The Royal Bank of Canada Capital Markets’ U.S. covered bond origination chief sees opportunity in overseas banks tapping U.S. investor appetite for covered bonds. Ben Colice is leading the initiative. The hope is to transition to originating U.S. deals when legislation emerges. Colice told Reporter Amelia Granger the lack of a legislative framework is still holding back U.S. issuance, but said if it emerges, deals will see healthy investor interest. Listen to the interview here.
Highlights from the conversation are below, and more is available online as part of Securitization Intelligence’s podcast series, Tranche Talk.
SI: What is RBC Capital Market’s strategy with covered bonds? What kinds of volume is the firm looking at?
The strategy is multi-pronged. Specifically, with covered bonds at present, the real opportunity in the U.S. market is for non-domestic banks to access the U.S. dollar market. There is roughly EUR2.5 trillion in outstanding Euro-denominated covered bonds, whereas the U.S. market is much smaller at about $50 billion. One of the things we are particularly excited about is the opportunity for non-U.S. banks to diversify their funding sources by coming to the U.S. dollar investor base.
Over time, the goal will be to help U.S. banks take advantage of any positive developments in U.S. covered bonds legislation, if and when that passes. Volume is a tricky question in the dollar space, because it’s somewhat binary–inasmuch as volume will be tied to the U.S. legislation, which would allow U.S. banks to access the covered bond market. Certainly, [we expect] multibillion dollars per annum in issuance as Yankee, Canadian and Asian banks access the market. But if and when legislation comes into effect in the U.S., I think the market can get much larger.
SI: What are some of the challenges facing the market in terms of regulation? And is RBC active in efforts to set that market up.
The big challenge for the U.S. dollar market is U.S. covered bond legislation. There has been a bit of a standstill in the last couple of years around some of the risks associated with receivership in context of U.S bank law. Another challenge is the level of noise in Europe. That noise makes it a little more complicated—and a little bit less attractive, in some instances—for European banks to access funding in the U.S. as U.S. investors have increasing uncertainty about the future of certain countries, certain economies, etc. That’s a big headwind, but one we expect will be resolved.
SI: What does the investor base want to know about U.S. covered bonds? Who are they?
A: The investor base is comprised of predominantly the blue chip investors—asset managers, bank treasuries, insurance companies, etc. What they are looking for is some key characteristics of European covered bonds to carry over in the U.S. market. Those key characteristics are a debt instrument that is capable of surviving the issuing bank’s insolvency and continuing to pay interest and principal as planned. So, almost a quasi-agency product, something that has a higher rating than the underlying bank and something that doesn’t face prepayment risk in the case of asset-backed security.