Monday, October 22, 2007

RBC Sells Covered Bonds

Bloomberg, Steve Rothwell, 22 October 2007

Royal Bank of Canada, the nation's largest bank, received 3.6 billion euros ($5.09 billion) of orders for its debut sale of covered bonds, according to a banker managing the sale.

The 2 billion-euro issue, the first by a Canadian financial institution, is backed by domestic residential mortgages. Covered bonds differ from asset-backed securities in that the collateral backing the debt remains with the issuer, which becomes liable for the notes if the assets aren't sufficient.

The lender, based in Toronto, sold the five-year debt at a yield premium of 10 basis points, or 0.1 percentage points more than the midswaps rate, a benchmark for corporate borrowing in Europe, according to the banker, who asked not to be identified because terms of the sale aren't published yet. The bond's price will be set tomorrow, the banker said.

Barclays Capital, BNP Paribas SA, Commerzbank AG and RBC Capital, Royal Bank's investment banking unit, managed the sale of the debt, according to a statement sent by RBC Capital.

Fitch Ratings will grade the bonds AAA, its top investment- grade ranking, according to an Oct. 11. report by the ratings firm.
The Cover, 2 October 2007

The Royal Bank of Canada’s (RBC) debut covered bond issue is expected to closely follow existing UK structures when it is launched after a roadshow starting on Monday. RBC is hopeful that this familiarity coupled with Canada’s stable housing market will prove appealing to investors.

As Canada has no covered bond legislation RBC’s issue will take the form of a structured covered bond modeled on the UK framework.

“The RBC structure will be based on existing UK structures,” said David Power, vice president, market strategy and execution at RBC. “The Canadian legal system is similar to the UK legal system.”

RBC will be the issuer, while a limited partnership will guarantee the note and grant security of the cover pool assets in favour of noteholders.

One anticipated difference to the UK is that the valuation of the cover pool will be at market prices rather than book rates.

Unlike some highly rated issuers of structured covered bonds, such as HBOS, RBC, which is rated Aaa/AA-/AA/AA will not use a prematurity test on its covered bonds. The alternative option is having an extendible maturity, although this has previously been used mainly by lower rated issuers.

The Canadian deal is expected to closely follow the Capital Requirements Directive, enhancing its familiarity to the market.

The decision to follow the UK model was broadly welcomed by analysts, who considered it a prudent move given Canada’s similarity to UK law. “It was a good decision to follow the UK model, rather than the US,” said Ted Packmohr, a research analyst at Dresdner Kleinwort in Frankfurt.

Following the US structure would also have required additional regulatory approval, suggested one covered bond specialist, delaying the bond’s launch.

Packmohr did, however, have reservations about RBC’s timing. “Purely structured bonds have been sidetracked in favour of legislation-based covered bonds,” he said. “A thorough preparation of their market debut will thus be pivotal to RBC’s success.”

However, Power was confident that Canada will prove attractive to investors. “The Canadian mortgage market has several advantages over the UK mortgage market,” he said.

He cited the lower rate of 90 day mortgage delinquencies, at only 0.25% in Canada against 1.06% in the UK.

He also noted the lower economy-wide rate of household debt as a percentage of annual disposable income, which stands at 124% in Canada compared to 164% in the UK.