European issuers of covered bonds have sought to diversify their investor bases in recent years as European investors approach their limits in those securities, and new regulations such as Solvency II and Basel III favor issuance of covered bonds over ABS.
Jerry Marlatt, senior counsel at Morrison & Foerster, said his phone has been ringing steadily since client Royal Bank of Canada (RBC) filed a registration statement with the Securities and Exchange Commission (SEC) to issue public covered bonds in the U.S. His firm advised RBC on its filing to pursue the public offering - the first of its kind - and Marlatt said a number of European issuers have inquired about potentially following in its footsteps.
The SEC must still approve the offering. However, nearly $100 billion in covered bonds have been offered to U.S. investors by Canadian and European financial institutions over the past two and a half years through the private Rule 144A market, where issuance volume has steadily increased, Marlatt said. He added that some U.S. institutional investors' bylaws restrict their investments in private securities while some are prohibited altogether. "So registering the securities takes those issues out of investors' restricted buckets and also brings in new investors," Marlatt explained.
Investor demand is another factor increasing covered bond issuance in the U.S., he added. These securities are often backed by cashflows from residential mortgages, offering exposure to that asset class when RMBS issuance has been minimal, Marlatt explained. Covered bonds are corporate bonds that remain on the bank's balance sheet but, like ABS, have recourse to loans such as mortgages, in the event the financial institution becomes insolvent. - John Hintze