfy the preferences of the institutional buyer base.

We saw some pretty big deals being done through 144A, but in the SEC registered format we hope to see broader participation. And obviously the index eligibility will be helpful for the index buyers, and with Trace eligibility, post-trade price transparency will be superior. So hopefully that will give greater comfort to some of the buyer base already out there.

Genirs, Deutsche Bank: There’s no doubt SEC registration will add tremendous liquidity, and in today’s market liquidity is a very valuable commodity. In the end, you will have a more diverse investor base and, with that added liquidity, you should further broaden your investor base. So there’s a little bit of a win-win feedback cycle there.

In today’s market liquidity and transparency can trump just about everything including credit ratings. It can trump yield and just about any characteristic you care to mention. So I think anything that will add liquidity to your programme will be extremely valuable for a long time.

EUROWEEK: Does anyone else get the sense that the overriding improvement you’re likely to get from SEC registration will potentially be due to increased liquidity?

Walker, Toronto Dominion: Until now the existing programmes with the CMHC insured mortgages were quite robust and saw very strong demand. But as the eligibility of that asset class goes away under legislation, I believe SEC registration could help play a bigger role in broadening the investor base.

Genirs, Deutsche Bank: It will also likely deepen pools within the same existing investor base. Because even though you may be currently selling a 144A asset to an eligible institutional investor, they likely have many sub accounts. SEC registration should make it much easier for these investors to buy a larger amount of bonds on any given deal.

EUROWEEK: SEC registration helps mitigate against the potential loss of appeal that might be expected once insurance has gone. And therefore you may end up with something which is maybe a bit better, or roughly similar in terms of appeal, demand and liquidity?

Niebrzydowski, CIBC: Well, I’m not entirely sure it would be better. The Canadian programmes using insured collateral effectively trade as an almost identical asset class. So I don’t believe investors looked at them as liquidity restricted to the issuer’s name — they are all covered bonds with a certain homogeneous type of collateral.

Making your programme SEC registered or 3(A)(2) eligible will, on an individual name basis, add to the investor appeal and hopefully improve liquidity. Only time will tell whether liquidity genuinely improves or not.

Zaprianov, Deutsche: There are a lot of examples where the market does give credit to an SEC registered issuer vis-à-vis a 144A issuer — such as deals issued by Toyota and Honda, for example. They are similarly rated, high quality issuers yet there is probably 10bp-15bp of spread differentiation attributable to the 144A versus the SEC registered deal. That’s quite a difference especially in the context of how tight their absolute levels are. And the difference tends to magnify as the markets get worse.

EUROWEEK: But SEC disclosure is presumably going to be more onerous. Ken, can you shed any light on the level of SEC disclosure that’s required in terms of transparency relative to 144A?

Mason, RBC: There are some differences. The programmes we have in place were fairly strong in terms of disclosure to begin with. Canadian banks have made a practice of disclosing their collateral pools to investors.

But the SEC also had additional requirements for registered programmes, in terms of providing more enhanced data around the servicing business and a greater requirement around pool disclosure, and in particular the performance of different vintages. Effectively we provide enhanced delinquency and loss data for the various vintages within the cover pool at specific points in time.

EUROWEEK: So more information on these key risk metrics is broken down by the vintage, or year of loan origination?

Mason, RBC: That’s right for the point in time disclosure we are providing in our prospectus, which is sliced by year of origination. On a monthly basis, details on the delinquency status of the cover pool as at the report date will be incorporated as part of our regular pool disclosure.

That obviously puts a bit more pressure on the IT side, but it is information that we have, so I wouldn’t describe it as a significant burden. It’s something that we can supply.

EUROWEEK: But you don’t need to provide this information on the 144A deals at the moment?

Mason, RBC: That’s right.

EUROWEEK: There has been some research that suggests Canadian affordability is low and that house prices could be overvalued relative to the average income. Is there any truth to that?

Walker, Toronto Dominion: TD economists say house prices could be 10%-15% overpriced. They generally expect a soft landing, with gradual downward movement. But in general they believe that some sort of readjustment should be expected.

EUROWEEK: Are there any particular pockets that come to mind?

