The September issue of The Covered Bond Report, with features on rating agencies, Norway, Denmark and Turkey.

1. The Covered
Bond Report
www.coveredbondreport.com September 2011
Raters
stand firm
Agencies dismiss protests,
but face the consequences
Norway UniCredit Turkey
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3. The Covered
Bond Report CONTENTS
26
Cover Story
RATING AGENCIES
26 Raters feel the heat
Neil Day
8
FROM THE EDITOR
3 Thanks, but no thanks
MONITOR
4 Legislation & regulation
12 Ratings
17 Market
20 21 League Tables
September 2011 The Covered Bond Report 1

4. The Covered
CONTENTS Bond Report
32
Q&A: PHILIPP WALDSTEIN
22 UniCredit: more than covered
Neil Day
NORWAY: SAFE HAVEN
32 Northern light
44
Susanna Rust
EMERGING MARKET: TURKEY
40 SMEs bridge Turkish gap
Maiya Keidan
ANALYSE THIS:
44 Has the market got Denmark wrong?
40
2 The Covered Bond Report September 2011

5. FROM THE EDITOR
Thanks, but no thanks
G
uarantees for covered bonds? We’ve
heard this one before.
Morgan Stanley bank analyst Huw
van Steenis did, however, bring a new
twist to the proposal with a widely
discussed paper in mid-August: that
guarantees come not from individual sovereigns but
from the European Financial Stability Facility (EFSF).
Van Steenis sensibly suggests that were the EFSF to
go about guaranteeing bank debt, covered bonds might
be more politically acceptable given that economic risks
could be reduced.
As with all good things in the covered bond market,
the idea of governmental guarantees brings to mind a
German expression: doppelt gemoppelt. Covered bonds
are already guaranteed — effectively senior bank debt
The Covered
with a guarantee from the cover pool.
For proponents of covered bonds, any sovereign or su-
Bond Report pranational guarantees would be a retrograde step.
In the wake of the collapse of Lehman Brothers Eu-
ropean countries set up schemes for their banks to issue
www.coveredbondreport.com
government guaranteed debt. Only in Sweden was the
standard template pioneered by the UK extended to in-
Editorial
Managing Editor Neil Day clude covered bonds, but no one used the facility.
+44 20 7415 7185 True, it took European Central Bank support to help
nday@coveredbondreport.com the market to its feet with a covered bond purchase pro-
Deputy Editor Susanna Rust gramme after senior debt had already started flowing. But
srust@coveredbondreport.com since this prop was removed last year the asset class has
Reporter Maiya Keidan
surpassed expectations.
mkeidan@coveredbondreport.com
This is partly thanks to regulatory initiatives such as Ba-
Design & Production sel III supporting covered bonds and bail-in fears hitting
Creative Director: Garrett Fallon senior unsecured levels, but the fundamental strengths of
covered bonds have been key to the asset class’s success.
Printing Witness a Eu1bn 10 year UniCredit obbligazioni bancarie
Wyndeham Grange Ltd
garantite issue backed by Italian residential mortgages at
Advertising Sales the end of August, which was priced flat to an Italian gov-
ads@coveredbondreport.com ernment bond curve being supported by the ECB.
Guaranteeing covered bonds would also have the per-
Subscriber Services verse effect of weakening the arguments of those lobby-
subs@coveredbondreport.com ing in favour of the asset class around the world, not least
in the US, where the merest whiff of taxpayers’ money
Editorial
editorial@coveredbondreport.com being necessary is used as a counter-argument. Turning
to guarantees could also lessen the impact of their im-
The Covered Bond Report is a pressive performance in Europe, where covered bonds
Newtype Media publication have been a rare source of encouragement.
Regulators, politicians and others would do better
25, Finsbury Business Centre
to focus on the root causes of the crisis. Covered bonds
40 Bowling Green Lane
London EC1R 0NE alone won’t save the world. But guarantees could prevent
+44 20 7415 7185 them from playing their full role in the recovery.
Neil Day, Managing Editor
September 2011 The Covered Bond Report 3

6. MONITOR: LEGISLATION & REGULATION
Legislation & Regulation
ICMA
ECB hails CBIC transparency push
Disclosure on an electronic platform as forward to working with the ECBC and
envisaged in a transparency initiative by national associations,” she said.
the ICMA Covered Bond Investor Coun- The only buy-side feedback published
cil is of “utmost importance”, according on the CBIC’s website was from Pioneer
to the ECB, which said that the CBIC’s Investments, whose letter assessed the
work should help inform industry efforts data in the template thus: “Pretty exten-
to establish a covered bond label. sive and should cover most of the infor-
The European Central Bank’s com- mation requirements.”
ments were made in a response to a con- However, 12 investors are named on
sultation on the CBIC’s proposed trans- the CBIC’s website as “supporting en-
parency standards and were just one of hanced transparency standards in the
several to emphasise a need for greater European Covered bond market”, includ-
clarity and standardisation of definitions ing Allianz GI, Generali Investments, Le-
and concepts included in the CBIC’s tem- gal & General, and Schroders.
plate. Francesco Papadia, director gener- The UK Financial Services Authority,
al of market operations at the ECB, said HM Treasury and Bank of England said that
that this was important to help foster the the CBIC’s transparency template should
objectives of a better functioning market extend to require loan-level data in addi-
and greater integration. tion to the stratification tables proposed.
The ECB’s feedback also pointed to a However, the UK Regulated Covered Bond
need for a balance to be struck between Council (RCBC) set out a preference — in
providing “comparable, timely, frequent ECB calls for CBIC and ECBC to line with the CBIC’s — for aggregate cover
and easy to access data” and limiting is- join forces pool rather than loan-level data.
suers’ administrative burden. The UK RCBC listed several ways in
“The electronic platform accessible tion the ECBC described the introduc- which it felt the CBIC’s template could be
to all (investors, issuers, rating agencies, tion of a label for covered bonds as its improved, for example by better defining
market analysts, academics, and com- main focus, adding that transparency or describing certain requirements re-
mercial data providers) envisaged in the will form a key element of the label. ferred to in the proposed standards.
CBIC’s consultation paper is therefore of “The label transparency component “In the absence of clarification, the
utmost importance,” said Papadia. is the result of a detailed ongoing reflec- goal of establishing a consistent and har-
He referred to the commercial paper tion conducted by the ECBC that was monised standard will not be achieved as
market’s Short Term Paper Market in Eu- launched in late 2009,” it said. issuers may report certain information
rope (STEP) project and a recent ABS loan on a different basis,” it said.
level data initiative, saying that the ECB “The final product The UK RCBC also drew attention
would be pleased to share its experience “on to the existence of other covered bond
a catalytic basis”. The Covered Bond Report should allow transparency initiatives put forward by
understands that the STEP project is being flexibility” different industry organisations and dif-
looked at as an example of a successful label- ferent regulators, calling for a joint ap-
ling initiative by the ECBC, which is leading Nathalie Aubry-Stacey, director, regu- proach to be adopted where possible.
the covered bond market’s efforts. latory policy and market practice at the “In general, we consider that further
“Against this background,” said Papa- International Capital Market Associa- work may be required in order to es-
dia, “I would regard it useful if the CBIC tion, told The Covered Bond Report that tablish a suitable benchmark for all, to
and the ECBC would join forces both half a dozen investors responded to the avoid certain potential unintended con-
from a conceptual and a technical point CBIC’s consultation “in addition to many sequences and to strike an appropriate
of view in order to achieve and maintain investor comments received as the tem- balance from a cost-benefit perspective,”
a meaningful transparency pillar of the plate was drafted”. it said. “This work should not be rushed
prospective covered bond label.” “We will be publishing a reviewed and the final product should allow flexi-
In its response to the CBIC consulta- template in September/October and look bility for further market development.”
4 The Covered Bond Report September 2011

