Royal Bank of Canada opened the new era of legislative Canadian covered bond issuance in July 2013. On 12 June it launched its latest euro benchmark — a Eu1bn five year priced at 7bp over mid-swaps — to round off a busy 12 months that has also taken in the US and Australian markets. David Power, vice president, corporate treasury at RBC, discussed the bank’s strategy and the latest regulatory developments with The Covered Bond Report.

The Covered Bond Report: You have been issuing under the new Canadian legislative framework for around a year. What are the key benefits of having this in place? Has it made a difference to how Canadian covered bonds are perceived in the market, particularly euros?

David Power, RBC: Of course it is helpful, and the legislation aspect is now being tied to certain regulatory requirements for liquidity treatment, so we are very happy to have this in place. Legislation has helped us further strengthen our programme, for example, through the introduction of indexing requirements.

The CBR: What brought about your latest euro transaction?

Power, RBC: The transaction was part of our normal funding. We are constantly monitoring the market.

The five year maturity was attractive on a dollar Libor basis, and it’s a typical maturity for us. We will occasionally issue longer or shorter, but that’s right in the middle of the range that we would normally look at with our transactions.

The CBR: Some market participants suggested that your approach with the new issue, with regard to size and pricing, may have been influenced by the underperformance of previous transactions. Was this the case?

Power, RBC: The broader picture is that those were very large transactions and we’ve just adjusted our approach to be more in line with where the market has moved. There was a time when those sized transactions were not uncommon, but the market, by virtue of how it votes through pricing, really wants transactions more in the Eu1bn range for issuers like ourselves, so we are really just adjusting to that reality.

There may be some investors who say they like the larger deals, but that’s not evident through the pricing.

The CBR: The treatment of covered bonds in LCRs in Canada was recently decided. Are you satisfied with the outcome?

Power, RBC: OSFI has generally followed the Basel III guidelines very closely, so there was not really much surprise from our perspective.

The CBR: Canadian covered bonds look set to be eligible for LCRs under CRD IV as Level 2A assets, whereas they would typically be eligible as 1B if they were from the EU and hence UCITS-compliant. What is your view on this?

Power, RBC: First, my view is that the investors that are held to the requirements have the most relevant opinions on this topic.

My opinion on it is that bank regulations should be risk-based, rather than creating arbitrary distinctions between developed nations. For example, there generally are not different rules where if a bank makes a loan to a US-based company as opposed to Canadian-based company we are supposed to treat those differently for capital purposes.

However, the worst case scenario — of Canadian and other non-EU covered bonds being completely excluded — would have been quite bad — like the US situation, where covered bonds are not LCR eligible at all. If our bonds had suffered that fate at a time when EU covered bonds were actually being promoted into a better category, that would have been incredibly tough given that banks are about half of the investor base. So I think overall it’s not such a bad outcome.

The CBR: Are there other areas where the EU/non-EU playing field is not level? What should be done about this?

Power, RBC: There are a number of public documents from Basel, etc, that have looked at the consistency of implementation of regulatory rules. I would refer you to those rather than make any specific comments.

The CBR: Is the ECBC a good/appropriate vehicle for your concerns? Is the Label initiative something that you are keen for Canadian covered bonds to be a part of?

Power, RBC: We would potentially be interested in the Label providing it was based solely on risk-based criteria.

The CBR: You are among the most active issuers internationally in terms of having been active in three currencies in the past 12 months. How do you determine your strategy across currencies?

Power, RBC: We seek to diversify our funding across markets, while considering basis swap and credit spread pricing.

The CBR: What made Australian dollars an appropriate market for you? Have you issued previously in senior unsecured, did you do much investor work there, and do you feel Australian domestic issuance has been an important factor in the development of that market?

Power, RBC: We have issued benchmark funding transactions in Australia for a decade, so we are a familiar name to investors there. We occasionally do targeted investor work there, but we also have our own business presence in Sydney that keeps us close to investors.

The CBR: Do you see ongoing benefits from SEC registration? Do you expect the US covered bond market to develop, with other foreign issuers using the format?

Power, RBC: That format has helped our programme and continues to make our bonds attractive there. Unfortunately, that market has been slow, especially in light of more favourable euro issuance opportunities.

The CBR: You have been very active in the past year. Can we expect your issuance to continue at this pace?

Power, RBC: Our issuance volumes this year have been trending lower than last year (in part because last year we purchased Ally’s Canadian business). We continue to monitor covered and unsecured markets to meet our ongoing funding requirements.