Proposed legislation covering Canadian covered bonds will increase the structural requirements for achieving triple-A, according to Nicolas Malaterre, senior director of covered bonds at Standard & Poor’s.

Malaterre was speaking on a video posted on the S&P’s website.

Apart from reinforcing bankruptcy and solvency protection for covered bonds, the bill in Canada’s legislature does not include insured mortgages as collateral. “Typically we’ve seen in Canada insured mortgages being guaranteed by the Canada Mortgage and Housing Corporation (CMHC),” Materre said, adding the CMHC is rated ‘AAA’ by S&P. Currently six covered bond programs in Canada are backed by these kinds of mortgages.

Covered bonds with uninsured mortgages may have lower potential ratings uplift from the bank’s issuer rating than insured-mortgage-backed transactions have enjoyed. More credit enhancement may be needed as well. “This is because we believe that the potential credit losses on the covered bond pool are likely to be higher for uninsured mortgages vs. insured mortgages,” Materre said.

In terms of issuance, Matter said expectations weren’t high given that a limited number of deals are maturing this year. Another factor precluding fresh supply is the fact that one of the biggest issuers is reaching its limit of 4% on outstanding covered bond volume as a share of total assets.

There is currently over C$60 billion ($58 billion) in Canadian covered bonds, much of which has been issued in the U.S., in small part thanks to comfort with Canadian bank and sovereign risk.

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