8. MONITOR: LEGISLATION & REGULATION
AUSTRALIA
Aussie law could be done by Christmas
Australian covered bond legislation
could be in place by Christmas, accord-
ing to a Treasury official, laying the foun-
Parliament could see
dations for the first issuance from the
bill in spring session
country in 2012.
Speaking at a conference in mid-August,
John Lonsdale, general manager, finan-
cial system division, markets group, at the
Treasury, said that the department is work-
ing towards giving Treasurer (and deputy
prime minister) Wayne Swan the option of
introducing a bill into parliament early in
the Spring session, which started in August.
That could allow passage of the bill
by the time the session ends in late No-
vember, with Royal Assent being given
by Christmas. Lonsdale said that alterna-
tively the legislation would probably be
passed in early 2012, after which it would can observe how these frameworks operate to prevent authorised deposit-taking insti-
be up to industry to progress. in practice, allowing us to pick and choose tutions (ADIs) from issuing or topping up
Lonsdale said that the Australian Pru- those features that seem to work best.” covered bonds under certain circumstances,
dential Regulation Authority (APRA) “such as the ADI experiencing severe finan-
will revise some of its prudential stand- Crisis lessons heeded cial stress or breaching the requirements of
ards to facilitate covered bond issuance Lonsdale said that the issue of asset en- the Banking Act 1959”. However, he noted
and that he expects the regulator to con- cumbrance that comes with covered that APRA has no power over assets provid-
sult on these in the coming months. bond issuance and how this affects unse- ing security to covered bondholders once
The Treasury released proposals for cured creditors had come to the fore in they have been transferred to a cover pool.
covered bond legislation in March and the light of the financial crisis. Expectations of pooled covered bond
subsequent consultation finished in April. “The proposed legislative cap of 8% issuance from smaller Australian financial
on covered bond issuance by ADIs seeks institutions were dampened by Lonsdale
“We have listened to address any asset encumbrance con- when he said that “an aggregation model is
closely to the views of cerns, while also meeting regulatory
best practice,” he said. “As well as look-
not likely to be used in the period imme-
diately after the covered bond bill becomes
stakeholders” ing at offshore best practice, we have lis- law”. However, he said that the possibility
tened closely to the views of stakehold- of aggregation models should provide op-
Lonsdale said that while “the devil is in ers on how the new Australian legislative portunities in the medium to longer term.
the detail” when it comes to such legisla- framework should be designed.” “The government is interested in pro-
tion, he could not discuss the final wording He said that, alongside the introduc- viding a mechanism to allow smaller
of the bill that will be introduced to parlia- tion of a permanent financial claims ADIs to issue covered bonds into the
ment. He nevertheless gave some insights scheme, measures proposed under the Australian market in particular,” he said.
into the Australian government’s thinking. legislation would maintain depositor Lonsdale said that during the consul-
“Although the draft legislation attempts protection even if the introduction of tation process investors had requested
to obtain international best practice, it covered bonds might breach the previous regulatory disclosure requirements for
does not simply replicate the European “depositor preference” concept hitherto covered bonds, and that he expects the
framework, which in general is highly pre- enshrined in the Banking Act. Australian Securitisation Forum to work
scriptive, and is adapted for the Australian Lonsdale expanded upon APRA’s over- to develop such a framework, similar to
context,” said Lonsdale. “One benefit of the sight of covered bonds under the proposed one developed for residential mortgage
diversity in offshore jurisdictions is that we legislation, saying that it will have the power backed securities (RMBS).
6 The Covered Bond Report September 2011

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10. MONITOR: LEGISLATION & REGULATION
FEBELFIN
Belgian pandbrieven come into view
segregation of assets into two separate
estates for covered bond issuers, with a
general one containing assets of the is-
suer to which all creditors have direct
recourse, and a segregated estate com-
prising the cover pool. Any initiation of
insolvency proceeding will not affect the
assets recorded in the segregated legal es-
tate, according to the Dexia analysts.
They noted that the draft law is inspired
by the German Pfandbrief Act, with com-
mon elements including direct issuance
from the balance sheet, a cover asset regis-
Statue in grounds of National ter, a 180 day liquidity rule, and a separate
Bank – movement awaited programme for different asset classes.
However, in contrast to the Pfandbrief
Belgian bankers are waiting for the coun- Belgian bank. “We hope that it will revert Act, the draft Belgian legislation accepts
try’s central bank to release a draft cov- by late August/early September.” securitisations as cover pool assets under
ered bond law that, according to Dexia The Covered Bond Report under- certain conditions, such as 90% of the pool
analysts, could be in place by year-end. stands that in its feedback the Febelfin underlying the securitisation being directly
Concrete discussions about a frame- working group suggested only minor eligible for covered bonds and originated
work have been taking place between changes to the proposed law, on which by a group-related entity of the issuer.
Belgian banks, the National Bank of Bel- there is general agreement. In addition, while Germany’s Pfand-
gium (NBB), the Belgian financial super- Once the NBB gets back to the banks brief banks do not have to set up sepa-
visory authority (FSMA), and law firms with a reviewed version of the law it will rate programmes for commercial and
since at least 2009. be sent to the finance ministry and the residential mortgages, the draft Belgian
“Belgium is currently one of the few European Central Bank, and thereafter legislation foresees this being the case for
European countries that has no dedicat- to Belgium’s parliament. The supreme ad- Belgian banks.
ed legal framework in place,” said Dexia’s ministrative court (Conseil d’État/Raad Another aspect of the draft legislation
analysts. “However, it should not take van State) will also need to pass judge- highlighted by Dexia’s analysts is that it pro-
too long anymore before Belgian credit ment on the law. vides for covered bonds being compliant
institutions can use covered bonds as an with Ucits 52 (4) and the Capital Require-
alternative funding tool knowing that Sounds like Pfandbrief? ments Directive. However, they note that a
the covered bond fundamentals are laid In its prevailing form, which Dexia’s ana- distinction is made at programme level be-
down in a draft legislation.” lysts noted may change, the draft frame- tween CRD-compliant covered bonds, i.e.
The country’s banks will then be able work provides for a structure based on Belgian pandbrieven/lettres de gage, and
to issue bonds designated “pandbrieven” issuance by universal credit institutions non CRD-compliant covered bonds, sim-
or “lettres de gage” in the draft. that will need to be licensed as covered ply called Belgian covered bonds.
The country’s banks have submitted bond banks by the NBB, as will be the “The denomination of both terms
— via a working group operating under case for individual programmes, too. [pandbrieven/lettres de gage and cov-
the auspices of the Belgian banking as- A cap on issuance does not appear to ered bonds] is protected by law,” said the
sociation (Febelfin) — comments on the have been set, with Dexia’s analysts only analysts. “These distinct types of covered
draft to NBB, which has yet to return a referring to the possibility that the NBB bonds will appear on two separate lists.
reviewed version to the working group. might decide a limit on a case-by-case However the way that the law and the
“There is no confirmed timeline, but basis. An official at one of the Belgian Royal Decree are stipulated, assures that
the central bank had indicated that it banks confirmed that the NBB would in practice the Belgian credit institutions
would probably not revert before the end have full discretion in this context. will only be able to issue CRD-compliant
of the summer,” said an official at one The draft law also provides for the covered bonds.”
8 The Covered Bond Report September 2011

