When you’re breaking new ground on a financial product a deal can take time, patience, and ingenuity — especially when working with the U.S. Securities and Exchange Commission. Just ask the in-house department at RBC and its external legal team.
When RBC embarked more than a year ago on a path to releasing its first covered bond issue with the SEC, it knew it would involve navigating the complicated reporting mechanism required from the SEC, but would be well worth the effort.
The bond issue — which was released Sept. 13 and closed Sept. 19, worth US$2.5 billion, and AAA-rated for five years at 1.2 per cent — is the first time publicly traded U.S.-dollar covered bonds were available to individual investors. Covered bonds are guaranteed by the bank and a pool of mortgages.
“It was quite a long road to getting registered with the SEC,” says Erin Dion, senior counsel with RBC Law Group.
Working with Dion and her fellow RBC in-house counsel Joseph Hillier on the deal were Andrew Fleming, Eric Reither, Peter Noble, Adrienne Oliver, Matthew Lippa, and Glen Hines of Norton Rose Canada.
Dion estimates the whole process with the SEC took almost two years with the final push happening in the last six months of 2012.
“At all times, we worked well with the SEC, it’s just that it was an extremely involved process because being the first to register our disclosure with the SEC is precedent setting,” she says.
That meant the SEC needed to determine the appropriate level of disclosure required in RBC’s registration statement. The disclosure at issue was statistical information about the pool of mortgages.
“It was about reaching a balance between what is reasonable for the bank to have to disclose and what’s important for investors to know,” says Dion. “That was the longest part of the process in dealing with the SEC to get the green light for the program registered, and then crafting new disclosure.”
Given that RBC was attempting to develop this product, backed by mortgages, so soon after the U.S. sub-prime mortgage crash didn’t make things any easier.
“We walked straight into a shit storm,” says Andrew Fleming, a senior partner with Norton Rose. “The 2008 crash was largely mortgage related but principally securitization-related. The U.S. was re-publishing Reg AB which is the regulation that talks about disclosure in that sector, so I think our biggest challenge was explaining to the SEC that a covered bond is not a securitization, and that it should be treated differently because you have the credit of the bank on the hook and not just the assets.”
The natural reaction, he says, was in part, “Well that’s all well and good but you do have a pool of assets so we want you to treat the pool as if it were a securitization.”
Fleming explains that disclosure in securitization is a new and complicated area to navigate.
“As Erin points out, the real test was what disclosure should be made about the pool and the SEC did not want to misstep here because now that this one is out there with this no-action letter, all the other covered bond issuers from around the world who want to access public markets in the U.S. will rely on this as the form of disclosure required,” says Fleming.
One of the biggest challenges was that RBC has a global covered bond program and a pool of €15 billion of mortgages it has used to finance in Europe and in Canada. The challenge was to use the same pool of assets for a U.S. offering in an environment where the documentation had to comply with U.S. rules.
“We reviewed the documentation in connection with the transaction and compared it to the requirements of U.S. law — in particular the Trust Indenture Act of 1939 — and we had to tweak the indenture to a certain extent. The tweaks weren’t that hard but the challenge and excitement was that you have to get it right,” says Fleming.
The deal is considered a huge win for the bank. “It’s a huge source of financing available now at a very good rate,” says Fleming.
Morrison & Foerster LLP is RBC’s U.S. counsel and lawyers from that firm provided advice to assist with U.S. securities laws and negotiating with the SEC along with Norton Rose.
“Norton Rose’s input on this transaction has been invaluable,” say Dion. “They are lead counsel for our global covered bond program so they have expertise in the area and are also our bank counsel and know the ins and outs of the banks and our processes.”
Acting for the dealers were McCarthy Tétrault LLP, Davis Polk & Wardwell LLP and Allen & Overy LLP.
Dion has worked on RBC’s global covered bond program since 2007.
“We involve other lawyers from our own in-house team because our mortgage business is involved. It was great that I was able to draw on the other lawyers in the department,” she says.
“This is competitively sensitive information, so we have to liaise internally so we make sure we’re disclosing what we need to disclose properly and at the same time not say too much and say the right thing in the public eye,” she adds.
The challenge too, says Fleming, was getting the documentation to be Canadian sensitive and U.S. sensitive.
“I think that’s always a challenge in a cross-border transaction. In the past whenever you did a deal that involved Americans it was usually a situation of ‘my way or the highway’ coming from the south. I think that’s changed and acknowledging there are differences and one has to accommodate that.”