Canada

Since its inception in 2008, Canada’s covered bond market has grown steadily to become the cornerstone of US dollar supply. The next step will be the enactment of a covered bond law which will allow Canadian banks to reach investors across the globe. Between regulation and legislation, however, Canadian covered bond issuers face stringent limitations on the product’s use.

Market indices rallied on Thursday, following the EU’s unveiling of its Grand Plan to remedy the eurozone’s woes. BPCE was quick to capitalise on the upturn, securing nearly four times oversubscription for a minimum €200m tap of its 10 year. Bank Austria also moved swiftly on the positive mood and is taking IOIs for possible pricing this afternoon or Friday. Bank of Montreal showed the strength of US demand on Wednesday, when it attracted $3.75bn of demand for its $2bn three year deal. But the floodgates are unlikely to open fully ahead of November 3 when the ECB will announce details of its purchase programme.

Crédit Mutuel-CIC Home Loan SFH kept the euro market alive on Tuesday with an increase of an outstanding 10 year trade. The €200m tap is the sum total of primary issuance in the last week, though Canadian Imperial Bank of Commerce proved the dollar segment’s resilience to market volatility by taking supply over the same period to $7bn.

Against a backdrop of pervasive hesitancy in the euro market, triple-A rated Toronto Dominion Bank launched the largest ever dollar deal on Wednesday. The $5bn dual tranche trade broke the record held by HBOS, which sold a $3bn 10 year trade in 2007.

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.