11. MONITOR: LEGISLATION & REGULATION
“Changes have clarified a few issues that
were not in the original legislation” page 42
LATIN AMERICA
Banks lobby for Brazilian LFIs
The Brazilian Association of Real Estate demand.
Loans & Savings Companies (Abecip) LFIs are structured as debt securi-
in late July presented a proposal to the ties that will be guaranteed by the issu-
country’s central bank for a Brazilian ver- ing banks and a pool of assets. The rat-
sion of covered bonds, in a bid to create ing agency said that the proposed format
a long term funding instrument that can calls for tax exemption on investments
support a fast growing real estate financ- in longer maturity papers, primary those
ing market, according to Moody’s. with five to 10 year tenors, aimed at cre-
Savings deposits have been the prima- ating additional incentives for investors.
ry source of mortgage financing in Brazil, Moody’s noted that the country’s
with the country’s banks mandated to in- banks have no incentive to securitise
vest at least 65% of these into real estate their mortgage portfolios because they
lending, but this funding source is dwin- are required to invest in real estate, there-
dling and “could soon constrain further fore making that funding source unat-
expansion of mortgage financing”, said tractive.
the rating agency. Mortgage loans have been growing
Moody’s said that the introduction at an annual average rate of 45% since Banco Central do Brasil: received
of Brazilian covered bonds, to be called 2007 — in contrast to an 18% increase Abecip proposal
Letras Financeira Imobiliarias (LFI), is in savings deposits, with Brazil’s largest
a credit positive for the country’s banks banks standing to benefit the most from and Banco do Brasil. Caixa Economica
because it provides for an alternative long the introduction of covered bonds, said Federal, with a 60% market share, is
term funding instrument that will allow Moody’s. These are: Banco Santander the largest player in this market, said
Brazilian banks to serve growing housing (Brasil), Banco Bradesco, Itaú Unibanco, Moody’s.
FSA
Encumbrance on new UK Forum agenda
The UK Financial Services Authority is “Work is ongoing to John Wu, senior associate, capital
working on updating its asset encum- markets team at the FSA, told The Cov-
brance policy, according to the minutes update policy in this ered Bond Report that the UK Covered
of the first meeting of a new body, the
area” Bond Forum has a similar mission to that
UK Covered Bond Forum of the CBSG in that it is meant to be a
A review of the UK Regulated Covered firms by the FSA, and work is ongoing to group where market participants can air
Bond framework, transparency stand- update policy in this area”. their views on market developments and
ards, and ratings were also discussed at Suggestions for future topics of discus- regulations. The FSA intends for the forum
the first forum, which took place in June, sion included the implications of Solvency to meet at least twice a year.
according to recently released minutes. II, CRD IV and retail ring-fencing propos- “It should be frequently enough so that
The FSA was asked for an update on als being developed by the Commission there is a continuous dialogue, but with
asset encumbrance policy – a topic that for Banking, which is reviewing the UK sufficient time in between for there to be
has come to the fore in the wake of the banking industry. substantial issues to discuss,” said Wu.
financial crisis and that has been debated The new body takes on a role previ- The forum differs from the standing
in countries that are introducing covered ously played by the FSA’s Covered Bond group in that the membership is broader,
bond legislation, such as Australia. Standing Group (CBSG), which broke up extending to investors and trade associa-
According to the minutes, Lara Joseph as issuance of covered bonds in the pub- tions, according to Wu, while the CBSG
of the FSA’s capital markets team “ex- lic markets dried up after the onset of the only comprised the tripartite authorities
plained that a survey has been sent out to financial crisis. and issuers.
September 2011 The Covered Bond Report 9

12. MONITOR: LEGISLATION & REGULATION
ASIA
Japanese law planned with a public face
A push for covered bond legislation in Ja- legislation might receive political ap-
pan has been spurred in part by a desire proval could depend on the scope of the
to keep up with developments elsewhere, proposed framework and how it can be
but its goal contrasts with that of many squared with concerns about structural
other countries, according to a banker subordination.
familiar with the initiative. “If the legislation limits the number of
Japan has yet to join the ranks of cov- eligible issuers, in an extreme case only
ered bond jurisdictions, with Shinsei to DBJ or to DBJ plus the three largest
Bank having in 2008 aborted a struc- private banks, then it may not be that
tured, mortgage backed deal on account difficult to pass legislation,” said Egawa.
of the financial crisis and no issuance “But if we try to expand the scope of the
having been attempted since. law it may take more time and effort to
The government-owned Development persuade the banking regulators.”
Bank of Japan (DBJ) is now spearhead- According to Egawa the study group
ing a push for covered bond legislation has already envisaged ways in which cov-
in Japan. It is leading a study group that ered bond issuance could be structured
on 7 July published a report setting out to avoid a conflict with Japan’s existing
a range of considerations raised by its bankruptcy laws, under which deposit
members — representatives from major taking banks can be placed under legal
banks, securities firms, rating agencies bankruptcy procedures.
and the Bank of Japan; academics, law- Yukio Egawa, Shinsei: Covered bonds Also under discussion are the maturi-
yers, and institutional investors. unlikely to be used for housing finance ties the study group envisages the first Jap-
Yukio Egawa, chief strategist, head of anese covered bonds could feature, which,
research division at Shinsei Securities in vate finance initiative (PFI), social infra- at 10 years or longer, would be quite dif-
Tokyo and a member of the study group, structure and industrial lending. ferent from the average tenor of recent
told The Covered Bond Report that cov- “It is very unlikely that covered bonds dollar and euro benchmark supply.
ered bond legislation has only recently will be used for housing finance (residen- “The terms of social infrastructure,
become the focus of market participants’ tial mortgages) for the time being,” said PFI and local government loans, which
efforts, and that DBJ has been leading the Egawa. “Public finance, PFI, loans to rail- we are looking at covered bonds financ-
initiative as it considers ways to diversify way and other infrastructures are more ing, tend to have very long maturities, of
its funding sources. likely to form cover pool collateral.” 20 years or more,” said Egawa. “In addi-
“Another reason for the timing of He identified two reasons for the pub-
these efforts is the spreading of covered lic sector focus: as the main driver be- “Public sector loans
bond legal frameworks across the world, hind the initiative, DBJ, does not lend to
including in Australia, Canada, Korea consumers; and financing of residential tend to have very
and other non-European nations,” he mortgages in Japan is generally well pro- long maturities”
said. “If the trend continues and we do vided for by the Japan Housing Finance
not introduce our own framework then Agency, which purchases fixed rate mort- tion both private sector banks and DBJ
Japanese institutions will be at a disad- gages from originators and securitises have been able to raise funding of up to
vantage from a competitive viewpoint them. 10 years at very tight credit spreads in the
compared with European and North unsecured market.”
American institutions.” Breadth could influence timing It is not clear what the next steps are
But while developments in new juris- According to Egawa, covered bond pro- after the study group published its re-
dictions have tended towards mortgage ponents are aiming for legislation to be port in July. Egawa said that the group
finance, Japanese market participants are introduced within the first half of next is agreed on the need for a legal frame-
eyeing the asset class in the first instance year, and that the first issuance – initially work and standardisation, but that many
primarily as a tool to raise medium to domestic – would also take place in 2012. points are still open as various alterna-
long term funding for public finance, pri- The ease, or otherwise, with which tives are pursued.
10 The Covered Bond Report September 2011

