CIBC USD Covered Bonds: Q&A with Wojtek Niebrzydowski
"We believe that at this point we have full access to the USD market"
03/19/2010
Canadian Imperial Bank of Commerce (CIBC) made a big impact in covered bond circles earlier this year (Jan. 27) when it successfully launched a $2 billion, three-year covered bond issue denominated in U.S. dollars — the first dollar-denominated issue from any source since an initial push by Washington Mutual and Bank of America was quashed by the global economic crisis in late 2007. According to CIBC, a full 84% of the bonds went to institutional investors in the U.S., with pricing at 66 basis points over the 1.375% Jan. 2013 UST benchmark.
Wojtek NiebrzydowskiWojtek Niebrzydowski, a VP in CIBC's Treasury Department, helped spearhead the USD covered bond issue. For a period of time during and after the sale, legal constraints prevented him from making public comments. But in this exclusive interview with Covered Bond Investor™ he now is able to share some of his thoughts and observations.
Just after CIBC's Swiss Franc covered bond issue [in Dec. 2009], I asked why the bank chose Swiss Francs rather than euros, U.S. dollars or Canadian dollars. At that time, you replied: "Regarding USD, that market has been effectively shut for covered issuance for over two years, and it will require significant time and effort to restart it." What changed after that to make the U.S. dollar issuance more feasible or attractive?
The statement was and remains accurate. The market was closed since June 2007. At the same time we continuously evaluate ability to access different markets (be it Canadian dollars, U.S. dollars, Swiss Francs, euros, Norwegian Krone etc.) and where feasible make sure we have infrastructure in place to proceed if there is a need and an opportunity. The USD deal took a lot of work to pull together in the context of legal docs, rating agency work (in particular resolution to the Standard & Poors global methodology change, Canadian CB issuers were one of the first to have their aaa rating affirmed) and not to mention the prospective investor outreach.
With regard to the USD issue, how did the actual pricing compare to your hopes before launch?
The objective was to open the U.S. market for CIBC CB program while maintaining desired economics. That meant we needed to get the pricing below the equivalent of our senior unsecured levels in the lowest cost jurisdiction, which, not surprisingly, is our home market. We achieved the objective with the reoffer level being at least 10 basis points below that benchmark and likely 20-25 basis points inside a senior unsecured USD trade.
Please talk about your impressions of how the issue was received by the various types of U.S. institutional investors.
U.S. investors' past experience with CBs has probably been mixed. We needed to address liquidity concerns and more importantly get them comfortable with the issuer, program, collateral and the jurisdiction. Given geographic proximity and close economic ties between the two countries this was probably less difficult than attempting to do it in Europe. Ultimately we upsized the deal to $2 billion and still achieved a book that was more than twice oversubscribed. That's the best testimony to the investors' acceptance.
What kinds of questions have people from other Canadian banks asked you about the USD CB issue? Do you believe that others are likely to issue USD CBs any time soon? What about CIBC itself?
We cannot comment on any explicit questions but those institutions that talked to us viewed the deal in a reasonably favourable light. Likewise we are not in a position to comment on their funding plans. Any future issuance by CIBC will be driven by our term funding needs and associated economics. We believe that at this point we have full access to the USD market.
As you know, the Canadian government has now officially announced its intention to introduce covered bond legislation. If a strong legislative framework comparable to some European countries had already been in place at the time of CIBC's January USD issue, do you believe the pricing spread would have been better? Any other possible differences?
We do not believe that existence of Canadian covered bond legislation would have made a material difference for the USD deal at the time. This may have been a function of the market being reasonably familiar and comfortable with Canada as a jurisdiction and contractual law arrangements which are similar, albeit not identical, on both sides of the border. We would expect that a Canadian CB law when enacted should make it easier to access the European market in terms of both pricing and investor acceptance.
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