News & Views
Well, we were hoping 2013 would be a big year for covered bond issuance in the U.S., but it hasn't turned out that way. Total covered bond issuance in the U.S. market through early December is only about $22 billion, a very disappointing year. The total for 2012 was almost $44 billion. Many factors influenced this, but probably the biggest factor was CMHC, the new Canadian covered bond regulator. It took much longer than anticipated for the Canadian banks to be registered by CMHC. As of November 1, CMHC had registered RBC, CIBC, BNS and NBC. TD, BMO and CCDQ are still in process. And it was mid-year before the first two banks, RBC and CIBC, were registered, so it was a late start to Canadian issuance.
Other influencing factors likely were the free money provided to U.K. banks by the Bank of England, deleveraging by European banks, cross currency swaps moving in favor of the euro and against the dollar and the focus on equity raising. The net result was sharply diminished issuance of both ABS and covered bonds by European issuers. The most dramatic impact probably was in the U.K where issuance of ABS and covered bonds was reported to be down almost 99% from the prior year.
CMHC Registered Covered Bonds
The appearance of covered bonds registered under the new Canadian covered bond legislation was a significant development. RBC and CIBC were both registered on July 3. In a flurry of activity, RBC promptly made a US$ SEC registered offering on July 16, followed by a euro offering off its UKLA-listed program on July 25, an Australian offering on August 7, another US$ SEC registered offering on September 24 and a euro offering on October 22. CIBC did a euro offering off its UKLA-listed program on August 2 and an Australian offering on October 22.
We also keep hoping that 2013 may see the adoption of covered bond legislation in the U.S. The housing market is recovering, Fannie Mae and Freddie Mac are being wound down and the FDIC program that guaranteed unlimited amounts of deposits has ended leading to the withdrawal of significant amount of corporate and institutional funds from the banking system. All of this suggests that banks will need to turn to the private market for funding the growing volume of new mortgage loans. But Fannie Mae and Freddie Mac are being deflated slowly and the banks generally are in good cash positions. So there has been little activity around U.S. covered bond legislation. Both the Senate and the House are turning their attention to resolving Fannie Mae and Freddie Mac. There are bills in each legislative house to address the GSEs. The bill in the Senate, S.1217, has strong bi-partisan support and no covered bond provisions. The bill in the House, H.R. 2767, has only Republican support but does have covered bond provisions, which are very similar to those proposed last year. The timetable for these bills is unpredictable, although the Senate Banking Committee has said that it wishes to act on S.1217 by year end.
There is also an effort underway to have the Federal Reserve Board make covered bonds eligible at the discount window. Under current Fed rules, only "Pfandbrief" and U.S. issued covered bonds are eligible (see the list here and here). The senior debt of the issuers of covered bonds in the U.S. market is eligible at the Fed so long as it is rated at least BBB, but not the covered bonds of the same issuer even if rated AAA. It would seem that a simple starting place would be to treat covered bonds the same as senior unsecured bonds of the same issuer. Making covered bonds eligible at the discount window would add important liquidity for investors. The U.S. Covered Bond Council submitted a letter to the FRB on February 1, 2013. The FRB staff responded orally that the question was more complicated than the letter indicated. It has been suggested that the FRB cannot move ahead with this until it resolves the Dodd-Frank task of removing rating agency ratings from all of its rules and regulations. Eligibility at the discount window will be increasingly important as the U.S. market for covered bonds grows. Lack of eligibility will tend to stifle market growth.