"We are not ruling out other currencies, but our objective is to build a curve in the European market"
Because of the high volatility in the covered bond markets, RBC was relying on investor feedback to determine the best time to launch its debut issue. With the bullish noises coming from the roadshow and the positive response to other planned issues, such as the HBOS seven-year euro benchmark, RBC felt that the time was right for issuance.
Canada is especially ripe for covered bond issuance because of its high-quality mortgage market. The portfolio of mortgages in RBC’s cover pool is as pristine as they come, and there are plenty of prime mortgages originated by other Canadian financial institutions that would fit well in a covered bond programme. "RBC’s covered bond has opened up a new funding platform and a new investor base for Canadian financial institutions," says Jerry Marriott, head of structured finance at ratings agency DBRS. "With very high quality assets available, we expect to see more Canadian issuers soon."
Although RBC claims the first Canadian covered bond, some similarities can be drawn with mortgage-backed bonds issued by other Canadian institutions. Canada Housing Trust (CHT) issues jumbo mortgage bonds on a quarterly basis, and although their structure differs significantly from RBC’s covered bond in many respects, the fact that both are triple-A rated issues backed by very high-quality Canadian mortgages could suggest that RBC is not tapping an entirely new investor base for Canadian issuers. Indeed, DBRS’s structured finance team rated both the issues, despite CHT being a crown company and hence falling under the sovereign umbrella.
At any rate, investors attending RBC’s roadshow through Europe were keen on the issue, and the strength of the underlying Canadian mortgages. German investors were especially positive, as evidenced by their attendance as well as their feedback. Other particularly encouraging reports came from the Nordic region and the UK. It is likely that the strong European interest will mean that RBC confines its covered bond programme to the European market in the near term. The bank does a lot of dollar funding, and might well look to tap the US market with a dollar-denominated covered bond, as well as other currencies in which it is positioned, such as Canadian dollars and Swiss francs. "There is an opportunity to use the programme across other markets but our motivation was to open pockets in Europe that we would not reach with unsecured funding," says Morgan. "We are not ruling out other currencies, but our objective is to build a curve in the European market."
RBC will look to issue two benchmark deals each year, with at least one, and probably both, in euros. As the largest mortgage underwriter in Canada, it was important for the bank to be first to the covered bond table. "We want to be the pioneer of jumbo Canadian covered bonds," Morgan asserts.
RBC even expects to take on the role of opening the wider covered bond market in future. Its first issue has a five-year maturity, and price guidance is 11 basis points over mid swaps. The deal is led by Barclays Capital, BNP Paribas, Commerzbank and RBC Capital Markets.
Any fears that RBC might have had about whether or not investors are ready for a debut deal from a completely new market were allayed by the strong performance of other issues coming to market from other jurisdictions. HBOS’s €2 billion, seven-year issue was oversubscribed to €3.7 billion after one day of book building. The issue is good news for the UK covered bond market in particular, which has stuttered since HBOS tried to reopen it in September with a three-year deal but was hampered by Nationwide’s issue shortly afterwards, which widened spreads and increased volatility. It also came at a time when the market was still reeling from the ACI financial market association’s decision to triple bid-offer spreads in an ill-fated attempt to maintain market-making in the covered bond markets.
Now, though, the market has stabilized with HBOS’s latest deal, which primed many investors for RBC’s debut covered bond.