$47B for CMT in ’09

Karen Mazurkewich, Financial Post Published: Thursday, January 28, 2010

They were the biggest issuance in the Canadian marketplace last year. But there were no media headlines or industry buzz. The tried-and-true Canada Mortgage Bonds (CMB) churned out through a trust set up by the Canada Mortgage and Housing Corp. have been so much part of the landscape that their growth goes almost unnoticed.

But grow they did. In 2009, the Canada Housing Trust (CMT ) issued $47-billion worth of bonds. When the product was first launched in 2001 its first offering was for $2.1-billion. CIBC were the top book-runners for these bonds — selling $6.4-billion. They were followed by TD Securities, RBC Capital Markets and BMO Capital Markets.

High demand in the past couple of years is not only proof that investors — both in Canada and abroad — love this AAA-rated product, but that banks are increasingly turning to them for liquidity.

The way it works is this: The CMB program allows financial institutions — primarily the banks — to sell a portion of their mortgages to the government for cost-effective financing, says Warren Lovely, executive director and government strategist at CIBC World Markets.

Traditionally, financial institutions have used different avenues to fund their mortgage programs. They’ve funded them through GICs and deposit notes, but increasingly “Canada Mortgage Bonds have become a growing and attractive way to fund themselves,” said Andrew Hainsworth, director debt capital markets group at BMO. Last year, financial institutions pushed about 17% of their mortgages off their books through the CMB program.

Not only do financial institutions like them, but so do investors. The reason: CMBs offer full faith and credit from the Government of Canada and they are very liquid, said Mr. Hainsworth. He added: “CMT makes sure these issuances are large, regular, and they deal with a large investor/ dealer syndicate. They make the provision of liquidity a cornerstone.”

“Investors have responded extremely well to the safety and security of Canada’s mortgage market as well as the AAA backing from the Canadian government,” said Doug Bartlett, managing directors and head of government finance for CIBC World Markets.

That said, it’s unclear how much more the CMB program can grow. “The explosive growth that characterized the early years is behind us, the program is very mature,” said Mr. Lovely. The CMT however continues to launch innovative new products to attract a different subset of investors. The five-year semi-annual, fixed rate, bullet maturity bonds are the program’s bread and butter. But CMT has also responded to the changing patterns of investor demand by incorporating addition terms (three-year and 10-year maturities) as well as floating rate notes. The new 10-year term tranche, launched in November 2008, represents 15% of the gross issuances of 2009.

Canada Mortgage and Housing Corp. has also announced that it intends to diversify its investor base through U.S.-dollar borrowings in global debt markets, as well as the potential establishment of a domestic money market program, said Mr. Bartlett of CIBC. If they do, they will join the growing list of government issuers successfully tapping international capital markets.

The CMHC was not the only mortgage insurer to see a lot of action this year. Genworth Financial, a private mortgage insurance and wealth management company based in the United States, also did a public offering worth $850-million in Canada last May to generate some liquidity for their troubled parent company.

“In distress, you have to sell the jewels,” said Donald Fox, managing director, investment banking, CIBC World Markets. “Because of the strong housing market in Canada, and because Genworth Financial Canada was performing well, it was our view that the Canadian markets would support (an issuance),” he added.

It worked out well. At its initial public offering the stock sold for $19; it is now trading at $26.