For centuries, German and Danish banks have raised money by selling what's known as covered bonds. Now Royal Bank of Canada is bringing this form of financing to Canadian institutions.
Canada's largest bank sold $750-million of covered bonds on Thursday, the first such issue in the local market by a domestic bank.
Covered bonds are belt-and-suspenders type borrowing. Investors get debt that is backed by both the institution that issues the paper, plus a claim on an underlying pool of assets, typically mortgages.
In return for all this security, covered bonds typically feature relatively low interest rates. That was the case on the Royal Bank issue: The five-year bonds paid 3.27 per cent interest, a premium of just 49.7 basis points over the comparable Government of Canada debt.
The prospect of even a little extra income with all kinds of covenants - the Royal Bank issue carried a triple-A rating - meant underwriters led by RBC Dominion Securities were able to bump up the size of the offering to $750-million from an initial minimum of $500-million.
Royal Bank was the first domestic borrower to tap the European covered bond market, with a €2-billion inaugural issue in October, 2007. Bank of Montreal also tapped this market in the fall of '07.
When these issues rolled out, there were lofty predictions of $90-billion market developing in Canadian covered bonds. That estimate was based in part on the fact that federal regulators at OSFI ruled in 2006 that domestic financial institutions can finance up to 4 per cent of their total assets this way.
The credit crunch got in the way of further covered bond issues, but this week's Royal Bank financing shows the market is back, and can be developed in Canadian dollar-denominated issues.
RBC Dominion used two separate syndicates to sell this offering, with one team of investment banks selling to Canadian institutional and retail investors, and a second group of dealers marketing to foreign clients.
The domestic dealers included CIBC World Markets , BMO Nesbitt Burns, National Bank Financial, Scotia Capital, TD Securities, Bank of America Merrill Lynch, HSBC Securities, JPMorgan Securities, Laurentian Bank Securities and Manulife Securities.
The global syndicate, which included heavy European content, was made up of Barclays Capital, BNP Paribas, Commerzbank and Morgan Stanley.