13. The Covered
Bond Report
The Covered Bond Report is not only a magazine, but also a
website providing news, analysis and data on the market.
Did you know that The Covered Bond Report has its own database
of benchmarks?
Did you know that we link directly from bond data to relevant coverage?
Did you know that we include price guidance, book sizes and
distribution statistics?
Did you know that you can run league tables by country and currency?
To register for trial access to The Covered Bond Report, visit
news.coveredbondreport.com or contact Neil Day, Managing Editor, at
nday@coveredbondreport.com. And don’t forget: if you are an investor in
covered bonds you can qualify for free access to the website.

14. MONITOR: RATINGS
Ratings
SPAIN
Severe S&P multi-cédulas cuts criticised
Standard & Poor’s downgraded 46 multi- world environment we had back then,” the reasoning behind S&P’s views.”
cédulas between one and nine notches on said Florian Hillenbrand, senior analyst Dries Janssens, fixed income strategist
1 August, surprising market participants at UniCredit. “Going from as high as at Dexia Capital Markets, agreed that the
by the severity of its actions, with ana- AAA to BBB- is tough, but rating agen- merger of the institutions was more likely
lysts disagreeing with the rating agency’s cies tend to do tough calls these days to have enhanced credit quality than neg-
view on concentration risk in particular. and S&P usually comes around with the atively affected it.
The rating agency removed the multi- toughest calls since they base their as- “The S&P report seems to put more
cédulas, totalling some Eu103bn, from sessments on Probability of Default rath- emphasis on the deterioration of the
CreditWatch negative. They were put on er than on expected loss.” creditworthiness of the cajas, than on the
review in September 2010. Only two is- S&P cited deterioration in the credit positive effects of consolidation and re-
sues that were subject to the review re- quality of the financial institutions be- capitalisation,” he said.
tained their AAA ratings. hind the multi-cédulas between 2008 and Will added that S&P had not taken
2011 as the main reason for the down-
“S&P usually comes grades. In 2008 71.93% of issuers were “Consolidation
rated higher than bbb/BBB (credit esti-
around with the mate or rating), but by 2011 the number has heightened
toughest calls” in that category had dropped to 27.27% concentration risk”
(see table below for more details).
“People are surprised that we saw as Along with an amplified credit risk, into account the “massive” overcollater-
much as a nine notch downgrade,” said the rating agency said a consolidation alisation levels on the multi-cédulas.
Frank Will, senior analyst at RBS. “I did within the Spanish savings banks sector The rating actions also came as a re-
not expect a downgrade to BBB- of some had heightened concentration risk of the sult of the adoption of an updated ver-
of the transactions. I thought maybe we’d multi-cédulas and increased the impact sion of S&P’s credit risk model, which
see a downgrade to single-A, but not so of an individual financial institution on addresses updated default rate stresses,
close to junk. the corresponding multi-cédulas. correlation assumptions, concentration
“It’s clear that there is something Analysts found fault with this reason- risks, and model risk.
wrong with S&P’s approach if you have ing, saying the merger of banks that had S&P said the credit enhancement to
downgrades of this extreme.” occurred in Spain had likely done more cover possible interest shortfalls in 46 of
Two transactions, for example an AyT good than harm. the 48 transactions analysed “would not
Cédulas deal launched in March 2007, “They didn’t take into account the me- be sufficient to pay interest on all bonds
fell to BBB-. dium to long term benefits of the merg- to a AAA rating level if a cédulas de-
“It was issued based on our perfect ers,” said Will at RBS. “I can’t understand faults”.
CHANGE IN CREDIT QUALITY OF MULTI-CÉDULAS PARTICIPANTS 2008-2011
2008 2011
Credit estimate/rating % of entities Number of entities % of entities Number of entities
aa-/AA- or higher 7.02 4 11.36 5
a+/A+ 12.28 7 0 0
a/A 15.79 9 6.82 3
a-/A- 14.04 8 6.82 3
bbb+/BBB+ 22.81 13 2.27 1
bbb/BBB 17.54 10 18.18 8
bbb-/BBB- 1.75 1 36.36 16
bb+/BB+ or lower 8.77 5 18.18 8
Total 57 44
Source: Standard & Poor’s
12 The Covered Bond Report September 2011

15. MONITOR: RATINGS
“Norway’s economy is more
sheltered from abroad” page 34
ECB REPO
Greeks tweak to avoid Fitch junking
Greek banks have restructured their uncertainty surrounding recent develop-
covered bond programmes in success- ments in Greece”, and the RWN status of
ful bids to stave off downgrades below the four banks’ issuer ratings.
investment grade by Fitch, keen to keep Alpha Bank, Eurobank EFG, National
investment grade ratings necessary for Bank of Greece and Piraeus Bank com-
continued repo eligibility with the Euro- pleted structural adjustments to trans-
pean Central Bank. form the liability profiles of covered
Greek banks have had to take action as bond programmes in line with a release
their issuer ratings faced pressure in spite by Fitch on 14 July, which had said that Greeks under pressure
of the second rescue package for their the changes were expected by 29 July and
sovereign, and particularly with Moody’s that the ratings would be cut were the grammes so that the maximum Asset
having already stripped their covered restructurings not implemented by then. Percentage commitment is contractually
bonds of investment grade ratings. NBG’s changes are to its Programme II. undertaken. Fitch said a contractual As-
At the end of July Fitch confirmed that Fitch said structural amendments to set Percentage clause offers more protec-
structural changes have been made to the four covered bond programmes have tion to bondholders than a public com-
covered bond programmes of four Greek changed their liability profile from soft mitment and was a credit positive for the
banks that it had said were necessary to bullet redemption to partial pass through covered bonds.
avoid downgrades. amortisation. The rating agency said that Fitch added that it expected Greek is-
The BBB- ratings of the four pro- this transformation mitigates refinancing suers to demonstrate an ability to replen-
grammes were left on Rating Watch risk after an issuer default by eliminating ish their cover pools on a regular basis by
Negative. The rating agency said that its maturity mismatches between the cover maintaining assets over and above the vol-
continuing review “reflects the adverse assets and the covered bonds. ume of assets required to meet their con-
economic conditions and heightened The issuers have revised their pro- tractual Asset Percentage commitments.
COLLATERAL ANALYSIS
Moody’s covered-RMBS checks differ
Moody’s relies far less on double-checking the credit quality of portfolios underlying loan operations, regardless of whether the
of loan-by-loan data for covered bonds than RMBS, “the accuracy and veracity of the loans are in the cover pool or not.”
for residential mortgage backed securities information relating to the main risk driv- The second reason relates to the im-
given the on-balance sheet nature of cov- ers is vital”. It therefore expects independ- portance of factors aside from collateral
ered bonds and the lower importance of col- ent third parties to have assessed factual quality in Moody’s covered bond rating
lateral analysis as a factor when rating them. information provided by issuers and their methodology.
In an August report, “Identifying key agents that is key to determining ratings. “The amount of losses we model for
aspects of pool AUP reports in EMEA struc- But Moody’s said that it does not rou- covered bond transactions are only partly
tured finance and covered bond transac- tinely receive pool AUP reports for cov- (currently about one-third) derived from
tions”, the rating agency discussed how it ered bond transactions. It cited two rea- the collateral analysis,” said the rating
ensures the integrity of data through reports sons for this; firstly, the on-balance sheet agency. “The remainder are due to market
provided by originators and arrangers. nature of covered bonds. risks that arise due to refinancing risk and
“Third parties usually conduct these “In covered bond transactions, the interest rate and currency mismatches.”
data checks on a sample of the underlying loans that secure the covered bonds are Moody’s said that it would not expect
asset pool and in compliance with agreed- normally originated by the issuer group a pool AUP report to have a “material”
upon procedures (AUP),” said Moody’s. and remain on the issuer’s balance sheet,” impact on its analysis of the majority of
The AUP reports assess the integrity of said the rating agency. “The expectation is covered bond transactions. However,
loan-by-loan data provided by originators. that issuers, as regulated and supervised it said that it may consider AUP reports
The rating agency said that as loan- financial institutions, will maintain high in certain cases and if the issuer is lowly
by-loan data is the basis for its analysis of standards of quality control over all their rated or unregulated.
September 2011 The Covered Bond Report 13

