The budget tabled yesterday by the Canadian government promised to create a legal framework for Canadian covered bonds.
Similar to the U.S., Canadian issuers in the sector have come to market with structured covered bonds and without a legal framework to support the sector.
Three of the country’s banks have issued structured covered bond deals both in the public and private markets — CIBC, Royal Bank of Canada and Bank of Montreal.
According to the text from the Canadian government’s budget, 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 may be why there has been more covered bond issuance from Canada.
Even with these positive features, having specific covered bond legislation in Canada is expected to further increase investor comfort in the collateral and should foster the growth of the market.
This is particularly true since the rating agencies give credit to the existence of a legislative regime in their analysis as to whether a given structure should receive a 'AAA' rating, Fingerhut said.
“Investors like the statutory protection that this type of legislation gives, which is what they have in Europe,” Fingerhut said. “By having a legislative covered bond framework to work with, investors will not have to rely solely on structuring techniques to be satisfied that these bonds work.”