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Covered Bonds

A Mini-Primer
Summary
The covered bond market has demonstrated significant growth in recent years as paper
outstanding has grown to 1.8 trillion (YE 2005) from 850 billion in 1995 annual
growth of 8% per annum. The product has been in existence in Europe for several hundred
years, but real growth began a decade ago with the introduction of a jumbo product
attracting international attention and providing significant market liquidity. Originally
established by German and Danish issuers, these two markets still remain the largest but
an important trend is the expansion of the market beyond European borders. Washington
Mutual broke new ground in 2006, launching the first covered bond issue from a U.S.
issuer and Bank of America followed with the first U.S. dollar-denominated issue.
In Canada, covered bonds are a known commodity as Maple issuers such as Compagnie
de Financement Foncier, Depfa ACS Bank and Dexia Municipal Agency have placed
approximately C$2.3 billion of the securities in our market. Most recently, OSFI weighed-
in to the world of covered bonds by indicating it was prepared to permit domestic deposit-
taking-institutions to issue the securities. Whats driving the dramatic growth? From an
investors perspective the bonds offer quality, yield (relative to triple-A alternatives) and
diversification opportunities. Alternatively, issuers are attracted by the cost of funding
efficiencies and the opportunity to grow their funding toolkit in an era of feeble deposit
growth. While Canadian investors will undoubtedly see covered bond offerings from
domestic banks, the value proposition depends on ones perspective. Although one may
argue a triple-A rated offering from a Schedule-1 bank could be marketed as a higher
yielding Government bond alternative, clients are equally likely to adopt a view that, as
financial paper, there are more rewarding alternatives to the same credit at a marginal
incremental assumption of risk.
Highlights
We expect Canadian banks to begin issuing covered bonds
OSFI recently indicated that it was prepared to permit deposit-taking-institutions to issue
covered bonds, with certain restrictions (mainly: covered bonds cannot make up more than
4% of the institutions total assets).

Covered bonds are unique to regulated financial institutions
Covered bonds are debt instruments issued by regulated financial institutions. They are
secured by a priority claim on collateral of high quality, on-balance sheet assets.

The argument for investors and issuers
For investors, covered bonds provide safety, liquidity and yield over more conventional
triple-A securities. For issuers, they provide benefits such as cost effective funding and
funding diversification.

The financial impact should ultimately be minimal
The issuance of covered bonds should lead to a small positive impact on margins as it
could lower borrowing costs by 5-10 basis versus banks most expensive sources of
unsecured wholesale funding, but the 4% of assets cap put in place by OSFI will limit the
potential savings to less than 0.5% of net income. Capital levels should not be impacted by
the issuance of covered bonds.

J uly 20, 2007

Global Credit Research, Canada
RBC Dominion Securities, Inc.
Altaf Nanji, CFA
Credit Research Analyst
(416) 842-6462
altaf.nanji@rbccm.com









Priced as of prior trading days
market close, ET (unless otherwise
stated). For Required Disclosures,
please see page 11.











All values in Canadian dollars
except where indicated.

For pertinent disclosure, please
see page.11 .


J uly 19, 2007 Covered Bonds A Mini-Primer
2


What are Covered Bonds?
Issued by regulated financial institutions, covered bonds are debt instruments
secured by a priority claim on collateral of high quality, on-balance sheet
assets.
The assets are typically a pool of prime residential mortgages or public sector debt
that remains on the issuers balance sheet but acts as collateral to cover the bonds.
For investors, covered bonds provide safety, liquidity and yield over more
conventional AAA-rated securities. For issuers, they provide benefits such as cost
effective funding and investor diversification.
Characteristics of a covered bond include:
Currency: traditionally and predominantly issued in Euros, some non-Euro
currency issues have been coming to market including a few Canadian dollar
deals by European issuers. US dollar issues have been limited so potential
exists for significant growth in USD issuances.
Structures: fixed rate and bullet maturities are predominant, although
international preferences have allowed some evolving into pass-through
and other investor-driven structures.
Cover pool assets (cover pool): predominantly prime residential mortgages
and public sector loans with some commercial real estate and shipping loans
being issued more recently.
Double protection: investors have full recourse to the issuer as well as
recourse to the cover pool in the event of issuer insolvency.
Bankruptcy remoteness of covered bonds essentially ring-fences the assets to
safeguard investors preferential position and ensure payments to covered
bond investors continue.
An Asset Coverage Test ensures that sufficient overcollateralization is
available to meet repayment obligations, and this is monitored by an
independent party.
Exhibit 1: Generalized diagram of a covered bond issue