16. MONITOR: RATINGS
FITCH
Downgrade rate doubles on sovereign woes
Fitch downgraded as many covered bond
programmes in the first half of the year as
“Disagreement tive based in 2009, three-quarters are
today. Among developments contribut-
it did in all of 2010, reflecting the damage persists on ing to this was the introduction of ob-
the euro-zone debt crisis has caused the ligations de financement de l’habitat in
asset class.
allocation of France in March.
The 33 downgrades made by Fitch overcollateralisation” The rating agency noted that Canada
were confined to Portuguese, Greek, and New Zealand, where issuance is al-
Spanish, Irish and Cypriot financial insti- the onset of the global financial crisis, they ready established on a contractual basis,
tutions or their affiliates, said the rating were on average subject to lower spikes have launched consultations regarding
agency in an EMEA structured finance than those witnessed in the senior unse- introducing legislative frameworks — but
snapshot report released in early April. cured debt and securitisation markets. that in some of these younger jurisdic-
“The vast majority resulted from sov- “On the other hand, investors’ appe- tions regulators were also looking more
ereign rating downgrades and/or down- tite is fuelled by risk aversion and regu- closely at the wider impact of covered
grades of the relevant issuer default rat- latory incentives. Historically, legislative bond issuance. Fitch pointed out that the
ings,” said Hélène Heberlein, managing covered bonds have attracted a low capi- Reserve Bank of New Zealand has set a
director of covered bonds at Fitch. “In tal charge at EU investing banks. Also 10% limit on the amount of assets that
fewer cases, the decision was motivated preferential eligibility criteria as well as can be encumbered by covered bond is-
by insufficient overcollateralisation, li- haircuts have been applied for central suance, while Canada’s Department of
quidity and comingling issues.” bank repo operations. Additionally, some Finance has proposed a maximum over-
And she said that the unfolding sov- covered bonds qualify for banks’ future collateralisation level of 10%.
ereign crisis is obstructing access to the mandatory liquidity coverage ratios, and But while Heberlein noted further de-
capital markets for covered bonds from the debt instrument is widely expected velopments in Australia, for example, she
those countries affected. to be exempted from banks resolution was cautious about prospects in the US.
However, the doubling in the rate of regimes.” “Disagreement between stakeholders
downgrades did not stop covered bonds She added that the rest of the year could persists on the allocation of overcollater-
from achieving a record breaking year, hit- be quieter given that some issuers took ad- alisation in the event of an issuer default,”
ting Eu215bn of new issuance in the first vantage of the buoyant first half to meet she said.
half of 2011, according to the rating agency. their funding needs “to a large extent”. The Federal Deposit Insurance Cor-
Heberlein highlighted the attractions poration continues to have objections to
for issuers and investors that have been Regulation de rigueur an initiative to introduce covered bonds
driving the supply surge. Fitch highlighted a trend towards cov- by Republican Congressman Scott Gar-
“A competitive cost of funding would ered bonds based upon dedicated legisla- rett, who nevertheless saw the United
certainly be the first argument cited by tive frameworks rather than contractual States Covered Bond Act of 2011 passed
bank treasurers,” she said. “Although cov- issuance, noting that whereas two-thirds by the House Financial Services Com-
ered bond spreads rose substantially since of the programmes it rated were legisla- mittee in June.
Top 12 countries by covered bond issuance H1 2011
Eu (bn)
50
40
30
20
10
0
Canada
Spain
Italy
Finland
Norway
Germany
France
Austria
Nether-
Kingdom
Sweden
Switzerland
lands
United
Source: Fitch, Dealogic
14 The Covered Bond Report September 2011

17. MONITOR: RATINGS
“There is so much more rating
shopping going on” page 31
US
WaMu covered fall on collateral deterioration
Fitch cut the rating of mortgage covered Chase, the rating of the covered bonds suer default cannot be bridged. This is
bonds issued off a former Washington is based on a Discontinuity Factor (D- because as an institution insured by the
Mutual programme to one notch above Factor) of 100%, which captures Fitch’s Federal Deposit Insurance (FDIC) Act, JP
the rating of the programme sponsor, JP assessment that the bonds’ probability of Morgan Chase is subject to a 90 day auto-
Morgan Chase Bank, because of a dete- default is aligned with that of the sponsor matic stay period upon insolvency, while
rioration in collateral quality. bank. However, Fitch said that a contrac- two of three outstanding series of soft bul-
The rating agency downgraded the tual maximum asset percentage (AP) of let covered bonds issued off the programme
covered bonds at the beginning of Au- 67% is commensurate with a AA stress only provide for an extension period of 60
gust from AA+ to AA, one notch above a scenario on a recovery basis. days. This does not give the mortgage bond
AA- long term issuer default rating of the The rating agency has assigned the indenture trustee sufficient time to enforce
sponsor bank. 100% D-Factor to the WM Covered Bond its security over the cover pool and liqui-
“The rating downgrade is driven by Program because it believes that potential date the portfolio prior to covered bond
increased loss expectations assessed on asset and liability mismatches after an is- redemption, said Fitch.
the cover pool assets on account of the
deterioration in observed performance
of US payment-option and interest-only
hybrid adjustable rate mortgages,” said
Fitch. “As a result, the level of overcollat-
eralisation in the programme is no longer
sufficient to provide expected recoveries
above 91% on defaulted covered bonds in
an AA+ stress scenario.”
In addition to the rating of JP Morgan
HM TREASURY
UK misfits shrug off guarantee differences
Covered bonds issued by the government Management at AAA, although — un- that in that case it made an exception to
owned rumps of Bradford & Bingley and like a Bradford & Bingley affirmation two its standard criteria for analysing such
Northern Rock have been affirmed at weeks earlier — it gave no credit to an HM support, which focus on their irrevoca-
AAA by Fitch, in spite of the rating agen- Treasury guarantee because of differences bility. Fitch said that the B&B guarantee
cy taking different attitudes to govern- between the two support arrangements. does not contain language describing it
ment support for the programmes, while Fitch said that it does not give credit to as “irrevocable” but that it made an ex-
Standard & Poor’s upped B&B’s to AAA. the guarantee provided to NRAM’s cov- ception to its standard criteria for analys-
Fitch in mid-August affirmed covered ered bonds because it can be removed ing guarantees because it considers that
bonds issued by Northern Rock Asset with at least three months’ notice. governments do not make such guaran-
“The agency is not comfortable giv- tee commitments lightly.
ing credit to a short term guarantee to S&P in late July raised the ratings on
support its long term rating on the cov- B&B’s mortgage covered bonds from AA
ered bonds as it does not consider there to AAA — without giving any credit to the
is sufficient protection to support the guarantee because it had “not received
covered bond rating upon withdrawal comfort that the guarantee arrange-
of the guarantee,” it said. ments meet our sovereign guaranteed
Fitch had in late July affirmed at AAA debt criteria for rating substitution”. S&P
covered bonds issued by Bradford & Bin- said that it had reduced its asset-liability
gley based on an HM Treasury guaran- mismatch classification of B&B’s pro-
tee, even though the rating agency said gramme from “moderate” to “low”.
September 2011 The Covered Bond Report 15

