Foreign Banks Tap US Investor Appetite for Covered Bonds

15th Jul 2010 21:58

By Prabha Natarajan Of DOW JONES NEWSWIRES NEW YORK (Dow Jones)--Bank of Nova Scotia (BNS, BNS.T) sold $2.5 billion of covered bonds Thursday, pushing issuance of that kind of mortgage security to a record high as foreign banks step up to satisfy U.S. investors starved of a supply of traditional mortgage-backed bonds. Foreign banks have been able to raise $11.04 billion through sales of covered bonds to U.S. investors so far this year, already exceeding the previous full-year record of $10.7 billion in 2007. Covered bonds are similar to traditional residential mortgage securities but require issuers to hold the collateral on their own books rather than spin them off into quasi-independent special-purpose vehicles. Backed by the additional heft of the full bank's balance sheet, covered bonds were seen as a safer alternative to residential mortgage securities, which were at the heart of the financial crisis. Foreign banks are the only source of these sought-after new bonds, which haven't yet been minted in the U.S. because of a lack of clear regulations. Canadian banks have been particularly eager to tap U.S. investors. Bank of Nova Scotia is the fourth to do so and a fifth, Toronto-Dominion Bank (TD, TD.T), is said to be putting together its covered bond program. European banks also issue these mortgage bonds, but Europeans have been reluctant to sell them in the U.S. in light of the Greek debt crisis and investors' general wariness over European credit. Hopes to encourage the creation of covered bonds in the U.S. have failed primarily due to the need for better regulation. Efforts to pass a bill to do this received a setback last month when it wasn't included in the regulatory-overhaul bill package approved Thursday. "We remain optimistic about the prospects for U.S. covered bond legislation and are encouraged by the ongoing dialogue taking place in Washington," said Ben Colice, the head of covered bond origination for the Americas at Barclays Capital. Meanwhile, the lack of domestic issuance presents opportunity for others, market participants said. Issuance is expected to ramp up in the coming months as more foreign banks look to access the deeper investor base in the U.S. By the same token, investors here seek out these high-quality assets as an added option to pick up yield given the concerns about riskier investments in uncertain economic times. The Bank of Nova Scotia bond carries a three-year maturity and a 1.450% coupon. Because of robust investor demand, it priced at a small discount, 99.86 cents per dollar of face value, to yield 1.498%. Barclays, Bank of America Merrill Lynch, HSBC and Scotia Bank were on the deal. Advocates of covered bonds hope that an active market will help support efforts to create a domestic market. -By Prabha Natarajan, Dow Jones Newswires; 212-416-2468; [email protected] (END) Dow Jones Newswires July 15, 2010 16:58 ET (20:58 GMT)