November 10, 2015

Record Covered Bond Issuance of $27.6 Billion in 2014

Covered bonds are debt obligations generally issued by large, regulated financial institutions and secured by a segregated pool of assets, with residential mortgages the most common asset type. After their introduction in Canada in 2007, there was rapid growth in the issuance of covered bonds. Issuance peaked at $25.7 billion in 2011, under the contractual framework that governed covered bonds from 2007 to 2012 (see grey line (Issuance: Contractual) in chart).

Effective 2013, the Government of Canada established a dedicated legal framework for the future issuance of covered bonds. The Covered Bond Legal Framework has made the Canadian covered bonds market more robust, by improving investor certainty in regards to their asset, and by diversifying the investor pool, as some international investors who invest in covered bonds can only purchase those that are issued under a legislative framework.

With the switch to the legislative framework there was an adjustment period for issuers. Issuance of covered bonds under the legislative framework began in mid-2013 (see light brown line (Issuance: Legislative) in chart), and surged to $27.6 billion in 2014. Issuance reached record high in 2015, with $35.0 billion issued since January. As of 2015 Q3, the total value of covered bonds outstanding stood at $109.6 billion, 76% of which is now under the legislative framework. (see brown bar (Outstanding: Legislative) in chart).

Covered bonds provide a diversified funding source for lenders. Covered bonds issued under the legislative framework represent a private source of mortgage funding, as taxpayer-backed insured mortgages are prohibited as collateral assets in cover pools. The term lengths of covered bonds are mostly five-year, but have included seven-year and three-year terms. In the last two years, issuance of covered bonds has been predominately in Euros and U.S. Dollars, with a few issues also in Australian Dollars and British Pounds. Issuing bonds denominated in foreign currencies allows issuers to appeal to more foreign investors and hence achieve greater market depth in foreign markets.

Issuance and Outstanding Volume of Covered Bonds

Issuance and Outstanding Volume of Covered Bonds
Billions of CDN ($)
Year Issuance
Contractual Legislative Contractual Legislative
2007 2.84   2.84 0 2.84
2008 6.98   9.83 0 9.83
2009 1.45   11.27 0 11.27
2010 17.34   25.02 0 25.02
2011 25.67   50.37 0 50.37
2012 17.00   64.53 0 64.53
2013   13.21 46.56 23.79 70.36
2014   27.60 34.59 50.64 85.23
2015 Q3   34.98 26.27 83.27 109.54

Note: From 2007 – 2012, covered bonds were issued under contractual frameworks. From 2013, all covered bonds were issued under the Covered Bond Legal Framework, a dedicated legislative framework. Covered bonds that are currently oustanding include bonds issued under both types of frameworks.

Source: DBRS

For more on mortgage funding sources in Canada, see the Housing Finance chapter of the 2014 Canadian Housing Observer

More data on the covered bond market can be found in the data table “Covered Bonds” (xls).



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