18. MONITOR: RATINGS
TREUHÄNDER & CO
Active or passive? S&P examines trustees
Covered bond trustee roles vary wide- there,” added Daehn, “as long as the bank
ly from country to country, said Standard itself is solvent there is not really a trustee
& Poor’s in a report focussing on trus- employed.”
tee-like roles in the five largest markets The report said different covered bond
released in late August, reaffirming the programmes in Spain use different ap-
rating agency’s view that not all covered proaches but cédulas hipotecarias and
bonds are created equal. cédulas terrioriales, for example, do not
While all covered bond programmes employ trustees when solvent, but rather
benefit from trustees, or trustee-like enti- the issuer itself manages the cover pool,
ties, the names, nature and scope of those supervised by the Spanish regulator.
appointed to safeguard bondholders’ in- The trustee role also varies after a de-
terests vary significantly by jurisdiction, fault, said S&P, with Daehn, however,
said S&P. Their roles range from rather identifying as a common theme that “trus-
passive to highly active depending on the tee-like entities have more power than be-
country, said the rating agency. fore in that usually new entities enter the
“The trustee roles differ significantly Sabine Daehn: “You have countries scheme or enter for the first time.”
in different countries,” said Sabine Dae- where trustee-like entities have a much For example, in Spain and Denmark,
more active role.”
hn, credit analyst at S&P, in a podcast that a trustee-like entity — which enters for
accompanied the release of the report, “as the first time at the point of insolvency —
we, for example, look at the powers trus- that overcollateralisation levels are com- examines the cover pool, she said.
tees have in various jurisdictions. mensurate with the regulatory overcol- “Depending on the jurisdiction, they
“You have countries like the UK or lateralisation requirements. might have sole responsibility for manag-
Germany where trustee-like entities have The Treuhänder has the power to ing the cover pool, the cover programme,
a much more active role within covered request and check all information re- like for example in Denmark,” she added.
bond programmes.” quired to review the eligibility of the According to the S&P report, dur-
For example, in both Germany and programme, and remove or cancel assets ing insolvency proceedings Finanstil-
the UK, trustees must sign off on new from the cover pool accordingly. synet, the Danish financial supervisory
issuance — in Germany’s case it is the In the UK, the bond trustee and se- authority, appoints a trustee to manage
cover pool monitor (Treuhänder) and in curity trustee approve amendments or the cover pool and provide it with quar-
the UK it is the bond trustee and security corrections to transaction documents terly reports. In the case of a mortgage
trustee who act together. and bond terms, as well as authorise the bank, the Finanstilsynet appoints a liq-
S&P said that in addition to signing termination and appointment of agents uidator (Kurator) who administers the
off on new issues the Treuhänder super- and servicers. cover pool and has the same rights over
vises the portfolio to ensure that it com- “When we, however, look at a country the mortgage loans as the insolvent bank
plies with covered bond regulations and like Spain and the cédulas programmes would have had.
METHODOLOGY UPDATE
October at the earliest for S&P counterparty finale
Standard & Poor’s does not expect to of feedback. able to advance as quickly as originally
publish updated counterparty criteria for S&P at the beginning of June report- intended.
covered bonds before October, the rat- ed on the comments it received on its The rating agency had been receiving
ing agency announced in mid-August. proposals. questions from market participants about
It said that it is “giving due consid- Karlo Fuchs, analytical manager for whether finalised criteria would be re-
eration to the opinions expressed” dur- covered bond ratings at S&P told The
, leased before a possible wave of bench-
ing a consultation period that ended on Covered Bond Report that for internal mark supply, and so wanted to provide an
4 May and yielded “significant” levels reasons the rating agency had not been update about the timing, he added.
16 The Covered Bond Report September 2011

19. MONITOR: MARKET
Market
EUROS
ING leads covered rush as senior swoons
European banks raised close to Eu20bn
of funding through benchmark covered
bonds in seven business days at the end
of August as the asset class left the senior
unsecured market trailing.
Ballooning spreads on senior unse-
cured debt meant that market was yet
to reopen post-summer as The Covered ING: “The catalyst for all this is-
Bond Report was going to press, and cov- suance.”
ered bonds were the only game in town.
The Netherlands’ ING reopened the
market on 24 August with the first bench-
mark since 5 July, issuing a Eu1.25bn 10
year at 80bp over mid-swaps. Martin Ni-
jboer, head of long term funding at ING,
told The Covered Bond Report that the financement de l’Habitat, Crédit Agricole secondary market spreads were widening
bank had felt a sense of responsibility in Home Loan SFH, Erste Group Bank, RBS, by 70%-80% of new issue premiums.
reopening the market. SpareBank 1 Boligkreditt and Swedbank “How long can this continue with
“You want to do a good, successful Mortgage all following, overall demand wide primary issues?” he asked. “All the
transaction that means the market re- eased. Orders for a Eu1bn 10 year trans- curves are going wider.”
mains open for others,” he said. “If you action for Norway’s SpareBank 1 Bolig- However, although sympathetic to con-
go out with a 10 year you should show kreditt, for example, came in slower than cerns about secondary spreads, a syndi-
leadership and be strong.” expected and guidance was revised to re- cate official said that issuers and his peers
Issuers that followed paid tribute to flect the worsening market conditions. should be less worried about where exactly
the Dutch bank. “We felt that the low 60s was a fair start- new issue premiums were coming in at.
“ING gave us a lot of confidence that ing point but the revision of the guidance “If you look at the moves in sovereigns or
the market had opened,” said John Paul was a reflection of market conditions – a in senior unsecured,” he said, “these bizarre
Coleman, head of capital raising and combination of heavy supply and a shakier discussions around new issue premiums
term funding at RBS, which tapped the credit market overall,” said Arve Austestad, seem to be very misguided. The questions
market a week later. “It was an excellent chief executive at SpareBank 1 Boligkreditt. are not relevant, especially when seeing such
deal and the catalyst for all this issuance.” Secondary spreads came under pres- high unsecured levels and sovereigns.
The reopening expanded quickly, with sure — particularly with new issue premi- “We’ve seen a lot of different deals,”
UniCredit selling the first OBG bench- ums on the supply being high. A portfolio he added, “which have been bought up
mark since Italy was drawn towards manager said the new issue premium on with many different types of investors, so
the centre of the euro-zone sovereign ING’s reopener — put at 15bp by several what this really shows is that it is a really
debt crisis in mid-July (see Q&A with market participants — was scary and that strong market in horrific conditions.”
UniCredit’s Philipp Waldstein for more).
“Everyone was expecting a short dat- Covered bonds outperform senior unsecured
350
ed deal from a German or Scandi issuer Banks SEN A iBoxx € Covered
300 Banks SEN AA iBoxx € France Covered
to reopen the market,” said a syndicate iBoxx € Banks iBoxx € Germany Covered
official, “but it was a 10 year, and then 250
you’ve got all these other things coming 200
bp
out like a 10 year OBG. It does show quite 150
a strong reopening for the market.” 100
Deals for Eurohypo, UBS and Nordea 50
Bank Finland also came that week, but 0
with Abbey National Treasury Services, Dec-09 Mar-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11
Source: UniCredit
Barclays Bank, BPCE SFH, Caisse de Re-
September 2011 The Covered Bond Report 17