Walker, Toronto Dominion: The two logical ones, and certainly ones we’ve been getting questions from our investors on are condominium markets here in Toronto and Vancouver. I think it’s certainly possible you’d see more of a readjustment in those markets versus the general, across the board, expectation.

EUROWEEK: What about household leverage and affordability?

Jhaveri, Bank of Montreal: Not specific to household leverage and affordability, but I would note that we’re attentive to the risks in the Canadian real estate market and continue to monitor our portfolios closely. We have consistently applied prudent lending standards throughout the cycle and overall we are comfortable with our position.

EUROWEEK: How do collateral pools differ between issuers? Can you describe Bank of Montreal’s pool?

Jhaveri, Bank of Montreal: About 70% of our overall mortgage book is insured and the remainder is uninsured. They are all underwritten according to the same standards, so that doesn’t change. The big difference is the loan to value ratio. On an index adjusted basis, the LTV of our uninsured book is around 56%. I would note that a borrower who has more than an 80% LTV at origination is required by law to have insurance and that applies to every bank.

EUROWEEK: How about CIBC?

Niebrzydowski, CIBC: Based on our second quarter disclosure, 78% of the book is insured. As of February, the average LTV for the uninsured portion was about 49%. The CBA published statistics for March that show 90 days plus arrears at 37bp for the industry as a whole. That compares to March 2011 when the number was around 50bp-52bp, so it has come down quite a bit. Over the last decade serious delinquencies have generally averaged between mid-30bp to around the high 40s.

EUROWEEK: What is the reason for that - improving employment trends?

Niebrzydowski, CIBC: As of a few months ago, the Canadian economy matched and exceeded the absolute employment levels that were in place before the 2008 recession. The unemployment rate is actually a bit higher, but that’s a function of the size of the labour force and the participation rate. There are a multitude of factors driving delinquencies down, such as the Canadian credit culture, strict loan underwriting standards and so on.

EUROWEEK: If your uninsured mortgage pool has a much lower weighted average LTV then the raw material must be good quality. So how much over-collateralisation could be required in the new programmes relative to the existing high LTV programmes?

Mason, RBC: RBC has an asset percentage of 91.8%, so that would equate to over-collateralisation of 8.2%.

EUROWEEK: How does that compare to others?

Niebrzydowski, CIBC: There is a material difference between the various rating agencies, and we are the lucky ones using four rating agencies. But if you look at the delta between the strictest and least onerous agencies the over-collateralisation required to get to triple-A is, off the top of my head, around five to six percentage points.

EUROWEEK: So over-collateralisation depends a lot on who’s rating your programme. But Ken is saying that required over-collateralisation on his uninsured pool is about 8%. How would that change compared to other programmes at the triple-A level?

Jhaveri, Bank of Montreal: Over-collateralisation on our insured pool is operating at around 5% right now. That’s what is required, but we have more in the pool, obviously.

Niebrzydowski, CIBC: The asset percentage for our insured pool is 92.7%, which gives over-collateralisation of around 7%, but that’s a function of one specific rating agency.

EUROWEEK: So basically you could deduce that the increase in over-collateralisation from an insured to uninsured pool could be in the region of 3%-5%?

Mason, RBC: Yes.

Walker, Toronto Dominion: 3%-5% on average, depending on the agency. Uninsured programmes are going to be less efficient and, all things being equal, it is likely that the actual funding level will be more expensive. On the other hand, the legal framework and SEC or 3(A)(2) registration could help counterbalance some of those likely increases in costs.

Genirs, Deutsche Bank: There are a great number of investors that are outside of the United States that invest in US dollar denominated assets. With the existing programmes, the distribution is very heavily US-centric. US investors feel very comfortable with Canada, and especially the guaranteed collateral. And, because of that, Canadian covered bonds trade at a premium in the US market. Maybe not enough of a premium according to our issuers, but I think the programmes definitely trade with added value relative to other programmes.

EUROWEEK: How do European investors view CMHC collateral relative to non-insured collateral?

Genirs, Deutsche Bank: I think the CMHC insurance value is lost a little, or at least not valued as much by European investors. A similar situation exists with the US GSEs; Europeans don’t pay as much of a premium for Fannie Mae or Freddie Mac as US investors do.

