French mortgage bank Compagnie de Financement Foncier has sold the first benchmark covered bond issue in Canada’s maple bond market. The 10-year issue was so oversubscribed that the borrower increased its size by 25% over the originally planned figure. "We originally considered a C$400 million issue, but it was so oversubscribed that we were able to increase that to C$500 million (US$443 million), which offered a benchmark size for the market," says Tim Skeet, head of covered bonds at Merrill Lynch, which acted as lead manager on the deal, alongside Royal Bank of Canada. "It was one of those deals that really worked. It caught the market, it caught the moment and it caught the imagination."
Strong words, maybe, but in this instance they might well be justified. The issue is certainly a success. In very little time, CFF had an order book in excess of C$600 million.
The Canadian bond market has until recently been fairly unaccommodating to foreign borrowers. But when the foreign property rule was scrapped in 2005, issuers were granted access to a highly sophisticated investor base. The maple bond market has been growing ever since, and CFF’s issue is the latest part of that growth. It comes in a year that has so far seen a record proportion of maple bonds in the Canadian bond market. So far in 2007, maple bonds have accounted for 60% of new issues, according to Merrill Lynch. "There has been light domestic bond issuance [in Canada] this year, and maples have filled the void," says Susan Rimmer, co-head of debt origination for Merrill Lynch in Canada. Domestic issuance might pick up later in the year, lowering that figure of 60%, which would seem a touch high. Last year, maples accounted for 30% of new issues in the Canadian bond market.
On the move
Nevertheless, the maple bond market is very much on the move, as evidenced by the success of the CFF covered bond, which is a traditionally structured obligation foncier. That success was apparent as soon as the bank began marketing the issue. "We marketed the transaction in two stages; the first at the end of last year, the second in March 2007," says Paul Dudouit, head of long-term funding at CFF. "The feedback we received was very good, so we decided to open this new investor base."
CFF was also helped by the timely staging of a maple bond conference at the end of March by one of its bookrunners. "Merrill Lynch’s maple bond conference in Toronto provided a very good opportunity for issuers and investors to meet," says Dudouit, who was himself a keynote speaker at the conference. "It was a very powerful tool in terms of marketing."
It’s clear the market has potential considering the turnout. Some 21 issuers from eight countries met in Toronto, along with 70 investors. As well as CFF there were two other covered bond issuers in attendance, suggesting that Canada’s burgeoning interest in covered bonds will be met with provision.
Canada’s bond market has a sophisticated investor base, and the standard of portfolio managers is high. Consequently, these investors are very demanding in terms of the quality they expect. This is the reason why CFF employed joint lead managers for its benchmark issue, which is uncharacteristic for this market, which is often characterized by sole leads. "Involving another house as joint lead manager helps ensure liquidity," explains Skeet. "This is what the investors wanted, and we agree that it is an important component of this issue." The transaction also employed BMO Capital Markets and CIBC, which will also make markets in the bonds. Again this is what investors desired, as indicated in the feedback received by the bookrunners.
New regulations
The strength of the maple bond market looks set to increase further with the announcement in the federal budget on March 20 that the government will extend the eligibility of investments by registered retirement savings plans (RRSPs) to include maple bonds. The old rule meant that the maple market was almost exclusively the domain of institutional investors, such as those targeted by CFF’s covered bond. The new regulations will allow retail investors direct access to the maple market, though whether issuers will look to these investors, and the added regulatory requirements they would bring, remains to be seen.
Either way, maples will continue growing through 2007. Average deal sizes are increasing, and so are average maturity lengths, as investors continue to seek high credit quality. Issues like CFF’s obligation foncier will only expedite the process, especially if they meet with the same response. "This issue has been a great success," chortles Dudouit at CFF. "We will definitely increase our covered bond issuance programme in Canada."