Covered bond programmes add to enviable diversity
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Covered bond programmes add to enviable diversity

Royal Bank of Canada has an enviable array of funding tools at its disposal. Whether in calm or stormy times, the bank seems to always have options in the capital markets. Joe McDevitt finds out more.

Royal Bank of Canada is always looking for as much funding diversity as possible. It has made a concerted effort to keep a healthy mix of secured and unsecured debt, selling in a variety of currencies and jurisdictions. 

“Senior and covered markets are both important markets for us,” says David Power, vice president, funding and capital management, corporate treasury at RBC in Toronto. “While banks in some countries moved away from unsecured funding, that will not be our approach. We maintain a variety of issuance platforms in multiple jurisdictions in both formats. We will continue to visit all of the secured and unsecured markets as we see demand and pricing opportunities.”

The Canadian covered bond market has continued its evolution into a major market with the enactment of a legislative framework in 2012. Canadian banks previously issued contractual covered bonds that, while generally having similarities in terms of collateral requirements and protection for investors, could in theory vary. The new law sets a market best practice standard that all banks have to abide by. 

This has only increased appetite for the product in Europe, where some investors do not have mandates to buy covered bonds that lack a legislative framework.

The US bid for Canadian covered bonds has also been bolstered by registration of deals with the Securities and Exchange Commission. Previously, dollar covered bonds were sold in 144A format, which meant the bonds lacked index-eligibility and post-trade price transparency.  

RBC has been at the forefront of adapting to both of these changes in the covered bond landscape in Canada. In September last year it was the first Canadian bank to issue an SEC-registered covered bond, which attracted more than 180 investors. Canadian deals typically attracted 50 investors for dollar 144A issues, highlighting the immediate benefit of SEC approval.  

RBC was also the first bank to register its new programme with the Canadian Mortgage Housing Corporation. In July this year it re-opened the Canadian covered bond market after a more than half year hiatus with a $1.75bn five year — the first ever Canadian deal under the new law. It followed this up in the same month with Aussie dollar and euro denominated covered bond benchmarks, demonstrating the breadth of funding options available. 

“The cost advantage of covered has improved slightly over the past couple of years for us, partly due to market dynamics, and partly due to the SEC registration initiative,” says Power. “Our first SEC-registered covered bond attracted 184 investors and thus provided an instant boost in the size of our investor base. I think the US covered bond investor market still has some significant growth potential, particularly with US bank treasury books.”

RBC’s unsecured funding options remain focused in North America. As well as a $25bn SEC-registered unsecured shelf, it also has a C$15bn shelf and a ¥1tr Samurai shelf that it issues from less frequently. For now, asset encumbrance is not a big consideration when the bank is drawing up funding plans.  

“Our approach has not changed significantly because of the asset encumbrance issue. I think the topic of unsecured versus secured funding is a difficult one to communicate,” says Power. 

“Under International Financial Reporting Standards, Canadian NHA MBS that have been sold are accounted for as on-balance sheet and secured funded, US banks often have significant FHLB liens against their assets, standalone dealers have a lot of repo funding, and European banks typically have a significant covered bond funding programme. This makes it difficult to compare one firm’s use of secured funding against another. I think regulators have a difficult task ahead in trying to properly assess this topic, including how secured funding acts to reduce liquidity risk as a prudential benefit.”  

Despite all of this capacity to issue in different countries and formats, the bank’s largest sources of funding still come from two very distinctly Canadian sources: Canadian deposit notes and Canada Mortgage Bonds. Together the two sources accounted for around 42% of the bank’s wholesale funding (as of the end of October 2012). 

RBC can use the CMB programme, which is run by the CMHC and sits alongside covered bonds as a secured mortgage funding tool, to pledge mortgage loans into a specially incorporated SPV — the Canada Housing Trust — in return for cheap funding. The SPV issues bullet bonds that are backed by the banks’ pledged collateral.