As the insured CMHC collateral goes away, we will most likely see spreads on the new Canadian programmes trade at wider levels. But, this spread widening should encourage more interest from international investors. Most of the €2tr European covered bond market is comprised of programmes with non-government insured collateral. So we could get a higher international component in the distribution of the non-insured deals which would be a healthy development.

EUROWEEK: What about US investors, could the potential widening in spread attract new buyers?

Genirs, Deutsche Bank: US investors generally prefer the insured collateral and have been willing to pay for it. But at the same time, a wider assumed spread is a great incentive for new US investors to get comfortable and up to speed with the new programmes.

Niebrzydowski, CIBC: Legislation should encourage more participation from European investors and SEC registration or the 3(A)(2) exemption could attract index funds in the US.

Zaprianov, Deutsche: We expect global investor participation irrespective of the currency of issuance. US dollar and euro markets are the biggest, but there are other markets. In fact, about 30% of covered bond issuance year to date has been in currencies other than US dollars or euros. Canada’s stability has attracted a lot of global investors and we expect that to continue.

EUROWEEK: What’s your experience of issuing in the non-core currency markets?

Mason, RBC: The one thing I would like to stress is that our covered bond programme is very much a global one and we’ve issued across a number of different currencies. We’ve touched on some of the challenges in Europe with respect to the basis swap although I would point out that both RBC and, I believe, CIBC have issued in Swiss francs in the last year so we have tapped into some pockets of European demand.

And certainly there is support from Europe through reverse enquiry. So it’s just really just a question of finding the right opportunities and the right balance there. And then there are other currencies that we have tapped such as Canadian dollars, while other Canadian borrowers have tapped the Aussie dollar market.

Niebrzydowski, CIBC: It would be wrong to exclude European interest. The Swiss market has been there for longer tenors and it is helpful for diversification purposes. But the question is, at what level we individually or collectively are willing to issue at in euros?

In order to make it economically viable to currently issue in the euro you would probably have to price through mid-swaps but I don’t think there’s going to be many buyers at that level, but I defer to Deutsche Bank on that.

Zaprianov, Deutsche: The basis swap is just way too onerous right now. In five years, it’s a upwards of negative 80bp from euros to dollars so it’s a very tough to overcome. It has been very volatile over the past few years — spreads can change and open an window. We will actively monitor it.

EUROWEEK: What is the basis in the US between a covered bond backed by uninsured mortgages, and one backed by insured mortgages?

Mason, RBC: Over time that spread differential moves around a fair bit, but it’s hard to actually know what that number might be. But the other point to make is that with SEC registration and moving forward into this new best practices standard, it is almost like trying to compare apples and oranges in terms of how demand is going to shape up.

In the CMHC product, demand was primarily for the collateral. I think with SEC registration, there will be demand for a number of different elements, but better liquidity is the key. There certainly is a segment of the investor base that is very predisposed to look at the registered product. I think you will see a migration of different types of investors, which in the final analysis makes it hard to pin down.

Walker, Toronto Dominion: Ultimately covered bonds are a dual recourse instrument and I think the removal of this insurance from the assets in the pool is going to put renewed focus on the senior unsecured claim of the issuing institution.

So I don’t think you can just ask what is the level of insured versus uninsured, as pricing is going to become much more dependent on the issuer’s senior unsecured credit rating once the insurance has disappeared.

There’s certainly a distinct possibility we’re going to see greater spread differentiation across the whole range of Canadian banks that today have been issuing covered bonds that are backed by assets that are insured. And I think overall that that is a positive development.

It’s a positive that we will need to go out and get in front of our investors and talk a bit more about our credit as an institution. And also talk to them about the real estate market in Canada, which is still very much a good news story.

Though TD does not have as many uninsured assets to actually put in a cover pool, there is a silver lining for us as we’re going to put the focus back on strengths of TD and the Canadian economy, topics we’d like to discuss.

EUROWEEK: Paras, what’s your view on the pricing?

Jhaveri, Bank of Montreal: Not specifically on pricing, but I would note a couple of things. I think the CMHC insurance was something that investors got their heads around and understood easily. That’s partly what made it attractive to them.

