A potential breakthrough US dollar covered bond in 3(a)(2) format is nearing, according to market participants, with at least one European issuer said to have documentation in place and Canadian issuers being cited as strong candidates for using the format, which is expected to open up the US investor base.

BNP Paribas is said to have documentation in place to launch such a deal and Scandinavians and Canadians are reported to be considering such a move. The Covered Bond Report was unable to confirm BNP Paribas’s plans with the issuer.

Foreign US-targeted dollar covered bond issuance has so far been under Rule 144A, meaning that only qualified institutional buyers (QIBs) can participate in such deals, and these accounts may also have limits on their exposure to non-fully SEC registered bonds.

Additionally, 144A covered bonds are not eligible for the leading Barclays Capital US Aggregate Index (although they are eligible for some others), inclusion in which market participants say would have the most dramatic impact on expanding the US investor base for the asset class.

Issuance in 3(a)(2) format – a reference to the relevant section of the Securities Act and representing an exemption from full SEC registration – would be eligible for the index, however, greatly expanding the potential investor base for covered bonds in the format.

Some non-US banks have already explored the format in senior unsecured format, with Svenska Handelsbanken having last July become the first Nordic issuer to sell a 3(a)(2) deal. A treasury official at a Canadian issuer has told The CBR that it is assessing the 3(a)(2) option and Canadian issuers are said to be strong candidates given that some have sizeable US operations that make them suitable for the documentation.

Several market participants said that a 3(a)(2) covered bond would mark a turning point for the asset class in the US.

“If nothing else you’re going to force a whole bunch of investors who never even looked at you before to not only look at you but to have to buy it,” said one major investor. “That’ll be a big day.

However, a US-based lawyer said that the potential impact of covered bond issuance in 3(a)(2) format is hard to measure, noting that bankers talk of the positives it would bring in terms of index eligibility and therefore greater secondary market liquidity, but he said that it would not be a transformative event.

“It would not necessarily open the floodgates,” he said.

Other market participants were more positive, but were unsure just how quickly the first deal would arrive, with one saying it is “weeks to months away”.