Toronto-Dominion Prices $2 Billion U.S. Dollar Covered Bond

Among potential Canadian issuers of U.S. dollar-denominated (USD) covered bonds, Toronto-Dominion Bank (TD) was the next shoe that many expected to drop — and now it has.

TD entered the market (July 22) with a five-year, $2 billion covered bond (CB) issue, on the heels of a three-year, $2.5 billion USD CB priced June 25 by Bank of Nova Scotia (BNS).

Pricing for the TD issue was reportedly 57.1 points over comparable U.S. Treasuries (37 basis points over mid-swaps).

This makes TD the fifth Canadian bank to issue a USD CB — all in 2010.  The TD issue has received a provisional long-term rating of (P)Aaa from Moody's Investors Service and a provisional AAA rating from DBRS.

TD's USD CB launch came on the same day that Bloomberg ran a news story highlighting Canadian banks' huge recent success with covered bonds targeting U.S. institutional investors.  Pricing for those bonds has been favorable for the issuers.

"We are getting 30 to 40 basis points better economics in the U.S. than we could in Europe," Bloomberg quoted Wojtek Niebrzydowski of Canadian Imperial Bank of Commerce (CIBC) as saying.

Intrinsic to the covered bond structure is a "cover pool" of assets that is ring-fenced for the benefit of bondholders (in addition to the issuer's direct liability).  The cover pool supporting TD's Series 1 covered bond contains about C$10.7 billion worth of prime credit home equity lines of credit (HELOCs).

The 86,025 loans currently in the cover pool have an average outstanding balance of C$110,925, according to a pre-sale report from DBRS. Geographically, Ontario accounts for a plurality of the loans (49%), followed by Alberta (22%) and British Columbia (16%).

As with USD covered bonds previously issued by CIBC, Bank of Montreal (BMO) and BNS — although not the ones from Royal Bank of Canada (RBC) — the cover pool assets for TD's issue are insured by Canada Mortgage & Housing Corporation (CMHC). CHMC is 100% owned by the Government of Canada, and its obligations are backed by the government's full faith and credit.

A comparison of five Canadian covered bond programs in an appendix to Moody's pre-sale report shows great similarities among the programs from a credit standpoint.  In addition to the fact that four of the five cover pools are 100% CHMC insured, all have a committed over-collateralization of 3% and a Timely Payment Indicator (TPI) of "probable."  Weighted average loan-to-value ratios range from 52.16% to 68.21%.  All programs have a covered bond rating of Aaa.

Unlike mortgage loans in the cover pools of CIBC, BMO and BNS, however, the loans backing the TD issue probably would not be eligible for the Canada Mortgage Bond (CMB) program, according to Moody's. That is because unlike those other programs, the TD loans "are either non-amortizing home equity lines of credit or have a non-amortizing component."

When TD announced earlier this year that it was developing a covered bond program, it did not refer to U.S. dollar issuance, but the move was nonetheless widely expected.   On April 26, TD established a program allowing issuance of up to €10 billion (US $12.9 billion) in covered bonds, "denominated in any currency agreed between the Issuer and the relevant Dealer(s)."

According to an analysis by DBRS (April 30), TD potentially has room on its balance sheet to issue a total of more than C$19.3 billion (US $18.6 billion) in covered bonds (measured as of Oct. 31, 2009) before hitting the 4%-of-total-asset cap imposed by Canada's Office of the Superintendent of Financial Institutions (OSFI).

TD is the second-largest bank in Canada, with reported assets of about C$574 billion (US $551.6 billion) in assets as of June 30, according to Moody's.  The arrangers for the Series 1 USD CB issue were TD Securities and The Royal Bank of Scotland plc.