A nearly flat basis swap from euros into dollars has increased the likelihood of a Canadian issuer accessing the euro market for the first time since the collapse of Lehman Brothers, with some said to be eyeing the market for just such an opportunity, according to some market participants.

“The basis swap is in their favour right now,” said a covered bond banker, “so yes, I think they’re watching the market. I think if we see a drop of 4bp-5bp more in their favour, then they will look at accessing the market.

“The question is whether this would be the best time for them to issue given that they haven’t been in the market for some time.”

Royal Bank of Canada was the first Canadian issuer to enter the covered bond market, with a euro denominated trade in October 2007, but an unattractive cross-currency basis has contributed to a lack of Canadian euro issuance since September 2008.

“There has been a very discouraging basis swap out of euros back into dollars,” said a syndicate official. “I think that it has kept a lot of these issuers away, much to the disappointment of European investors.

“One thing you need to realise is that when euro based issuers have been issuing in US dollars and bringing those dollars back into euros they have picked up a very significant spread in the cross-currency basis, and this factor has kept a lot of issuers that have natural dollar needs in the dollar market and away from the euro.”

While Canadian issuers have not accessed the euro covered bond market, they have found the US dollar market highly receptive to their trades, with four having launched 144A benchmarks this year after the market took off in 2010.

US dollar covered bonds make up 64% of outstanding Canadian covered bonds, while euro denominated issues amount to 18%. There are three Canadian euro denominated covered bonds outstanding.

“Investors, especially in the US, really value the Canada Mortgage & Housing Corporation (CMHC) backed mortgages in these cover pools,” said a US based syndicate official. “US investors really give the Canadians credit for this fact.”

With the exception of Royal Bank of Canada, Canadian covered bond issuers have set up cover pools comprising solely CMHC insured mortgages.

Canadian covered bonds have been priced tighter than those from other, European jurisdictions in US dollars, but this is the reverse of the situation in euros, where Canada’s banks have always had to pay a premium over European covered bonds. This, alongside the unfavourable basis swap, has been cited as a factor for the lack of euro issuance from Canadians.

Any new euro issue from a Canadian bank would be the first since the country has made moves toward the implementation of covered bond legislation, with the federal government having released a covered bond consultation paper on 11 May. The deadline for feedback was 10 June.

Market participants said that they could not be sure of what impact the pending covered bond legislation would have on Canadian ventures in the euro market.

“It’s difficult to say whether the new legislation has any effect on the European markets,” said a Canadian issuer. “I think we probably won’t know until there is actually a Canadian issue in euros.”

Canadian issues in US dollars are nevertheless said to have tightened a few basis points on news of the plans for Canadian legislation.