The Securities and Exchange Commission's (SEC) response to Royal Bank of Canada's (RBC) request to conduct registered public offerings of covered bonds is likely to fuel growing U.S. dollar demand, according to Fitch Ratings. For ASR's coverage on the topic, please click here.
The SEC's "no action" letter will allow RBC and other issuers to offer covered bonds to a wider range of investors than previous bonds issued under 144A/RegS conventions.
Additionally, Fitch said in a press release today that the "no action" statement also paves the way for U.S. dollar-denominated covered bonds to be included in benchmark indices investors use to track returns.
According to the rating agency, U.S. dollar-denominated covered bond issuance from non-U.S. financial institutions has reached a high of roughly $50 billion for 2011. Nearly half of that sum was driven by Canadian banks.
"The soundness of the country's financial system, as well as the strong performance of Canadian residential mortgages during the financial crisis, has made Canadian covered bonds particularly attractive to investors," the Fitch release stated.
Furthermore, investors like the mortgage insurance provided by the government-supported Canada Mortgage and Housing Corp. (CMHC) on mortgages in existing programs (with the exception of RBC) that protect investors from the credit risk on the underlying assets.
In May, the Department of Finance Canada also announced a plan for a regulatory covered bond framework, which is expected to be approved by Parliament in the near future.
Canadian issuers have been given a six-month grace period to continue issuing covered bonds under existing unregulated programs, after which only regulated issuances will be permitted, according to the report.