Could Foreign Issuers Spur U.S. Covered Bond Action?

In late July of this year, Covered Bond Investor™ briefly noted the fact that a French covered bond issuer, CFF (Compagnie de Financement Foncier) had applied to the Securities and Exchange Commission (SEC) for an order exempting CFF from provisions of the (U.S.) Investment Act of 1940 in connection with the offer and sale of its securities in the U.S.

A notice in the Federal Register (July 28) stated:

"CFF proposes to offer and sell in the United States its covered bonds and other debt securities.... CFF states that any such offer and sale shall occur only in transactions exempt from registration under the Securities Act of 1933 ('1933 Act'), including transactions effected as traditional private placements with institutional investors or in transactions in which the securities may be resold to 'qualified institutional buyers' as contemplated by rule 144A under the 1933 Act" (italics added).

Jerry MarlattAttorney Jerry Marlatt, senior of counsel at Morrison & Foerster, highlighted CFF's request for exemption in an interview published last week (Oct. 2) with Joshua Hamerman of Investment Dealers Digest. 

"We see a curious development," Marlatt said, "where French banks and other foreign banks are actively looking at issuing dollar-denominated covered bonds in the U.S. market while U.S. banks are not because of the regulatory environment."

He added that the SEC had granted CFF's request.

Marlatt's observation about the request for exemption came in response to a question as to when he thought there would be enough of a framework for U.S. covered bonds to "take off."  The gist of his answer was that a push for covered bond sales in the U.S. by French and other foreign banks might help spur Congress to enact legislation that would better support covered bond issuance by U.S. financial institutions.

Although the IDD story does not mention it, upcoming potential efforts by CFF or others would not be the first time that foreign issuers have pitched their covered bonds to institutional investors in the U.S. In November 2006 — following Washington Mutual's success in launching the first U.S. covered bond program — Germany's Hypothekenbank in Essen reportedly managed to sell about 55% of a Pfandbrief (German legislative covered bond) issue, backed by public-sector obligations, to the U.S. institutional investment community.  Later the same month, the UK's HBOS launched a $2 billion issue that Euroweek called "the first purely residential mortgage backed covered bond dollar benchmark targeted at the U.S." — of which 76% reportedly was sold here.  But such foreign initiatives stalled as the global economic crisis began to raise its head and the opening phase of efforts to develop a U.S. covered bond market ground to a halt.

Among other points made by Marlatt in his interview with IDD:

• The U.S. investors most likely to gravitate toward covered bonds would be the types who have traditionally purchased agency debt — i.e., debt securities from Fannie Mae and Freddie Mac. (This coincides with recent remarks by Tim Skeet of Bank of America Merrill Lynch that U.S. covered bonds potentially could fill a market void as the supply of agency debt diminishes.)

• In Marlatt's view, the Garrett-Kanjorski covered bond bill, which is currently pending before Congress, would resolve some but not all legal impediments that currently pose difficulties for U.S. covered bonds. (Although Marlatt did not mention a recent analysis on that topic by Moody's Investors Service, he appears to be in agreement with it.)

Earlier this year, Covered Bond Investor™ published a four-part series by Marlatt on covered bonds in the U.S.: (1) "How Covered Bonds Could Extricate the U.S. Government from Residential Mortgage-Backed Securities"; (2) "Why a Covered Bond Market Did Not Develop Sooner in U.S. History"; (3) "Preparing the Ground for a U.S. Covered Bond Market: Recent Steps"; and (4) "Prospects for a Future Covered Bond Market to Finance Home Mortgages in the United States."

The complete text of CFF's application for exemption described above, as amended June 22, 2009, is available at:
http://www.sec.gov/Archives/edgar/data/1445545/000119312509134825/d40appa.htm.