RBC Issues New Covered Bond - Update #3

Royal Bank of Canada (RBC) has launched a new Canadian-dollar covered bond issue.  Pricing was reported as 40.9 basis points over the relevant Government of Canada benchmark bond curve, compared to initial price guidance in the area of 45 basis points.

Although initial reports put the planned issue size at C$500, the final size rose to C$850 million (USD $825.8 million).

The issue will not be eligible for sale into the U.S.

This is the second Canadian-dollar covered bond issue by RBC.  The first such issue was in October 2009, when the bank sold a five-year, C$750 million covered bond.  That issue was seen as well received by Canadian investors.

Of the three Canadian banks that have issued covered bonds, RBC is the only one so far to make an offering in Canadian dollars.

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.  Little known in the U.S., they are widely used in Europe for real estate and public sector financing.

For RBC's covered bonds, the cover pool consists of "first-lien prime conventional residential mortgages with maximum loan-to-values (LTVs) of 80% in Canada (Covered Bond Portfolio), which was approximately $19.2 billion as of January 31, 2010," as described by the credit rating agency DBRS.   Announcing its assignment of a provisional AAA rating to this covered bond issue (Series CB4), DBRS also noted that in the event of issuer default, "the final maturity date on the Covered Bonds can be extended for an additional 12 months, which increases the likelihood that the Covered Bonds can be fully repaid."