20. The Covered
Bond Report
The Covered Bond Report is not only a magazine, but also a
website providing news, analysis and data on the market.
Are you a covered bond investor?
Then you could be receiving free daily news bulletins from
The Covered Bond Report and access to its coverage of the market as well
as its proprietary database of new issues and cover pool data links.
If you would like to gain complementary access to
The Covered Bond Report’s website and to receive free
copies of The Covered Bond Report’s magazine, contact Neil Day,
Managing Editor, at nday@coveredbondreport.com or visit
news.coveredbondreport.com to register*.
*Investors directly linked to covered bond issuers may not qualify for this offer.

21. MONITOR: MARKET
DOLLARS
Swedbank a euro opt-out in US
Swedbank Mortgage launched the first dol- market, and also inside levels in the do-
lar benchmark covered bond in a month on mestic market.
24 August, achieving cheaper funding than “The dollar market was by far the
available in Swedish kronor or euros. most cost efficient,” he said.
Leads Bank of America Merrill Lynch, As well as the dollar market being
Barclays Capital, Credit Suisse and JP cheaper, Rydin said the issuer expected
Morgan gave initial price talk in the high to have a first mover advantage.
70s over mid-swaps for the five year deal, “I think we were one of the first banks to
and priced a $1bn issue at 82bp over. update our 144A covered bond programme
The Swedish issuer last sold a dollar deal following our Q2 results, so I guess we were
in March, a $2bn transaction split into fixed one of the first who actually were able to is-
and floating rate tranches of $1bn each. The sue,” he said. “One reason for us to move
three year FRN was priced at 45bp over was that we thought we’d be the one only
three month Libor and the five year fixed ones looking at the dollar market, while the
rate piece at 71bp over mid-swaps. euro market might be quite crowded.”
Although the funding levels for the lat- Coming from a financially sound ju-
est transaction were a little higher, Martin risdiction also helped, said Rydin.
Rydin, head of long term funding at Swed- “Sweden in general has good and sound
bank, told The Covered Bond Report that finances, which means that there is a safe
this was to be expected given the challeng- haven bid regarding Sweden,” he said, “and
ing market conditions and given that the it’s probably also a positive factor that Swe-
transaction heralded the reopening of the den is not a part of the euro-zone area.”
dollar covered bond market. The last prior dollar benchmark was
Rydin added that the bank had ob- a $2bn five year for Canada’s Bank of
tained funding that was around 10bp Nova Scotia at 42bp over mid-swaps on
cheaper than in the euro benchmark 26 July.
SWISS FRANCS
Swissies offer growing respite
The Swiss franc market has provided cov- tapped the currency with either new is- Despite Royal Bank of Canada hav-
ered bond issuers with greater volumes sues or reopenings. ing launched the tightest transaction of
of funding this year, offering welcome “Whenever we’ve seen difficult times the year, the Swiss franc market has been
respite from the euro-zone’s problems. in Europe,” says Andre Schmid, head of dominated by core issuers from Scandi-
Foreign covered bond issuance in the Swiss franc syndicate at Credit Suisse, navia and France. That it is not to say the
second quarter rose from Sfr1.625bn “the Swiss market has been open for top market is not open to other jurisdictions,
in 2010 to Sfr2.125bn (Eu1.92bn) quality issues. As an issuer you can use according to UBS Swiss syndicate official
this year, and from Sfr1.175 in 2009. the Swiss market as a strategic market, Fabian Welandagoda, who said that Ger-
Supply in the year to the beginning of but you have to be aware that average man risk would also have been welcomed,
August increased from Sfr6.6bn in the transaction sizes are smaller. but was too expensive on a swapped basis.
same period of 2010 to Sfr7.2bn, ac- “But compared to euro deals, you “We believe the market is open for
cording to figures from Credit Suisse. get more interesting levels,” he added. other jurisdictions, too,” he said, “but
This made Swiss francs the fourth Maturities in the Swiss market have professional investors increasingly do
largest currency for international cov- varied from five to 10 years in 2011, look at the rating/credit metrics of the
ered bond issuance after euros, dollars said market participants. Schmid said underlying credit as well and expect a
and sterling. In the first seven months of the “sweet spot” for broadly distributed higher spread even if the cover pool
the year, 15 issuers from 10 countries issues was between four and six years. consists of high quality assets.”
September 2011 The Covered Bond Report 19