Source: RBC Capital Markets.
A Covered Bond Issue
Financial institutions issue covered bonds as an alternative tool for asset-liability
management and to fund loans of high quality such as prime residential mortgages and

Borrowers
Assets
Eligi ble Assets
Prime residential mortgages
Public debt
Other high quality loans
Other Assets
Liabilities
Covered Bonds
Cover asset pool
Prime mortgages, public debt
or other high quality loans
Non-priority Senior Debt
Other Capital
Equity
Collateral
Financial Institution Covered Bond Issuer
Investors
Origination Issuance
Borrowers
Assets
Eligi ble Assets
Prime residential mortgages
Public debt
Other high quality loans
Other Assets
Liabilities
Covered Bonds
Cover asset pool
Prime mortgages, public debt
or other high quality loans
Non-priority Senior Debt
Other Capital
Equity
Collateral
Financial Institution Covered Bond Issuer
Investors
Origination Issuance
Canadian Corporate Bond Market Outlook, 2007 J une 22, 2007
3


government loans. Features such as bankruptcy remoteness allow covered bonds to
rank ahead of other senior debt securities. Its this rank that can pose risk to other debt
holders and depositors because of the preferential claims covered bond holders have
over a pool of assets on the balance sheet, although there have been no instances of
issuer insolvency to date.

Covered Bonds versus Asset-Backed Securities
Covered bonds are similar to asset- or mortgage-backed securities because theyre
collateralized by an underlying pool of assets. However, a number of key differences
exist:
Issuer: Covered bonds issuers are loan originators who prefer to keep the assets
on balance sheet. Asset-backed securities (ABS) are issued by a Special
Purpose Entity (SPE) and are not consolidated on the balance sheet without any
recourse to the originator.
Risk: Covered bond issuers retain credit risk whereas ABS deals transfer the
structural risk to the investor. So ABS investors have claim only on the SPE assets
and its associated cash flows depending on the purchased tranche, whereas
covered bond investors have recourse to the issuer, and in the case of issuer
insolvency, to the assets.
Underlying assets: Cover pools are generally restricted to prime residential
mortgages, public or other high quality debt that revolve and are actively
managed. ABS collateral have little restriction on underlying asset type and are
mostly static within the SPE.
Investor: Covered bonds are generally fixed-rate bullet format deals with
principal payment at maturity, whereas amortization is common in mortgage-
backed security structures so investors assume prepayment risk. As a result, the
covered bond investor base may differ from buyers of amortizing product.
Regulation and framework: Covered bond issuance in many, but not all,
countries is governed by specific legislation or structured arrangements that
identifies a legal framework for a bond to be treated as a covered bond. Issuers,
who are normally large banks, are subject to regulatory supervision while ABS
entities are generally not specifically supervised.

Perspectives: Accounting, Legal and Capital
Accounting
Covered bonds remain on the issuers consolidated balance sheet. In some structured
cases, a cover pool can be sold into an SPE which would be considered a true sale
although it is fully consolidated, and the issuer structure model can vary from
jurisdiction to jurisdiction. Countries with a legal framework may mandate a distinct
cover pool on the balance sheet.
J uly 19, 2007 Covered Bonds A Mini-Primer
4


Exhibit 2: Example Special Purpose Entity (SPE) structure consolidated on balance sheet