Going forward, under the legislation, when you see uninsured covered bonds, what we shouldn’t lose sight of is you still have a relatively strong jurisdiction, and strong issuers — with maybe some differentiation. And then you still have good quality, generally lower LTV prime residential mortgages in the collateral pool.

So I think the quality of the asset class is still valuable. There might just be a bit more work required to educate and inform investors to take a deeper look into the pool and the issuer. Until now, investors were able to make their investment decision a little quicker with the CMHC collateral.

Mason, RBC: We have not had the insurance and we are issuing in a number of different jurisdictions. So the uninsured product already exists, though admittedly we haven’t issued for a couple of years in the US. So I do agree, there’s probably going to be a bit of a renewed focus on credit fundamentals for some of these investors. But I think that’s a good thing because we do have a lot of strong elements to our programme that we have touched upon.

Zaprianov, Deutsche: But at the end of the day, there will be a spread differential between CMHC and the new legislative covered bonds. And that will be more of a function of the CMHC product going away. As supply dries up, it has the potential to tighten a lot — similar to the FDIC guaranteed bonds that US banks issued in 2009.

So it could well become almost irrelevant to think of the uninsured spread versus where CMHC guaranteed product prices today. I think Peter’s point is probably much more relevant in terms of looking at the underlying strength of the bank and where its senior unsecured bonds are trading. And then you can derive some sort of premium, as opposed to looking at where the CMHC product is. I wouldn’t be surprised to see the CMHC product trading at Libor flat at some point given there is no more supply.

Genirs, Deutsche Bank: It will also take some time to develop the new legally enshrined uninsured Canadian covered bond market. We’re starting from almost zero again. Now we have a whole new scope in terms of size of issuance, size of supply and pace of supply. And, I think the overall tone of the market will have a big impact on the ultimate spreads.

It’s not so much a spread differential that we’re talking about; what we’re asking is: what will be the fair price that the market will be willing to pay for the new uninsured programmes? We might have tight nominal spreads or wide nominal spreads because, as Ken said, spreads are likely to move around. Also, it will take some time for the new market to mature.

It may take a little bit more time than you think for the market to actually differentiate between the credit quality of different covered bond issuers as much as one might think it should. It will be a function of getting enough supply into the market. If the market is ready for the new supply and really wants the new supply, then we may see more compressed spreads to start than we think may be theoretically fair for different banks.

We’ve seen that with the European issuers in the United States where initially there was very little spread differentiation. I think a lot of investors would say there was not enough spread differentiation between the different Yankee banks, whether the issuers were Scandinavian, UK or Australian — the spreads were compressed. But I think as we get more and more supply into the market, over time, we will see increased differentiation.

EUROWEEK: How are Deutsche Bank and other firms preparing for the recent covered bond developments?

Zaprianov, Deutsche: Deutsche Bank has always been committed to the covered bond space. The recent move towards more legislative framework has created numerous structuring mandate opportunities for the dealer banks.

As an example, in Australia we recently helped structure NAB and Suncorp’s global covered bond programmes. We are also very interested in helping the continued development of the US dollar-denominated covered bond market and we intend to be a major participant in the market for new-style covered bonds issued by the Canadian banks — both from an origination and a secondary trading perspective.

We envision that once the regulation is finalised and the new programme requirements are set up, we will be active in providing advice and our market expertise to our clients from both a structuring and new issue perspective. It won’t be easy to structure these programmes as you will need legal and structuring expertise in Europe, US and Canada.

EUROWEEK: What are people’s thoughts about the new guideline being proposed by the Office of the Superintendent of Financial Institutions (OSFI) called B-20?

Niebrzydowski, CIBC: This is a proposal so it remains to be seen what its final form is going to be. From the standpoint of our covered bond programme it should not have a material impact. We don’t know at this point whether there is going to be a requirement to have some type of mortgage indexation. But in my view B-20 does, if implemented as it is proposed right now, materially change the landscape of HELOCs. Otherwise, it effectively codifies in OSFI documents what most if not all the Canadian institutions have being doing for a number of years.