10/19/2012

Canadian Banks Mapping US Covered Bonds

Three more Canadian banks have approached the SEC about selling covered bonds in the U.S.

Bank of Montreal, Bank of Nova Scotia and Toronto-Dominion Bank recently entered discussions with the regulator, saying they hope to have new shelf entities in operation next year. In creating those vehicles, the institutions would be following the lead of RBC — which last month became the first issuer to complete an SEC-registered sale of covered bonds.

Although all four banks previously have sold covered bonds in the U.S., those deals were privately placed. With its latest issue, meanwhile, RBS demonstrated that SEC-approved paper can appeal to a wider audience. Bidders for its securities included state-government operations, along with mutual funds and other mainstream investors that usually avoid private transactions. “This is clearly the next step for Canadian banks, since anyone can buy a publicly registered bond,” one attorney said.

Like their previous issues, the planned offerings from Bank of Montreal, Bank of Nova Scotia and TD Bank would be backed by loans written in Canada. One key difference: The collateral for the past issues benefitted from guarantees from the state-run Canada Mortgage and Housing Corp. Under proposed Canadian regulations, such mortgages would no longer be eligible as covered-bond collateral. So upcoming offerings would be underpinned by uninsured accounts akin to non-agency mortgages in the U.S.

The expectation is that the three banks won’t gain SEC approval until mid-2013, at the earliest. Deals would follow soon after.

It took RBC nearly a year to get the go-ahead from the SEC, with the heaviest lifting taking place from January to June as the bank disclosed details of its planned bond sales and their underlying receivables — in this case, uninsured loans. Its $2.5 billion offering priced Sept. 12.

The activity from Canadian issuers contrasts with the plans of U.S. banks, which have expressed an interest in funding their mortgages via covered-bond deals but are hesitant to move forward until Congress passes enabling legislation.

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