RBC Registers $12 Billion Covered-Bond Program After SEC Letter

Royal Bank of Canada won permission from the Securities and Exchange Commission to issue covered bonds as publicly registered securities in the U.S., potentially broadening the pool of investors for debt now sold through private placements.

The bank filed documents today for a mortgage-backed program under which it may issue as much as $12 billion of bonds. The SEC, in a so-called no-action letter posted on the agency’s website at the request of the Montreal-based lender, said it won’t penalize the bank for selling such debt as registered securities.

Sales conducted as private placements, known as 144A offerings, are restricted to qualified institutional buyers, have set trading limits and are excluded from the broadest benchmark indexes tracked by bond buyers. That can limit demand, depressing prices. The Financial Times earlier reported the SEC’s response to RBC.

“This development will be viewed positively by the fixed-income market and is a positive step forward for the broader prospects” of U.S. dollar-denominated covered bonds, Ben Colice, head of covered bonds origination at the lender’s RBC Capital Markets unit in New York, said in an e-mail.

Covered bonds are backed by both an issuer’s repayment pledge and by assets, usually mortgages or public-sector loans, which remain on the lender’s balance sheet and can be seized and sold after a default. The debt traces its roots back to sales in Prussia in 1769.

Foreign-Bank Sales

“Any different facts or conditions might require the division to reach a different conclusion,” Raquel Fox, an attorney fellow at the SEC, said in the agency’s May 18 letter to RBC. “Further, this response expresses the division’s position on enforcement action only and does not express any legal conclusion on the question presented.”

Foreign issuers have been raising more cash in the U.S. market as sales by the nation’s banks remain frozen. Dollar-denominated sales by non-U.S. lenders this year have exceeded $23 billion, according to data compiled by Bloomberg.

In Canada, the department of finance last month submitted a bill that would “establish a statutory covered-bond framework that provides legal certainty following an issuer’s insolvency, minimum asset standards, and regulatory oversight, yet prohibits Canadian banks from issuing covered bonds backed by government-insured mortgages,” according to Moody’s Investors Service.

U.S. Changes Debated

“Royal Bank of Canada’s program, which is the sole program that does not contain insured mortgages, will benefit from the protections the bill affords because it should be eligible to issue under the new law,” analysts Todd Swanson and Yehudah Forster wrote in a May 7 report.

U.S. lawmakers have debated changes to covered-bond regulations that would encourage their use by the country’s banks for more than four years.

Bank of America Corp., which issued both euro- and dollar-denominated debt, and Washington Mutual Inc. began tapping the market in 2006 before ending sales the next year during the financial crisis sparked by mortgage defaults.

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