Source: RBC Capital Markets

Legal / Legislation
To help maintain stability in the mortgage and public lending sectors, governments
and supervisory bodies have either enacted legislation that govern covered bonds or
have placed restrictions to provide safety to market participants.
There are two frameworks for covered bond issuance:
Legislation or Statutory Frameworks: Many countries in Europe have legal
frameworks that participants rely on to specifically segregate the cover pool from
the balance sheet assets of the covered bond issuer. Although frameworks can
vary between jurisdictions, legally supported provisions include criteria for
eligible cover pool assets, maximum asset Loan to Value ratios (LTVs), limits on
issuance amounts, swap and segregation mechanics, minimum
overcollateralization requirements and bankruptcy effects. (Standard & Poors,
November 2006)
Contractual or Structured programs: Some countries including the UK, the
Netherlands and the US rely on general contractual rules and structured
techniques that are proving to enhance the credit quality of the bond. (Standard &
Poors, November 2006) These are issued by financial institutions in jurisdictions
where no covered bond statutory framework exists, although many are moving
towards legislation. The Association of German Pfandbriefe (Covered Bonds)
Banks states that the less issuers are subject to prudential supervision, the more
detailed their covered bond regulations need to be to achieve clear segregation and
to convince capital markets of it.
The UK and The Netherlands are among several contractual countries examining and
moving towards a legal framework. Why? In Europe, the 1988 Directive on
Undertakings for Collective Investments in Transferable Securities sets out the
minimum requirement that provide the basis for privileged treatment of covered bonds
in different areas of European financial market regulation. (European Covered Bond

Borrowers
Assets
Eligible Assets
Prime residential mortgages
Public debt
Other high quality loans
Other Assets
Liabilities
Covered Bonds
Non-priority Senior Debt
Other Capital
Equity
Financial Institution Covered Bond Issuer
Investors
Origination
Issuance
Special Purpose Entity
Covered Bonds
Cover asset pool as collateral
Prime mortgages, public debt
or other high quality loans
Consolidated
on balance sheet
True sale of
eligible assets to SPE
but consolidated
on balance sheet
Guarantee over
cover pool
Canadian Corporate Bond Market Outlook, 2007 J une 22, 2007
5


Council, Fact Book, August 2006). If in compliance, the covered bonds benefit from
privileged credit risk weightings and are considered safe to justify higher investment
limits for funds and insurance companies. (E.g. investment fund limits for covered
bonds of a single issuer can increase from 5% to 25% if the issuer meets the above
criteria). Among other restrictions, the issuer must be a credit institution and be
subject to special prudential public supervision. Also, the cover pool of assets must be
defined by law and provide sufficient collateral to cover bondholders priority claims.
Some markets such as France have issuers (e.g. BNP Paribas) establishing structured
covered bond programs despite the existence of local legislation which adds to the
debate of the benefits of legislative versus structural frameworks. Our understanding
is that structured programs offer more flexibility (e.g. in terms of the underlying
assets) relative to the rigidity of legislation and that structured programs have been
well received when issued.
The European Covered Bond Council states that 25 covered bond systems are already
in place in Europe and 17 EU members have notified the EU commission on bonds
and authorized issuers fulfilling a set of criteria for covered bond treatment.
The main covered bond issuing countries are Germany (Pfandbriefe), Denmark
(Realobligationer), Spain (Cedulas Hipotecarias), France (Obligations Foncires),
Ireland (Asset Covered Securities), Sweden (Sakerstallda Obligationer), Austria
(Pfandbriefe/Fundierte Anleihen), and Luxembourg (Lettres de Gages).
The main structured covered bond issuing countries and example institutions include:
UK (HBOS, Northern Rock, etc), Spain (Ayt), Italy (CdP), Netherlands (ABN) and
now the US (WaMu in Euros, and BofA in USD).
Capital
In terms of seniority within the capital structure, covered bonds technically rank pari
passu to unsecured senior debt but have the double protection of the segregated asset
pool. Therefore, they can be considered a separate class that rank ahead of other debt
or deposit pools. It is the degree of bankruptcy remoteness of the cover pool, and its
cash flows, from the covered bond issuer that dictates the degree of ratings
differentiation between a covered bond issuer and the covered bond.
Regulatory risk weighting of covered bonds in Europe range from 10 to 20%. Under
Basel II, covered bonds arent explicitly addressed and are therefore treated as
unsecured bank bonds for credit risk weighting calculations.
Rating agencies:
According to S&P, rating covered bond issues requires analysis of the legal and
regulatory framework, analysis of the issuing bank, determination of the asset quality
of the cover pool and cash flow analysis, among other steps. True asset isolation from
the originators other assets and bankruptcy remoteness is considered by rating
agencies and by investors to provide double protection security, and S&P suggests
that a number of questions should be asked. How do you identify the cover assets?
How do you legally segregate the cover pool from an insolvent banks remaining
assets? Are the covered bonds touched by the legal proceedings? How do you ensure
liquidity in case of insolvency?


