Friday, October 30, 2009

RBC Covered Bond Attracts Sell-Out Investor Crowd

Posted on the Housing Wire by Austin Kilgore:

The latest covered bond out of Canada was not short of investor interest. The Royal Bank of Canada (RBC) is issuing the third series of C$750m ($695.7m), five-year fixed-rate bonds of its self-titled covered bond program with expected success.

The deal is under the same terms of its €15bn ($22.2bn) global covered bond program, and market reports suggest that third-party interest in such structured products is growing in strength.

Moody’s Investor Services assigned a provisional long-term rating of triple-A to the deal. The covered bond program has a cover pool comprised of prime-quality, seasoned mortgages secured by Canadian residential properties with an average weighted loan to value (LTV) of 66.2%. It has a minimum overcollateralization of 3%, which RBC is contractually obligated to maintain at all times.

In assigning the rating, Moody’s said bond investors will benefit from RBC’s credit strength, and hedging arrangements with respect to interest rates between the assets in the cover pool and the covered bonds.

Moody’s added investors are exposed to a number sources of risk, including refinancing, market conditions, liquidity, set-off, credit and substitution, but noted all are partially offset by the transaction’s structural enhancements. These risk would only materialize in the event of RBC’s default, so “there is a degree of linkage between the rating of the issuer and the rating of the covered bonds,” Moody’s said.

According to the Wall Street Journal, bonds priced at 50 basis points above benchmark, with a 3.27% coupon. There is no word on subscription rates yet.

Covered bonds are rare in North America, compared to Europe. To date, Bank of America and Washington Mutual are the only two existing domestic issuers of covered bonds in the US – but Citi, JPMorgan and Wells Fargo all expressed interest last year in starting covered bond portfolios. However, the bonds are expensive, considering the dual recourse structure that leaves banks liable for losses. A typical bullet repayment also tends to appeal to a separate investor base than securitization.

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