The Canadian covered bond market is flourishing, even without covered bond legislation to bolster the sector.

Just yesterday, the Royal Bank of Canada (RBC) came to market with C$850 million ($828 million) in covered bonds, according to a Bloomberg report, quoting a person who is familiar with the deal.

According to the Bloomberg report, the bonds will mature in March 2015 and priced to yield 40.9 basis
points over the equivalent-maturity sovereign debt, or 3.188%, citing the same person. The bonds are rated 'AAA' and RBC served as the sole underwriter on the deal, the report said.

Last August, ASR sister publication Investment Dealers Digest reported that CIBC formed a program for issuing covered bonds. The bank came to market with its first covered bond transaction backed by government-guaranteed loans earlier this year. Aside from CIBC and RBC, Bank of Montreal has also issued Canadian covered bond offerings.

According to Dealogic, covered bond activity in the country this year has reached $2 billion. The biggest year so far for the sector has been in 2008 when issuance reached over $6.2 billion. Please refer to the attached chart for deal volume covering the years 2007-2010. The numbers reflect issuance from all of the three banks mentioned above.

As earlier reported by, last week the budget tabled by the Canadian government promised to create a legal framework for Canadian covered bonds.

The text from the Canadian government’s budget said that a lesson from the global financial crisis is that financial institutions need to have access to a variety of funding sources. By introducing legislation that sets out a framework for covered bonds, the government will help federally regulated financial institutions diversify their funding sources, the budget stated.

The legislation, according to the budget, will increase legal certainty for investors in these debt instruments, thus making it easier for Canadian financial institutions to access this low-cost source of funding.

Martin Fingerhut, a partner at the Canadian law firm Blake, Cassels & Graydon, said that Canadian true sale rules and federal claw-back rights would appear to be more conducive to a covered bond transaction as compared with those in the U.S., which might be why there has been more covered bond issuance from Canada.


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