J uly 19, 2007 Covered Bonds A Mini-Primer
6

European History, Global Future
Growth of covered bond market has exploded recently and is now
characterized by diversification of issuers and investors globally.
Covered bonds have been in existence in Europe for a few hundred years, but real
growth began a decade ago with the introduction of a jumbo or benchmark product
attracting international attention and providing the necessary market liquidity.
Originally established by German and Danish covered bond issuers, these two markets
still remain the largest in Europe even though covered bonds are issued in over 25
different jurisdictions today. According to the European Covered Bond Council,
outstandings grew 10% from 2004 to 2005. Outside of Germany and Denmark, the
growth rate was 34%.

Exhibit 3: The Covered Bond Market outside Germany and Denmark are Growing










Source: European Mortgage Federation, European Covered Bond Council, RBC Capital Markets.
Evolution of Covered Bonds
The jumbo segment of large and liquid covered bonds has fuelled the recent rise, and
Euromoney reports that the consensus is for 2007 to be another record year for
covered bond issuances. Germany Pfandbriefe (covered bonds) still dominates the
jumbo segment with almost half the total global Euro market share, even with the
significant growth of other markets.
An important trend is the expansion of the market beyond German, and European,
borders. There are growing numbers of issues in different currencies and in new
countries. For example, Washington Mutual launched the inaugural (structured)
covered bond issue in the United States in September 2006 that was denominated in
Euros, while Bank of America became the first US issuer of US dollar-denominated
covered bonds completed in J une 2007. And more are in the works.
The cover pool asset composition is also diversifying out to loans such as commercial
real estate and shipping loans.

0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
2000 2001 2002 2003 2004 2005
Germany and Denmark Other countries
Covered Bonds Outstanding
1995 2005 (in billions)
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
2000 2001 2002 2003 2004 2005
Germany and Denmark Other countries
Covered Bonds Outstanding
1995 2005 (in billions)
Canadian Corporate Bond Market Outlook, 2007 J une 22, 2007
7


Exhibit 4: Cover pools mostly Mortgages and Government Loans







Source: European Covered Bond Council, RBC Capital Markets
We should point out that since covered bonds are a form of collateralized debt, they
are included in indices such as the Lehmans Global Aggregate Index and Pan-
European Aggregate Index as part of a securitized sector that includes mortgage- and
other asset-backed securities.

OSFI and the Canadian Market
New territory
Covered bonds are a known commodity in the Canadian fixed income landscape as
Maple issuers such as Compagnie de Financement Foncier, Depfa ACS Bank and
Dexia Municipal Agency were the inaugural issuers in the domestic market. In
aggregate these issuers have placed approximately C$2.3bn of covered bonds in the
Canadian market see Exhibit 5.

Exhibit 5: Maple Covered Bond Issuance
Issue Date Name Coupon Maturity
Amount
($CMM)
Bond Ratings
Parent Senior
Rating
25-Feb-05 DEXIA MA 4.68 9-Mar-29 200 - / Aaa / AAA AAH / Aaa / AA
31-Mar-05 DEPFA ACS BANK 5.25 31-Mar-25 300 - / Aaa / AAA N - / Aa3 / AA- N
24-Aug-05 DEPFA ACS BANK 4.9 24-Aug-35 350 - / Aaa / AAA N - / Aa3 / AA- N
30-Nov-05 DEPFA ACS BANK 4.2 30-Nov-12 250 - / Aaa / AAA N - / Aa3 / AA- N
21-Feb-07 DEXIA MA 4.625 30-May-17 500 - / Aaa / AAA AAH / Aaa / AA
17-Apr-07 CIE FIN FONCIER 4.55 1-Apr-17 500 - / Aaa / AAA - / Aaa / AAA
15-May-07 DEXIA MA 5 9-Mar-20 200 - / Aaa / AAA AAH / Aaa / AA

