CIBC Prices USD $2 Billion Covered Bond - Update
Start of a trend by non-U.S. banks?
By:
By Spencer Punnett
By:
For Covered Bond Investor™
01/27/2010
Canadian Imperial Bank of Commerce (CIBC) priced its USD $2 billion, three-year landmark dollar-denominated covered bond at 66 basis points over the 1.375% U.S. treasury bond maturing January 2013, according to Reuters (Jan. 27). That is equivalent to 30 basis points over mid-swaps (the price reported in the Financial Times). The yield is slightly over 2%.
This issuance marks the first time in years that covered bonds have been issued in U.S. dollars from any source — foreign or domestic.
"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.
Many observers believe that new issuance of covered bonds by U.S. banks will not become practical until and unless Congress enacts a legislative framework to govern them.
Meanwhile, the planned USD issuance by CIBC may be the start of a trend by non-U.S. issuers. 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).
Some such dollar-denominated covered bonds were issued by foreign banks before the global economic crisis. For example, in late 2006, Germany's Hypothekenbank in Essen reportedly sold 55% of a $1.25 billion public sector Pfandbrief (German legislative covered bond) in the U.S. The UK's HBOS had even greater success, reportedly selling more than 75% of a $2 billion mortgage-backed covered bond issue within the U.S. investment community.
The cover pool for the CIBC's new issue will consist entirely of Canadian residential mortgage loans and eligible substitute assets, according to Moody's Investors Service. An attractive feature is that all mortgage loans in the cover pool are insured by the Canadian Mortgage and Housing Corporation (CHMC), whose obligations are backed by the full faith and credit of the Canadian government.
CIBC's initial public announcement (Jan. 25) regarding the issue read as follows:
"Canadian Imperial Bank of Commerce has mandated Bank of America Merrill Lynch, CIBC, HSBC and RBS for a US$ 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."
Covered bonds are debt obligations that have recourse to a pool of assets — the cover pool — that secures or "covers" the bond if the issuer becomes insolvent. To date, they have primarily been used for real estate and public sector financing.
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