Registration took affect Monday afternoon for the Royal Bank of Canada (RY) to issue covered bonds backed by mortgages to U.S. investors.
It is the first covered bond shelf to be registered with the Securities Exchange Commission, according to the bank.
The bank received a “no-action” letter from the SEC in May, clearing RBC to register offers under the Securities Act of 1933. The next step after the registration took effect would be the actual issuance of the $12 billion bond under preparation.
The bank is expected to make the dollar-denominated offering soon.
RBC can register securities with the SEC, but the RBC covered bond guarantor, which will guarantee payments of interest and principal on the offering, previously could not, which is why a “no-action” letter was needed.
The bank will make regular reports to investors and the SEC.
Covered bonds are widespread in Europe. A cover pool of mortgage loans, in which investors hold a preferential claim in the event of default, are a selling point to the bonds. However, the bonds are expensive, considering the dual recourse structure that leaves banks liable for losses.
In the RBC case, the guarantor will use principal collected from the underlying mortgages to either pay the principal due to investors or to acquire more mortgages to replace the ones being paid down.
This keeps the covered bonds different from an asset-backed security. But with the SEC letter, more U.S. investors can purchase them because they will be registered under the agency.
Investors looking for alternatives to mortgage bonds issued by Fannie Mae and Freddie Mac, a market currently undergoing some flux, can access these new products.
A bill from Rep. Scott Garrett, R-N.J., would provide regulatory guidelines for U.S. banks to issue covered bonds backed by mortgages, but the bill remains stalled in House committees.
