RBC Sells Covered Bonds in C$750 Million Issue - Update #1

The Royal Bank of Canada (RBC) has sold a C$750 million (USD $698.1 million) covered bond issue with a five-year maturity — the first time a Canadian bank has issued a covered bond denominated in Canadian dollars.

Pricing was about 50 basis points over the relevant benchmark Bank of Canada bond, for a yield of 3.273%.

According to Canada's National Post, vigorous demand from institutional investors prompted RBC to raise the issuance amount by 50% from its original plan of C$500 million.  

"We're doing this [covered bond issue] because it's cost-effective for us and it's proved to be a very popular product" the Post quotes RBC VP David Power as saying.

Of course, covered bonds as a funding source are not new to RBC.  It launched the first covered bond by a Canadian Bank — worth €2 billion (USD $2.963 billion) — in October 2007.  But that issuance was denominated in euros and was aimed at European investors.

The Bank of Montreal and CIBC followed suit in 2008 — also in euros.  And the Bank of Nova Scotia set up a U.S. dollar-denominated covered bond program, although it currently has no covered bonds outstanding.  As of year-end 2008, covered bonds outstanding for all Canadian covered bond programs totaled €6.574 billion (USD $ 9.739 billion), according to the 2009 ECBC Fact Book.

In this context, denominating covered bonds in Canadian dollars is a real landmark.  It seems to signal a new target group of institutional investors.  The timing is also notable, as Canadian banks emerge from the credit crisis.

As described in The Globe and Mail, RBC used a two-pronged approach to marketing these bonds.  A syndicate of domestic dealers focused on Canadian investors, both institutional and retail.  A second syndicate aimed abroad — mostly in Europe, where sales of previous RBC covered bonds were concentrated.

Cover Pool Content

Royal Bank Plaza in Toronto (Photo: Siqbal)Toronto-based rating agency DBRS Thursday (Oct. 29) assigned a provisional rating of AAA to the new offering, known as Royal Bank of Canada Global Covered Bond Programme, Series CB3.  According to the agency, the cover pool consists of "first-lien prime conventional residential mortgages with maximum loan-to-values (LTVs) of 80% in Canada ... which was approximately 11.6 billion [Canadian dollars] as of September 30, 2009."

Among the positives cited by DBRS is that the covered bonds include an extendable-maturity feature, which could allow an additional twelve months for payment to bondholders if required.  Among the negatives are Canada's weakened housing market and the fact that the country lacks a specific legislative framework for covered bonds.

Moody's Investors Service Friday (Oct. 30) assigned RBC's Series 3 covered bonds a provisional long-term rating of (P)Aaa, and Fitch Ratings assigned an expected 'AAA' rating.  Geographic concentrations of the mortgage portfolio, according to Fitch: Ontario, 41.02%; British Columbia, 23.49%; Alberta, 16.49%; Quebec 11.06%; other provinces, less than 2.5% as of the cut-off date.

Separately, RBC announced Tuesday (Oct. 27) that John Taft, head of the U.S. division of RBC Wealth Management, has been named chair-elect of the Securities Industry and Financial Markets Association (SIFMA) for 2010.

Founded in 1864, RBC is Canada's largest bank.