Canada

Following the US downgrade, the dollar market for triple-A rated bonds has been reduced from around $15,000bn to $136bn, closing the market to dedicated triple A buyers. Covered bonds should benefit, but with up to 40% likely to be downgraded within a year, buyers will need to be selective.

Bank of Nova Scotia on Tuesday printed a $2bn 2.15% five year deal, continuing a recent trend of non-European issuers and markets providing primary covered bond supply.

Peripheral covered bonds lagged widening sovereign debt in the secondary market on Wednesday morning, which was triggered by the German finance minister’s warning that the bond buyback programme needed limits. Despite the comment, some traders reported a surprisingly constructive tone, especially when compared with recent weeks. The closure of the European primary market did not however preclude Canada’s Bank of Nova Scotia from issuing a US dollar benchmark which, by virtue of the strong order book, was increased and priced at the tight end of the guidance range.

Canadian Imperial Bank of Commerce found a window for issuance amid market volatility on Thursday, launching its third Australian dollar deal of the year. In a difficult week for all asset classes, market participants said the A$600m three and a half year benchmark showed covered bonds are living up to their billing as a genuinely global product.

The introduction of specific Canadian covered bond legislation “would be positive, and would likely provide further assurances for investors”, according to Standard & Poor’s. However, the rating agency emphasised that a codified covered bond law is not enough in itself to merit good ratings. Outstanding concerns include: limits to overcollateralisation, the lack of refinancing options after a segregation event, and Canada’s particular preference for demand loans to finance SPEs.

Canada’s DBRS rating agency has published a review on the Canadian government’s covered bond consultation paper titled: no impact on Canadian bank ratings. Though there have been a large number of covered bond deals it says that none of the banks are close to the hitting the existing limit of 4% of total assets.

The Canadian Department of Finance’s consultative paper outlining a legislative proposal for a covered bond legal framework “would be credit positive for investors,” said Moody’s. However, because overcollateralisation is capped, the issuer’s rating would have to be above a certain threshold. Moreover, because only federally regulated institutions would benefit, other issuers such as CCDQ would be left out in the cold.

The Canadian government has published a draft consultation paper proposing a legislative framework for covered bonds. It says legislation will create a more robust product that will retain investor confidence in periods of market instability by providing legal certainty and setting minimum standards. It will also help financial institutions diversify their sources of funding.

The National Bank of Canada’s inaugural covered bond deal arguably achieved what no other covered bond deal has been able to do this year. As opposed to coming with a hefty new issue premium, it priced through the closest comparables. Moreover, with an over subscription of 2.5 times, it attracted the highest level of oversubscription of any covered bond, at that time so far this year. The result had as much to do with the name as it did the tenor.

After a slow Wednesday, the European primary market aggressively picked up pace on Thursday with a range of seven deals from six jurisdictions was announced. Many have gone live and all appear to have been readily digested –in large part reflecting the constructive underlying tone to credit markets.

The primary market for European bank issued covered bonds appears to be gently slowing with just one deal from France’s Dexia MA pricing yesterday and another from Germany’s Aareal closing books at midday. In contrast a number of transactions are in the works from Canadian and Australian banks across a range of currencies –inaugural deals from new issuers and several rumours of others.

John van Boxmeer will leave the treasury and balance sheet management department of TD Financial Bank Group at the end of January 2011. Meanwhile, independently of van Boxmeer’s move, a reorganisation of the department has put Craig Lowery in charge of all funding activities at TD, The Cover understands.