americanlawyer.com April 2013

top transactions lawyers

dealmakers of the year

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By Drew Combs

Getting the securities and exchange commission’s blessing for a new type of securities offering by a canadian bank was no easy assignment.

he’s got it covered

orn in VancouVer, Jerry Marlatt has become a go-to law-yer for Canadian banks, but the New York–based Morrison & Foerster senior of counsel freely admits that his Canadian roots

haven’t played much of a role in his business development. More impor-tant, both with Canadian and U.S. clients, has been Marlatt’s covered bond expertise. It’s that know-how that led the Royal Bank of Canada (RBC) to turn to Marlatt to handle the first-ever Securities and Exchange Commis-sion–registered covered bond offering. “Not many people get to take an in-vestment product to the SEC that [it has] never seen before,” Marlatt says. “From my perspective, that was the most fun part about this process.”

For Marlatt, the process began with a call from RBC in June 2010. The bank turned to Marlatt because of his “very solid understanding of us as Canadian issuers, of the SEC conditions that had to be met, and of the many issues that were not yet defined,” says David Power, vice president, funding and capital management, in RBC’s corporate treasury department.

Covered bonds are debt securities that are based on mortgage or pub-lic sector loans. They are a staple in many European economies but rare in the United States. Covered bonds differ from some other types of debt instruments in that they remain on an issuing bank’s books, which means that even if the issuing bank becomes insolvent, investors will continue to receive payments on the bonds.

Because the bonds had not previously been registered with the SEC, their use in the U.S. had been confined to private placements, which lack broad investor appeal. “Many pension funds and retirement funds don’t have the ability to buy unregistered funds,” Marlatt says.

In 2006 Marlatt was counsel to Barclays as arranger and underwriter in connection with the issuance of the first covered bond by a North American bank. (JP Morgan Chase has replaced the defunct Washington Mutual as obligor of that bond.)

Since 2007, Marlatt has represented five Canadian banks or their under-writers in connection with covered bond offerings. But further opening the North American market for covered bonds with SEC registration would pose several challenges. Since there was no precedent, the SEC would have to, among other things, determine the disclosures that would need to be made to prospective investors, as well as the reporting procedures that

would need to be required in connection with the bonds.The SEC also voiced concerns about the registra-

tion statement to be used for the RBC–owned limited partnership that would hold the loans, according to Marlatt. The SEC viewed the bond offering proposed by RBC to be composed of two securities: the bond is-sued by the bank and the guarantee issued by the lim-ited partnership. This would subject the partnership to its own registration statement.

“This was a major sticking point,” Marlatt says. With both entities using the bank’s registration, RBC could more easily sell its covered bonds to the full amount registered without seeking additional approval and having to submit more paperwork.

Indeed, negotiations with the SEC stalled for several weeks on this issue. Marlatt was readying a new line of argument when the SEC reversed course in May and issued a no-action letter allowing for the partnership’s registration to be combined with the bank’s registration. The $2.5 billion bond, the first covered bond regis-tered by the SEC, was placed in September 2012.

For RBC it was a success. The larger investment pool meant that the price of the bonds was lower than it would have been if they had not been registered with the SEC. But beyond their own dollars and cents calculations, the bank also appreciates that there are industry-wide impli-cations. “Receiving SEC approval was a precedent-setting result,” says RBC’s Power, “and there is the potential that others will follow this course of action.”

Just another case of a local boy making good.

Email: dcombs@alm.com.

deal in brief

RBC CoveRed Bond offeRing

Deal Value $2.5 billion

Firm’s role Issuer’s Counsel

www.mofo.com (212) 468-8024

dealmakers of the year Jerry Marlatt, Morrison & Foerster

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Reprinted with permission from the April 2013 edition of THE AMERICAN LAWYER © 2013 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. For information, contact 877-257-3382 or reprints@alm.com. # 001-04-13-01

Morrison & Foerster’s Covered Bond practiceWe can say confidently, without hyperbole, and with complete accuracy, that when it comes to covered bonds, Morrison & Foerster has got you covered.

Our long experience with covered bonds and our knowledge of bank regulatory issues, financial institutions and financing techniques makes us the first call by market participants for covered bond issuances. The depth of our expertise and experience have proven to be the source of countless innovations in capital raising, including innovations relating to covered bonds.

In addition to advising on the first SEC-registered covered bond, we have advised on the first-ever U.S. bank covered bond, the first U.S. dollar-denominated covered bond, and the first covered bond issued by a Canadian bank.

For resources and additional information about our covered bonds practice, please visit our dedicated webpage at: http://www.mofo.com/covered-bonds-services/.*

About Morrison & FoersterWe are Morrison & Foerster—a global firm of exceptional credentials. Our clients include some of the largest financial institutions, investment banks, Fortune 100, technology, and life sciences companies. We’ve been included on The American Lawyer’s A-List for nine straight years, and Fortune named us one of the “100 Best Companies to Work For.” Our Lawyers are committed to achieving innovative and business-minded results for our clients, while preserving the differences that make us stronger.

• Ranked as one of the preeminent capital markets practices by Chambers USA, Chambers Global, Legal 500 US, IFLR1000 and U.S.News & World Report

• Ranked by IFLR1000, Legal 500 US and U.S.News & World Report as one of the leading securitization and structured finance practices.

• Structured Products magazine Law Firm of the Year, Americas for five of the last seven years. • Ranked by PLC Which lawyer? as having a leading banking and finance practice.

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*Morrison & Foerster LLP submitted information for the purposes of this reprint only.