Source: RBC Capital markets
Most recently, OSFI weighed-in to the world of covered bonds by issuing a memo to
the industry (dated J une 27, 2007) indicating that upon review of certain regulatory
and policy concerns associated with the instruments, it was prepared to permit
deposit-taking-institutions to issue the securities, with certain restrictions. Specifically
OSFI stipulated that covered bonds must not, at any time, make up more than 4% of
the Institutions total assets (as defined by the assets-to-capital multiple) and the
Institutions pledging policies would need to be amended and approved by the Board
prior to the issuance of any covered bond securities.
Public Sector
37%
Ships
1%
Mortgage
59%
Other Assets
3%
Covered Bonds Issuance in , 2005 (in %)
Public Sector
37%
Ships
1%
Mortgage
59%
Other Assets
3%
Covered Bonds Issuance in , 2005 (in %)
J uly 19, 2007 Covered Bonds A Mini-Primer
8

We note that OSFIs interest in covered bonds is entirely a function of limiting the
extent to which banks can create a preferred class of claimants (thereby reducing the
residual level of assets available to deposit holders in the event of an insolvency) for
unlike securitization, there is no regulatory capital benefit to issuing covered bonds
since the assets remain on the banks balance sheet. While OSFI has addressed this
concern with a 4% limit, the potential scope for issuance remains significant. As
demonstrated in Exhibit 6, total assets (on and off balance sheet) across all domestic
deposit taking institutions amounts to C$2.4 trillion 98% of which are Big Six bank
assets. The potential market size, therefore, amounts to C$97.6bn, or C$95.4bn for the
Big Six. Given the limited capacity for non-Big Six issuance, we expect covered bond
issuance will be almost entirely relegated to the larger institutions.
Exhibit 6:
C$MM BMO BNS CM NA RY TD Total All Domestic
On B/S 356.5 411.7 326.6 136.7 589.1 396.7 2,217.3 2,258.5
Off B/S 31.1 35.4 16.8 7.4 53.0 23.8 167.3 180.6
4% Limit 95.4 97.6

RBC Capital Markets
Opportunities and Risks
The covered bond market has demonstrated significant growth in recent years as paper
outstanding has grown to 1.8 trillion (YE 2005) from 850 billion in 1995 annual
growth of 8% per annum. With covered bonds being introduced in a growing number
of countries, primary activity continues to grow issuance in 2005 totalled 479bn, a
23% increase over the 391bn issued in 2004. Whats driving the growth? Below, we
outline some catalysts and considerations for investing in, and issuing, covered bonds.
The Investors Perspective
Quality: Stable, triple-A credit ratings that are largely independent of the issuing
financial institution and sovereign rating of the country of issuance offer an obvious
appeal. Structurally, as obligations of the financial institution rather than a SPE,
covered bonds offer risk-averse investors the safety of a high-quality cover pool while
benefiting from the cash-flows of the entire financial institution, rather than those of
just the collateral. Does covered bond issuance structurally subordinate existing debt
holders? To the extent that covered bond issuance creates a layer of preferential
claimants, existing debt holders are disadvantaged. However, OSFI is well aware of
the implications of creating a layer of claimants that rank ahead of deposit holders
and, as such, has introduced a conservative 4% limit.
Yield: As very highly rated, high quality securities covered bonds are traditionally
considered a yield-enhancing alternative to government bonds, supranationals,
sovereigns and agencies Exhibit 7 lists the typical covered bond investor base. From
a Canadian investor perspective, however, the value proposition offered by a
Schedule-1 bank covered bond is not as absolute as there are currently plenty of high-
yielding triple-A alternatives. Maple supranational and agency offerings, also triple-A
rated, continue to offer value relative to government (and even provincial) bonds as
they are not treated as a perfect substitute. Furthermore, while one may argue a triple-
A rated offering from a Schedule-1 bank with a strong brand could be more easily be
sold as a Government alternative, clients are equally likely to adopt a view that, as
Canadian Corporate Bond Market Outlook, 2007 J une 22, 2007
9


financial paper, there are better yielding alternatives to the same credit at a marginal
incremental assumption of risk.
Exhibit 7:
Investor Type Typical Allocations
Central banks 10% - 20%
Insurers 2% - 7%
Funds / asset managers 20% - 40%
Savings and cooperative banks 20% - 40%
Pension funds 5% - 15%

Source: RBC Capital markets.
Other: Global interest in covered bond investments has been further enhanced by
factors such as: (1) preferential risk weighting in Europe the lower risk weighting
materially reduces the regulatory capital burden; (2) the opportunity to diversify for
conservative fixed income investors who are otherwise confined to the sovereign
space; (3) the elimination of event risk, given their tight collateral criteria and full
recourse to the cover pool. Preferential risk weighting is not a factor for regulated
Canadian investors as all claims on Canadian deposit-taking institutions, OECD
(Organisation for Economic Co-operation and Development) banks and non-domestic
OECD public sector entities continue to attract a 20% charge.

