With Canada Mortgage Housing Corp’s limit on mortgage insurance unlikely to be raised, more Canadian banks are expected to issue what could soon become a very scarce asset.
Toronto Dominion priced a $3bn 1.5% March 2017 covered bond in line with mid-swaps plus 45bp area guidance at 45bp on Monday. This is the largest fixed rate Canadian covered bond this year and the largest since September 2011, when the same issuer priced a five year at mid-swaps plus 44bp.
BNP Paribas, Barclays Capital, RBC Capital Markets and Toronto Dominion jointly led the transaction.
It attracted a $3.8bn order book from a large number of accounts. Though leads were unable to specify the exact number of buyers, they did say there were many more than the 45 accounts that participated in CCDQ’s deal, which was priced at 51bp.
The tighter pricing largely reflects the view that Toronto Dominion is a stronger credit. But the spread was also 70bp tighter than Commonwealth Bank of Australia, which issued a five year dollar deal the same day. Like Toronto Dominion, CBA is also a strong double-A bank from a stable jurisdiction.
In this case the big spread difference reflects the fact that Canadian deals are viewed as a much closer match to the agency product, due to the underlying mortgage loans being CMHC insured. In addition, the relative pricing might also be due to technical supply considerations, said syndicate bankers.
End of an era
“All the issuers have told me that CMHC insurance is going away so investors and issuers are trying to make the most of it while it is still available,” said a London based banker on the deal.
CMHC is nearing its C$600bn mortgage insurance limit, and the ceiling is unlikely to be increased.
Royal Bank of Canada’s covered bond programme, which does not benefit from CMHC insurance, trades 15bp-20bp wider than the other issuers. But RBC is a stronger bank and trades tighter in the senior unsecured market to most of its domestic peers. This suggests that uninsured mortgage deals from banks other than RBC could be priced as much as 25bp-30bp wider than CMHC insured deals.
If the CMHC cap on insurance is not increased, it seems probable that existing deals, whether the loans benefit from insurance or not, will become grandfathered. This is likely to increase their potential for future performance due to scarcity.
Issuers will try to bring more deals that benefit from the CMHC insurance while they still can, bankers believe, given its likely imminent curtailment. Bank of Nova Scotia is rumoured to be looking, even though it issued a five year dual tranche deal on January 20.
CIBC and National Bank of Canada have yet to issue covered bond deals this year.
Given this backdrop, bankers away from the group expressed surprise that Toronto Dominion did not issue a larger size. “Two or three months down the line no one will be able to issue these deals — so these will be the last of the line,” said one. Given this prospective scarcity some rare US corporate buyers of these transactions had been tempted to make a return, he added.