Saturday, January 30, 2010

CIBC fuels US covered bond hopes

Posted in the Financial Times by Nicole Bullock and David Oakley:

Canadian Imperial Bank of Commerce yesterday sold $2bn of covered bonds in a deal that bankers hope will lay the groundwork for a US covered bond market.

European bankers are monitoring the US for signs that covered bond issuance can take off after success in Europe with deals totalling $50bn so far this year, five times more than the same period last year.

Covered bonds are debt issued mostly by banks and secured by a pool of loans. Bankers have touted them as a way to boost mortgage lending and to provide financing for banks.

The US market has never developed, largely due to the lack of legislation codifying the treatment of covered bonds if the issuing bank were to fail.

Several non-US banks have issued covered bonds in US dollars, but CIBC is notable because it sold bonds to US investors, a rare occurrence in the last few years, bankers say.

From the Wall Street Journal:

Canadian Imperial Bank of Commerce (CM) issued $2 billion of covered bonds, maturing February 2013, according to a source familiar with the offering.

The bonds, which carry a coupon of 2%, were priced at 66 basis points over the 1.375% U.S. Treasury bond maturing January 2013, for a yield of 2.008%, according to the source.

A covered bond is a debt security backed by cash flows from mortgages. CIBC covered bonds are backed by Canada Mortgage and Housing Corp.

Bank of America Merrill Lynch, HSBC Holdings PLC, Royal Bank of Scotland Group PLC, and CIBC World Markets are acting as joint lead-managers on the transaction.

Canadian Imperial's covered bond issue is the first big dollar-denominated deal aimed at U.S. investors since the summer of 2007. Some European companies have done some small dollar-denominated covered bond deals since then, but they were targeted at non-U.S. investors.

The offering is considered "a first step on the road" to reopening the covered bond market in the U.S., said Tim Skeet, head of covered bonds at Bank of America Merrill Lynch.

U.S. investors were attracted to the offering for two reasons, Skeet said. One, they were comfortable with Canada, whose financial sector had side-stepped many of the woes seen in other countries during the financial crisis. Second, the structure was easy to understand since the underlying mortgage collateral is insured by Canada Mortgage and Housing Corp., a federal agency.

"This was the ideal issue to bring to the (U.S.) market to get people interested," Skeet said.

No comments: