Q&A with RBC on Canadian-dollar Covered Bonds

The Royal Bank of Canada (RBC) made headlines when it became the first Canadian bank to sell covered bonds denominated in Canadian dollars (Oct. 29).  In contrast to earlier series, which were pitched towards Europe, fully 99% of this issuance was purchased within Canada.

RBC's Ken Mason, Senior Manager, Capital and Term Funding, answered some written questions from Covered Bond Investor™ as follows:

Why and when did RBC start thinking about issuing a new covered bond?  

We have been able to fund ourselves quite cost effectively this year through a mix of retail deposit growth and low cost domestic securitization programs and senior unsecured issuance.  We have been looking at the covered bond market more seriously the last several months as spreads began to improve.  

Why and when did RBC start considering an issuance denominated in Canadian dollars (C$)?  What do you see as the advantages and disadvantages?  

From the outset of establishing our program in 2007, we have always had the intention of exploring issuance in C$.  When market conditions started to improve earlier this year, we undertook an exercise to put the appropriate domestic documentation in place.

How did RBC arrive at its initial decision to issue C$500 million? Were you surprised to see enough demand to justify increasing that figure by 50%? 

We viewed the C$500 million threshold as benchmark size for C$.  Based on some initial soundings, we were confident that we could achieve this and we were pleased to see the book build to support a larger sized trade. 

In what ways does the profile of investors in this series differ from RBC's previous covered bonds?  Do you believe this will be a trend?

In many ways, the investor mix for this deal is similar to our European offerings in that there is broad based support from a number of different investor types. 

How did European investors receive the idea of a Canadian dollar (rather than euro) issuance from RBC?  What was the reception in the U.S.?

Going forward, this should provide a high-grade fixed income alternative with an attractive spread to those non-Canadian investors that have C$ to invest.  In addition, it demonstrates that we have domestic support for the product, which provides us with a diversification benefit, allowing us to access different buyer bases when issuing covered bonds.

While rating the RBC covered bonds highly, DBRS and other credit rating agencies nonetheless pointed negatively to Canada's lack of a legislative covered bond framework.  What is the current state of play on that initiative? 

The Canadian Bankers Association has approached the Canadian government to propose the development of specific covered bond legislation.  Those discussions are progressing, although they are still in the early stages.

How do you view the future of covered bonds in Canada?  Do you see them as likely to play a more important role over time?  If not, why?

We felt it was important to give our domestic investors an opportunity to buy the full suite of products that we issue internationally.  Covered bonds fill a supply gap for high quality non-government paper.  Based on the support for this first deal, we are encouraged that the market will expand from here. 

To download a PDF of the Case Study for the RBC Canadian-dollar covered bond issue, click on "RBC Case Study" under Attachment below.