The Royal Bank of Canada is preparing to issue a 15 billion ($21 billion) covered bond program to finance a pool of mortgages. The Global Covered Bond Programme represents the first issuance of covered bonds backed by Canadian assets.

Backed by prime-quality mortgage loans originated across the country, the cover pool has a weighted average loan-to-value (LTV) ratio of 70.5%, according to Moody's Investors Service, which gave the bonds a triple-A rating. Established under Canadian law, the rating agency says the program has a lot in common with covered bond programs in the U.K. It does not rely on specific covered bond legislation to get off the ground and continue to operate, and benefits from a creditor-friendly national legal framework.

The deal signifies more progress for the covered bond market worldwide, as market sources widely expected such a move from that asset class.

While the underlying mortgages in RBCs deal are considered prime, a significant amount of the cover pool, 52.7%, is comprised of a relatively new mortgage product from RBC, according to Moody's.

RBC's product, called Homeline, allows homebuyers to have up to five tranches in a traditional mortgage segment, and another five tranches of a HELOC segment secured under one collateral mortgage.

The amount available under the HELOC segment increases, up to the maximum allowed by the lender, as long as the mortgage component is paid down. Also, the LTV on all of the mortgage tranches and the HELOC combined can never exceed 80%.

Moody's noted that, depending on the composition of some of the Homeline loan segments, the severity of losses on the Homeline loans might be lower or higher on some segments following a borrower default.

Canadians, however, appear to be using the new product sparingly, because most Homeline loans only have one mortgage segment with a single tranche.

(c) 2007 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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