The Issuers Perspective
Efficiency: The obvious price advantage of covered bond funding has been a key
driver of increased primary activity.

Exhibit 8:
High Grade Spreads (10Y)
Debt Spread (bps)
Government of Canada 5.25% 1Jun12 (Yield) 4.621%
EDC 14
CMHC 14
Canada Mortgage Bond 14
Covered Bonds* 40.5
Asset Backed Securities 43
Senior Bank Debt 72

* Assuming 8bps through LIBOR; Source: RBC Capital Markets
Exhibit 9 below depicts secondary spread levels for various covered bond issuers.
Generally, a financial institution can anticipate savings over senior debt funding levels
of 7-9bps in the 5-year term, 9-11bps in 7-years and 12-14bps in 10-years. The ability
to tap funding at preferential levels in global markets where brand recognition is less
favourable is clearly an attractive value proposition for Canadian banks. Furthermore,
J uly 19, 2007 Covered Bonds A Mini-Primer
10

while we will see domestic Banks issue Canadian dollar covered bonds at some point,
Europe currently offers the worlds deepest, most liquid covered bond market.
Combined, brand enhancement and a more liquid market suggest the more substantive
efficiencies are clearly in overseas funding.
Funding: covered bonds serve to augment a banks funding toolkit with a resilient
form of cost effective financing. In addition to allowing for more cost effective global
funding, the covered bond investor universe is distinctive, offering an entirely new
investor base. Furthermore, the cost effective funding is particularly attractive against
a backdrop of stagnant deposit growth and shrinking margins.
Exhibit 9:
Issuer Security Type Coupon Maturity Spread
HBOS SENIOR 4.5 Oct-13 EURIBOR +10
HBOS COVERED 3.25 J an-13 EURIBOR FLAT
WAMU SENIOR FLOAT Sep-11 EURIBOR +41
WAMU COVERED 3.875 Sep-11 EURIBOR +5
BAC SENIOR 6.25 Apr-12 USLIBOR +7
BAC COVERED 5.5 J un-12 USLIBOR FLAT
BAC SENIOR 5.3 Mar-17 EURIBOR +34
BAC COVERED 4.25 Apr-17 EURIBOR +6

Source: RBC Capital Markets
Canadian Corporate Bond Market Outlook, 2007 J une 22, 2007
11


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Explanation Of RBC Capital Markets Ranking System For Global Credit Research (Canada)
(Note: Our risk-reward assessment is based, in part, on a comparison of the spread of a particular bond to the spread interpolated by a credit
ratings-derived relative value curve for a given maturity.)
Top Pick (TP): Represents the analysts best ideas in the Outperform category; provides best relative risk-reward ratio and/or is expected
to significantly outperform the RBC CM Canadian corporate bond index over 12 months.
Outperform (O): Provides superior relative risk-reward ratio and/or is
expected to materially outperform the index over 12 months.
Index Perform (IP): Provides an adequate relative risk-reward ratio and/or
the spread performance is expected to be in line with index average over 12
months.
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Additional Disclosures
R a n k i n g C o u n t P e r c e n t C o u n t P e r c e n t
B UY [TP /O] 53 25.24 33 62.26
H OL D [IP ] 118 56.19 72 61.02
SEL L [U] 39 18.57 19 48.72
R B C C a p i t a l M a r k e t s L i m i t e d
I B Se r v ./ P a s t 12 M o s .
J uly 19, 2007 Covered Bonds A Mini-Primer
12

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throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their residents, as well as the process for doing
so. As a result, the securities discussed in this report may not be eligible for sale in some jurisdictions. This report is not, and under no circumstances should be construed as, a
solicitation to act as securities broker or dealer in any jurisdiction by any person or company that is not legally permitted to carry on the business of asecurities broker or dealer in
that jurisdiction. To the full extent permitted by law neither RBC Capital Markets nor any of its affiliates, nor any other person, accepts any liability whatsoever for any direct or
consequential loss arising fromany use of this report or the information contained herein. No matter contained in this document may be reproduced or copied by any means
without the prior consent of RBC Capital Markets.

