Royal Bank of Canada could launch the first fully SEC registered covered bond after having filed programme documentation with the regulator on Friday, with any subsequent deal benefitting from eligibility for indices and TRACE, although requiring disclosure in line with Reg AB.

The filing was made in reliance upon a “no action” letter RBC received from the SEC.

US dollar covered bond issuance to date has been via 144A private placements, but this format has limited the investor base for the product, with many accounts having restrictions on the amount of 144A offerings they can purchase. In addition, 144A issuance is not eligible for inclusion in major bond indices, such as the Barclays Aggregate, limiting the depth of the market.

Should RBC follow up its SEC notification with a full registered issue, it would face no such selling restrictions and, unlike 144A issuance, would be eligible for the main US indices. In addition, unlike 3(a)(2) issuance that many market participants had expected to be the next step in the US market’s development, there is no requirement for the issuer to have a US branch or agency and no capital implications for such a branch/agency.

“This will bring covered bonds into the mainstream of the capital markets in America,” said Jerry Marlatt, senior of counsel at Morrison & Foerster, which acted for RBC.

In a letter to the SEC, it said: “The Bank proposes to file the Registration Statement with the Commission for the offer and sale of the Covered Bonds under the Bank’s Global Covered Bond Programme… The Bank believes that covered bonds would provide an attractive investment alternative in the United States, and therefore believes that conducting a covered bond on a registered basis would greatly facilitate the introduction of the product in the United States.”

In a client note released today (Monday) Morrison & Foerster (MoFo) said that the no-action letter from the SEC provides relief to allow the guarantor limited partnership LP, part of the RBC contractual covered bond structure, to qualify for registration. MoFo’s letter on behalf of RBC set out the conditions for including the guarantor as a co-registrant on the registration statement, with the significant items being, according to Morrison & Foerster, that:

• The covered bonds are not deemed to be ABS, however disclosure that is consistent with Regulation AB is required
• Disclosure regarding the cover pool assets is similar to the disclosure for a credit card or UK RMBS master trust
• No loan level disclosure is required for the cover pool; and
• Financial statements of the guarantor are not required.

RBC already has an SEC registered senior debt programme, making it less onerous for the bank to meet all the requirements necessary for covered bond issuance in the format.

According to MoFo, eligibility for Form F-3 that is necessary requires an issuer to have been filing annual and periodic reports with the SEC for at least a year, and that issuers that have existing senior debt programmes on this form will already qualify.

A covered bond banker said that the launch of a fully registered SEC covered bond deal would be a “giant leap forward” for the visibility of the asset class given such a transaction’s eligibility for the Barclays Aggregate and TRACE (Trade Reporting & Compliance Engine), and that RBC is a “superb” issuer to take such a step. He noted that Reg AB disclosure requirements are fairly onerous, however, and that this raises the question of whether other issuers would be in a position to carry out such a step and/or consider the rewards sufficient to do so.

MoFo noted that covered bond issuers that do not utilise a two tier contractual structure to segregate the cover pool, with those from Germany mentioned as an example, would not fit within the method contemplated by the no action letter for RBC, and would present different considerations that would require discussions with SEC staff.

The Canadian government is introducing covered bond legislation that, among other measures, will prohibit issuance backed by cover pools comprising insured mortgages, which will affect all issuers except for RBC and could affect their ability to issue. Unlike its peers, RBC has not used mortgages insured by Canada Mortgage & Housing Corporation in its cover pool but uninsured prime residential mortgages, and it could therefore find issuance easier. Its last US dollar issue was a $1.5bn five year deal in April 2010.

“This is the perfect riposte strategically to that change,” said the banker. “It provides the greatest chance to generate both a strong bid and liquidity, and the future performance in this asset class.

“In the same way that covered bonds sit naturally in a lot of both very institutional but also smaller and midcap portfolios in Europe, there is no reason why they should not do so in the US as well.”

The no-action documents can be found here:

http://sec.gov/divisions/corpfin/cf-noaction/2012/rbc051812-f3.htm

and a related RBC filing here.