With Canadian Imperial Bank of Commerce visiting investors on a European roadshow next week, EuroWeek spoke to the issuer as it attempted to explain why its mortgage-backed debut would also be the first public sector bond from Canada.
CIBC, Commerzbank, HSBC, Merrill Lynch and RBS (ABN Amro) have been mandated as lead managers on the deal, which is expected to launch after a two team roadshow next week. It benefits from the groundwork laid by two Canadian issuers and a roadshow from a third.
"Other Canadian banks have rightly stressed the strength of the Canadian economy and housing markets, not just as compared to other economies in North America but also to many in Europe," said Wojtek Niebrzydowski, vice-president, treasury at CIBC. "Beyond that, what makes CIBC unique is the strength of our cover pool assets, which should appeal to credit conscious investors."
Niebrzydowski said that CIBC enjoyed an unusual source of public sector collateral due to the Canadian regulatory environment.
"Canadian banks cannot fund uninsured mortgages on balance sheet with LTVs above 80%," he said. "Those with mortgages above 80% must be fully insured.This covers the principal, interest payments and foreclosure and is paid by the borrower. Any financial institution can choose to insure its low LTV mortgages on the same terms, but in this case the cost is borne by the financial institution.
"CIBC is among the financial institutions that sometimes choose to insure the low LTV mortgages. This insurance results in full credit risk transfer and increases the liquidity of mortgages for use in covered bonds and RMBS."
Sarah Kanes, a director in ABN Amro’s debt capital markets group, said that while CIBC was not alone among Canadian issuers in having insured mortgages, it had deliberately restricted the collateral it could place in its cover pool.
With public sector deals enjoying tight pricing, CIBC wants to convince investors that this is a purely public sector deal.
"CIBC will be roadshowing the first Canadian public sector covered bond programme," she said. "While other issuers do have insured mortgages in their pool, CIBC’s programme is unique in that it is the only one to restrict the asset eligibility criteria to CMHC insured mortgages for the life of the programme."
However, with some market participants blaming investor confusion over Société Générale’s plans to mix its initially pure cover pool to an eventual even split with mortgages for the deal’s struggles, Niebrzydowski is aware of the need for clear communication.
"There are now four mortgage insurers in Canada, although until the mid-1990s there was only one, Canada Mortgage Housing Corporation, an arm of the federal government," he said. "We will only have CMHC-insured mortgages in our pool. CMHC has offered insurance since the mid-1950s and has a full claim on federal government powers of taxation and borrowing."
Despite the covered bond market’s recovery being somewhat deflated by the withdrawal during bookbuilding of a new issue for the Swedish Covered Bond Corporation this week, CIBC still has its eye on pricing a new deal after its roadshow.
"This is a public sector programme. The assets are mortgages, but they are government insured," said Niebrzydowski. "We’d ideally follow our roadshow with a euro benchmark, but CIBC has many funding sources and certain pricing hurdles, so there is no pressing need to issue. This is a very attractive funding and diversification product, but it is not a main source of wholesale funding."
The bank intends to issue one to two benchmark sized transactions a year to keep its name in the market, and to eventually build a full curve.
With the Canadian regulator, the Office of the Superintendent of Financial Institutions, placing 4% limit on covered bond issuance as a percentage of a bank’s total assets, Niebrzydowski says that there is little chance of the bank being short of insured collateral. "There is no question of CIBC running out of CMHC-insured mortgages," he said.
"With 40% to 45% of the flow of our mortgages having to be insured, and CIBC having voluntarily insured C$37bn (Eu23.31) of mortgages with an LTV below 80%, this give us a combined total of around C$60bn of insured mortgages. With the 4% regulatory limit on covered bonds, we’re therefore very unlikely to run out of insured collateral."