Additional information is available on request.
To U.S. Residents: This publication has been approved by RBC Capital Markets Corporation, which is a U.S. registered broker-dealer and which accepts responsibility for this
report and its dissemination in the United States. Any U.S. recipient of this report that is not a registered broker-dealer or a bank acting in a broker or dealer capacity and that
wishes further information regarding, or to effect any transaction in, any of the securities discussed in this report, should contact and place orders with RBC Capital Markets
Corporation.
To Canadian Residents: This publication has been approved by RBC Dominion Securities Inc. Any Canadian recipient of this report that is not a Designated Institution in
Ontario, an Accredited Investor in British Columbia or Alberta or aSophisticated Purchaser in Quebec (or similar permitted purchaser in any other province) and that wishes
further information regarding, or to effect any transaction in, any of thesecurities discussed in this report should contact and place orders with RBC Dominion Securities Inc.,
which, without in any way limiting the foregoing, accepts responsibility for this report and its dissemination in Canada.
To U.K. Residents: This publication has been approved by Royal Bank of Canada Europe Limited ('RBCEL') which is authorized and regulated by Financial Services Authority
('FSA'), in connection with its distribution in the United Kingdom. This material is not for distribution in the United Kingdomto private customers, as defined under therules of
the FSA. RBCEL accepts responsibility for this report and its dissemination in the United Kingdom.
To Persons Receiving This Advice in Australia: This material has been distributed in Australia by Royal Bank of Canada - Sydney Branch (ABN 86 076 940 880, AFSL No.
246521). This material has been prepared for general circulation and does not takeinto account the objectives, financial situation or needs of any recipient. Accordingly, any
recipient should, before acting on this material, consider the appropriateness of this material having regard to their objectives, financial situation and needs. If this material relates
to the acquisition or possible acquisition of a particular financial product, a recipient in Australia should obtain any relevant disclosure document prepared in respect of that
product and consider that document before making any decision about whether to acquire the product.
To Hong Kong Residents: This publication is distributed in Hong Kong by RBC Investment Services (Asia) Limited, a licensed corporation under the Securities and Futures
Ordinance. This material has been prepared for general circulation and does not take into account the objectives, financial situation, or needs of any recipient. Hong Kong persons
wishing to obtain further information on any of the securities mentioned in this publication should contact RBC Investment Services (Asia) Limited at 17/Floor, Cheung Kong
Center, 2 Queen's Road Central, Hong Kong (telephone number is 2848-1388).

Registered trademark of Royal Bank of Canada. RBC Capital Markets is a trademark of Royal Bank of Canada. Used under license.
Copyright RBC Capital Markets Corporation 2007 - Member SIPC
Copyright RBC Dominion Securities Inc. 2007 - Member CIPF
Copyright Royal Bank of Canada Europe Limited 2007
Copyright Royal Bank of Canada 2007
All rights reserved

Canadian Corporate Bond Market Outlook, 2007 J une 22, 2007
13







RBC Capital Markets - Global Credit Research Team

Toronto Barbara Komjathy, CFA (416) 842-6466 barbara.komjathy@rbccm.com
Altaf Nanji, CFA (416) 842-6462 altaf.nanji@rbccm.com
Edward Martinez (416) 842-5165 edward.martinez@rbccm.com
Jie Liu (416) 842-6140 jie.liu@rbccm.com
Andy Mystic (416) 842-6152 andy.mystic@rbccm.com

London Miriam Hehir 44 20 7653 4175 miriam.hehir@rbccm.com
Alastair Whitfield 44 20 7653 4834 alastair.whitfield@rbccm.com


