The Covered Bond Report

News, analysis, data

Canadian flows to ease despite new names, says S&P

Impending Canadian covered bond legislation could result in new entrants setting up programmes in 2012, according to Standard & Poor’s, but the rating agency expects less supply than last year, saying that one issuer is nearing a limit on issuance to 4% of total assets.

S&P noted in a report on Friday that covered bond issuance grew 48% from C$17.3bn in 2010 to a record C$25.7bn (US$25.8bn/Eu19.6bn) in 2011, but said that this growth is probably not sustainable. Last year’s growth took outstandings to C$50.4bn as of 31 December 2011.

“We don’t expect Canada’s covered bond sector to set new records for issuance in 2012,” said S&P. “Only one outstanding series is scheduled to mature this year, so refinancing will not be a significant driver of new issuance.”

The rating agency estimates that federally regulated financial institutions with established covered bond programmes have the capacity to issue close to C$60bn more given the 4% limit imposed by Canada’s Office of the Superintendent of Financial Institutions.

“Since the most active covered bond issuer is nearing this 4% limit we believe issuance levels will be slightly lower than in 2011,” it said.

Figures cited by S&P – which match calculations by DBRS last month – put Canadian Imperial Bank of Commerce just C$300m short of the 4% limit, with C$13.4bn of covered bonds outstanding versus a C$13.7bn issuance limit. However, as the figures are based upon data from different dates (end of year for issuance and Q2 or Q3 for assets), the issuer may have more leeway. (See below for full S&P data.)

S&P said that any increase in the 4% limit would increase its issuance expectations for 2012. No potential changes to the 4% limit were discussed in the draft legislation.

The rating agency said that if the proposed legislative framework comes into effect in Canada, more issuers could enter the market this year. Market participants have suggested that legislation could come out alongside the country’s federal budget at the end of this month.

The rating agency said that legislation could help make Canadian covered bonds more attractive to many European investors.

“However, to the extent that European financial markets remain unstable and Canadian issuers maintain their relative funding cost advantages due to a perceived flight to quality, we expect most of the country’s issuance to continue to be to US based investors,” added S&P.

According to S&P, 84.6% of last year’s Canadian issuance was in the US dollar market.

“We believe the high level of issuance to US investors is mainly a function of lower funding costs, as well as US demand for Canadian bank secured debt,” it said.

Market participants have said that the Canadian authorities could limit the use of mortgages insured by Canada Mortgage & Housing Corporation (CMHC) as collateral for covered bonds, but S&P did not discuss this.

Estimated issuance limits for federally regulated financial institutions

Bank of MontrealBank of Nova ScotiaCanadian Imperial Bank of CommerceNational Bank of CanadaRoyal Bank of CanadaToronto-Dominion BankTotal
Assets to capital multiple (i) (C$bn)14.2716.9816.7617.1616.4217.4N/A
Total adjusted net tier 1 and adjusted tier 2 capital (i) (C$bn)30.231.720.48.439.633.9164.2
Estimated total assets (numerator of assets-to-capital multiple) (C$bn)430.4538.2341.6144.7649.9590.52695.2
4% limit imposed by OSFI (C$bn)17.221.513.75.82623.6107.8
Oustanding covered bond issuance (ii) (C$bn)7.11013.42.49.5749.4
Estimated remaining capacity (C$bn)10.111.50.33.416.516.658.4
Current utilisation (%)41.246.697.741.736.529.745.8

Note: Totals may not sum due to rounding. (i) Basel Capital Adequacy Reporting Capital Components as of third-quarter 2011. (ii) Canadian dollar equivalent covered bonds outstanding as of 31 December 2011. Source: Standard & Poor’s and OSFI