CIBC to Issue U.S. Dollar Covered Bond - Update

Canadian Imperial Bank of Commerce (CIBC) announced Jan. 25 that it will offer a covered bond denominated in U.S. dollars "subject to market conditions." 

No details were provided either as to the possible dollar amount or the timing, although reportedly the bond will be priced later this week.  (The text of CIBC's announcement appears at the end of this story.)

Assuming that no other bank issues U.S. dollar-denominated bonds in the meantime, this will be the first time in years that covered bonds have been issued in this currency (e.g. a USD $2 billion issuance by the UK's HBOS in November 2006).

"This is a welcome development," said Jerry Marlatt, Senior Of Counsel at Morrison & Foerster and a member of the Steering Committee of the U.S. Covered Bond Council.  "Everything that helps open up the U.S. covered bond market is to be cheered, and issuance by non-U.S. banks may help move the proposed [federal] legislation [for U.S. issuers] along."

"But it is a bit ironic to have foreign banks financing foreign mortgage loans in the U.S. private markets when U.S. banks are not able to finance U.S. mortgage loans in the market," Marlatt added.

The planned USD issuance by CIBC may be the start of a trend.  Just last week, Michael Reuther of Germany's Commerzbank stated that the bank has plans for a U.S. dollar Pfandbrief-style covered bond issue in the second half of 2010.

CIBC's most recent covered bonds date from December 2009 — an issue denominated in Swiss Francs (CHF 675 million, or about USD $660.5 million at the time).  At that point, issuance in U.S. dollars apparently seemed a distant prospect for the bank.  In an interview published Dec. 10, CIBC VP Wojtek Niebrzydowski said: "Regarding USD, that market has been effectively shut for covered [bond] issuance for over two years, and it will require significant time and effort to restart it."

U.S. dollar-denominated covered bonds of the type now contemplated by CIBC are issued under the laws of the issuer's home country (not the U.S.).  Such bonds may be marketed to U.S. institutional investors if they receive an exemption for that purpose from the U.S. Securities and Exchange Commission (SEC).

The cover pool for the CIBC issue will consist entirely of Canadian residential mortgage loans and eligible substitute assets, according to Moody's Investors Service.  An attractive feature is that all mortgage loans in the cover pool are insured by the Canadian Mortgage and Housing Corporation (CHMC), whose obligations are backed by the full faith and credit of the Canadian government.

CIBC's public announcement regarding the planned issue reads as follows:

"Canadian Imperial Bank of Commerce has mandated Bank of America Merrill Lynch, CIBC, HSBC and RBS for a US$ offering, subject to market conditions, [of] its covered bond programme which is rated Aaa/AAA/AAA/AAA and backed exclusively by CMHC insured assets.  CMHC is Canada's national housing agency, and is a Canadian federal Crown corporation, wholly owned by the Government of Canada.  CMHC's obligations are those of Her Majesty The Queen in Right of Canada and as such carry the full faith and credit of the Government of Canada."