Additional Disclosures
RBCCapital Markets is the business name used by certain subsidiaries of Royal Bank of Canada, including RBCDominion Securities Inc., RBCCapital Markets Corporation, Royal Bank of Canada Europe Limited
and Royal Bank of Canada - Sydney Branch. The information contained in this report has been compiled by RBCCapital Markets fromsources believed to be reliable, but no representation or warranty, express or
implied, is made by Royal Bank of Canada, RBCCapital Markets, its affiliates or any other person as to its accuracy, completeness or correctness. All opinions and estimates contained in this report constitute RBC
Capital Markets' judgement as of the date of this report, are subject to change without notice and are provided in good faith but without legal responsibility. Nothing in this report constitutes legal, accounting or tax
advice or individually tailored investment advice. This material is prepared for general circulation to clients and has been prepared without regard to the individual financial circumstances and objectives of persons
who receive it. The investments or services contained in this report may not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about the suitability of
such investments or services. This report is not an offer to sell or a solicitation of an offer to buy any securities. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss
of original capital may occur. RBCCapital Markets research analyst compensation is based in part on the overall profitability of RBCCapital Markets, which includes profits attributable to investment banking
revenues. Every province in Canada, state in the U.S., and most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their
residents, as well as the process for doing so. As a result, the securities discussed in this report may not be eligible for sale in some jurisdictions. This report is not, and under no circumstances should be construed
as, a solicitation to act as securities broker or dealer in any jurisdiction by any person or company that is not legally permitted to carry on the business of a securities broker or dealer in that jurisdiction. To the full
extent permitted by lawneither RBCCapital Markets nor any of its affiliates, nor any other person, accepts any liability whatsoever for any direct or consequential loss arising fromany use of this report or the
information contained herein. No matter contained in this document may be reproduced or copied by any means without the prior consent of RBCCapital Markets. Additional information is available on request.
To U.S. Residents: This publication has been approved by RBC Dominion Securities Corp. (RBCDS Corp.) and RBC Dain Rauscher Inc. (RBC DRI), both of which are U.S. registered broker-
dealers, which accept responsibility for this report and its dissemination in the United States. Any U.S. recipient of this report that is not a registered broker-dealer or a bank acting in a broker or
dealer capacity and that wishes further information regarding, or to effect any transaction in, any of the securities discussed in this report, should contact and place orders with RBCDS Corp. or RBC
DRI.

To Canadian Residents: This publication has been approved by RBC Dominion Securities Inc. Any Canadian recipient of this report that is not a Designated Institution in Ontario, an Accredited
Investor in British Columbia or Alberta or a Sophisticated Purchaser in Quebec (or similar permitted purchaser in any other province) and that wishes further information regarding, or to effect any
transaction in, any of the securities discussed in this report should contact and place orders with RBC Dominion Securities Inc., which, without in any way limiting the foregoing, accepts responsibility
for this report and its dissemination in Canada.

To U.K. Residents: This publication has been approved by Royal Bank of Canada Europe Limited (RBCEL) which is authorized and regulated by Financial Services Authority (FSA), in connection
with its distribution in the United Kingdom. This material is not for distribution in the United Kingdomto private customers, as defined under the rules of the FSA. RBCEL accepts responsibility for this
report and its dissemination in the United Kingdom.

To Persons Receiving This Advice in Australia: This material has been distributed in Australia by Royal Bank of Canada - Sydney Branch (ABN 86 076 940 880). This material has been prepared
for general circulation and does not take into account the objectives, financial situation or needs of any recipient. Accordingly, any recipient should, before acting on this material, consider the
appropriateness of this material having regard to their objectives, financial situation and needs. If this material relates to the acquisition or possible acquisition of a particular financial product, a
recipient in Australia should obtain any relevant disclosure document prepared in respect of that product and consider that document before making any decision about whether to acquire the
product.

To Hong Kong Residents: This publication is distributed in Hong Kong by RBC Investment Services (Asia) Limited, a licensed corporation under the Securities and Futures Ordinance. This material
has been prepared for general circulation and does not take into account the objectives, financial situation, or needs of any recipient. Hong Kong persons wishing to obtain further information on any
of the securities mentioned in this publication should contact RBC Investment Services (Asia) Limited at 17/Floor, Cheung Kong Center, 2 Queen's Road Central, Hong Kong (telephone number is
2848-1388).

Copyright RBC Capital Markets Corporation 2007 - Member SIPC
Copyright RBC Dominion Securities Inc. 2007 - Member CIPF
Copyright Royal Bank of Canada Europe Limited 2007
Copyright Royal Bank of Canada 2007
All rights reserved