New US-Dollar Covered Bond Program Coming From Canada
[Update 1: Adds pricing, trader commentary.] The Canadian Imperial Bank of Commerce (CIBC) reportedly priced a covered bond platform backed by a pool of Canadian residential mortgages. Details of the covered bond offering is still developing, but credit rating agency Moody's Investors Service indicates the bonds will be US dollar-denominated, with 3- to 5-year bullet repayment maturities and fixed rates on the bonds. Covered bonds are the oldest structured finance product in the market. The bonds are backed by a dual recourse structure whereas the issuer of the bonds is on the hook to investors to pay-out if the related collateral, in this case mortgages, see widespread defaults. The added "cover" is pricey, but attractive to a risk-averse investor base. A covered bond issued by a CIBC would benefit from the strength of Canadian banks, according to Alberto Basu, who heads up the US dollar-denominated covered bond JP Morgan (JPM) acquired when it bought Washington Mutual. "The very high quality of the Canadian banks, the collateral and the structure make for a very attractive proposition," Basu tells HousingWire. "A number of the leading banks have issued previously in Euros, Swiss francs, and Canadian Dollars, but the basis swap makes euro issuance expensive at this time." A basis swap is a hedging tool used for the risk mitigation of two floating rate variables in a deal, in this case the various foreign exchange rates of the currency basket. A new covered bond platform by CIBC would serve as the latest indication of the growing momentum for US dollar-denominated covered bonds, as HousingWire magazine reports. However, market players say they need a stamp of approval from the government via a supporting regulatory structure and a strong legislative framework, in order to support a larger covered bond market. "I agree that this is extremely positive for the market as a whole, and it will be interesting to see what develops with the other issuers rumored to be considering a US$ transaction," Basu says. "This should encourage momentum in the US towards legislation, to allow US issuers to tap into this pool of private money." Covered Bond Investor said in a post Tuesday CIBC priced the $2bn covered bond at 30-32 bps over mid-swaps. The upcoming platform will be issued as a series under the current CIBC €8bn (US$11.27bn) Global Public Sector Covered Bond Programme, according to Moody's. The credit-rating agency assigned a triple-A provisional long-term rating to the covered bonds — debt instruments covered by a pool of loans that remain on the issuer’s balance sheet. The bonds will be backed by Canadian mortgages insured by the Canada Mortgage and Housing Corp. (CMHC), according to Moody's research released Monday. Moody's told HousingWire that CIBC, rated double-A-2, can issue triple-A covered bonds because the mortgages in the covered pool are insured by the triple-A-rated CMHC. CIBC, for its part, did not return requests for comment on the size and issue date of the covered bonds before this story was published. However, there is a growing push for covered bonds in the US. Supporters say the structured finance product does not seek to replace securitization, but rather could increase liquidity for new mortgages, industry insiders said during a December teleconference. Heading up the call was Rep. Scott Garrett (R-NJ), who recently introduced covered bond legislation that outlines statutory framework to facilitate the broad domestic use of covered bonds. Although there are currently only two dollar-denominated Covered Bond platforms in the US — one by Bank of America (BAC) and the other by Washington Mutual — Garrett said an increase in investor demand over the last few months of 2009 brought about seven new European issuance totaling around €20bn. Write to Diana Golobay. Disclaimer: The author holds no relevant investment positions.