22. MONITOR: MARKET
SECURITISATION
RMBS pick-up more molehill than mountain
Market participants have cautioned
against reading too much into a pick-up in
European RMBS issuance in the first half
of the year, suggesting that tough condi-
tions, regulatory disincentives and the at-
tractions of covered bonds could stymie
any continued recovery.
Standard & Poor’s in mid-August noted
that European issuance of residential mortgage
backed securities, excluding retained deals,
neared Eu30bn in the first half of 2011, 20%
more than in the first half of 2010. The rating “Not expecting that under current
agency said improving collateral performance conditions issuance will improve”
and recovering investor sentiment could be
partly responsible for the moderate revival.
“As RMBS issuance has slowly returned,
there has been some shift in post-crisis
transaction structures,” said S&P, using the
example of standalone transactions, which in Spain, for example.” RMBS would lead to an improved outlook.
it said have gained traction. Paolo Binarelli, CDO portfolio manager “CRD IV indicated favourable treatment
However, market participants noted that at P&G SGR Alternative Investments, said for covered bonds,” Simon Collingridge,
the increase was from a low base. Boudewijn the Italian RMBS market is currently illiquid. managing director, structured finance, at
Dierick, head of structured covered bonds at “It hasn’t been a very liquid market since S&P, told The Covered Bond Report, “where-
BNP Paribas, for example, was more scepti- a couple years ago, as the bulk of outstand- as structured finance seems to be quite heav-
cal about the return of the RMBS market. ing bonds is made of legacy paper and the ily treated in things like Solvency II. I think
“Because the amount of issues in H1 number of new issues has been very lim- investors forget that not all covered bonds
2010 was relatively small, it does not need a ited since the end of 2010,” he said. “I’m not are created equally and that there is actually
huge amount of deals more to get a 20% in- expecting that under current conditions is- a higher degree of transparency with RMBS.”
crease,” he said, “but it is indeed a good sign.” suance will improve, though of course any- Of 70 respondents to a poll on The
“The Dutch and UK markets are still the thing could happen. Covered Bond Report website, 39 said that
only active RMBS markets,” he added. there is an unjustified regulatory bias in fa-
S&P acknowledged any recovery was “Netherlands and UK vour of covered bonds over ABS while 31
limited to the UK and the Netherlands,
which together accounted for 95% of placed
still the only active disagreed — although The Covered Bond
Report’s readership might be more inclined
RMBS issuance in H1 of 2011. S&P expects RMBS markets” to considering any favourable covered
this trend to continue into next year. bond treatment appropriate.
Dierick contrasted the recovery in the “I think eventually they will probably BNP Paribas’ Dierick said it is very
UK and the Netherlands with Italy and try a non-public way of issuing — probably difficult to get investors to acknowledge
Spain — the two other European markets through finding funding with the ECB.” RMBS because of the regulatory treatment
that were the most active pre-crisis. Binarelli added that covered bonds they face.
“The big difference is that, for example, were more viable because issuers could ac- “Not necessarily for insurers or pension
we have seen one or two Italian deals but cess the market more swiftly, thus enabling funds,” he said, “but for bank investors, in
that’s it,” he said, “while pre-crisis Italy was them to act during a brief market upturn, all their investments they take into account
quite important. and because their investor base included whether it counts as liquid assets.”
“Spanish RMBS was also really big and international and domestic investors. The European Securitisation Forum
we haven’t seen those either, although Market participants have complained (ESF) and lobbyists have approached the
that’s more linked to the sovereign prob- about regulatory bias in favour of covered European Banking Authority (EBA) seek-
lems and the state of the housing market bonds and said that better treatment for ing better treatment for the asset class.
20 The Covered Bond Report September 2011

23. MONITOR: LEAGUE TABLES
League Tables
EURO BENCHMARK COVERED BOND RANKING MULTI-CURRENCY BENCHMARK COVERED BOND RANKING
1 January 2011 to 31 August 2011 1 January 2011 to 31 August 2011
Rank Bookrunner Deals Amount (Eu m) Share % Rank Bookrunner Deals Amount (Eu m) Share %
1 BNP Paribas 49 12,789.17 7.93 1 BNP Paribas 56 14,451.48 7.81
2 Natixis 55 12,343.33 7.65 2 Barclays 53 13,660.90 7.38
3 Crédit Agricole 41 10,550.00 6.54 3 Natixis 56 12,524.17 6.77
4 UniCredit 48 10,517.86 6.52 4 HSBC 55 12,339.64 6.67
5 HSBC 46 10,152.02 6.29 5 Crédit Agricole 41 10,550.00 5.70
6 Barclays 39 10,096.67 6.26 6 UniCredit 48 10,517.86 5.68
7 Deutsche 36 9,724.52 6.03 7 Deutsche 39 10,220.34 5.52
8 UBS 36 8,492.08 5.26 8 UBS 41 10,194.51 5.51
9 Société Générale 30 7,412.50 4.60 9 RBS 30 7,892.82 4.27
10 RBS 23 5,902.50 3.66 10 Société Générale 31 7,631.63 4.12
11 Commerzbank 28 5,454.58 3.38 11 Commerzbank 29 5,635.42 3.05
12 DZ 24 5,390.36 3.34 12 DZ 24 5,390.36 2.91
13 Danske 14 4,166.67 2.58 13 Citi 17 4,298.36 2.32
14 ING 16 4,087.50 2.53 14 Danske 14 4,166.67 2.25
15 LBBW 22 4,047.50 2.51 15 ING 16 4,087.50 2.21
16 Citi 14 3,710.42 2.30 16 LBBW 22 4,047.50 2.19
17 BayernLB 14 2,876.19 1.78 17 JP Morgan 17 3,685.22 1.99
18 Nomura 14 2,791.67 1.73 18 Santander 12 3,179.35 1.72
19 Goldman Sachs 10 2,566.67 1.59 19 Nomura 15 2,910.33 1.57
20 BBVA 9 2,550.00 1.58 20 BayernLB 14 2,876.19 1.55
21 Santander 10 2,525.83 1.57 21 BAML 12 2,794.12 1.51
22 NordLB 11 2,216.67 1.37 22 Goldman Sachs 10 2,566.67 1.39
23 JP Morgan 11 2,150.00 1.33 23 BBVA 9 2,550.00 1.38
24 Credit Suisse 9 1,904.17 1.18 24 Credit Suisse 11 2,219.34 1.20
25 Banca IMI 6 1,683.33 1.04 25 NordLB 11 2,216.67 1.20
Criteria: Euro denominated fixed rate syndicated covered bonds Criteria: Fixed rate syndicated covered bonds of 500m or
of Eu500m or greater, including taps greater, including taps, in euros, dollars and sterling
These league tables are based on The Covered Bond Report’s database of benchmark covered bonds. For further details visit our
website at news.coveredbondreport.com. Please contact Neil Day on +44 20 7415 7185 or nday@coveredbondreport.com if
you have any queries.
Don’t forget
to visit our
website at:
www.coveredbondreport.com
September 2011 The Covered Bond Report 21

24. Q&A: UNICREDIT
UniCredit:
More than covered
22 The Covered Bond Report September 2011

25. Q&A: UNICREDIT
A successful OBG issue in late Au-
gust allowed UniCredit market
access in the wake of Italy being
drawn into the crisis. But although
UniCredit is keen to establish fur-
ther covered bond platforms, Philipp
Waldstein, head of group strategic
funding and portfolio at UniCredit,
says that privileged treatment of the
asset class should not be to the detri-
ment of others, such as RMBS. He
shared his views with Neil Day.
Q At the end of August UniCredit was able to sell a Eu1bn
10 year obbligazioni bancarie garantite issue, only a few
weeks after bail-out fears caused panic in the Italian gov-
ernment bond market. Are you surprised how soon after-
wards you were able to come to market?
A I have been on the road a lot, especially in 2011, continuous-
ly discussing with various investors the Italian covered bond
pool in particular, and I’ve always noted that the impression
they have of the Italian collateral is extremely high — and it
has always been extremely high.
Now, I was assuming that because of the crisis people
would have been put off. But in fact it turned out that they
hadn’t been put off, and that their positive appreciation of
the Italian collateral has remained, even when the level of
the crisis has increased. That’s been to me the surprise: that
the vast majority of the investors I have been in contact with
maintained a positive spin towards us.
“If we privilege covered bonds
too much, other asset classes
will suffer even more”
However, it has always been clear that there is a broad
range of investors out there doing a fundamental qualitative
analysis, and obviously that hasn’t changed. It might have even
increased, because relative to other asset classes the cover pool
has become even more interesting. Even in comparison to the
sovereigns, it has become more interesting, because what
we’ve seen is a sovereign crisis, not a mortgage crisis. The fact
that we have been able to price the bond flat to BTPs demon-
strates that in relative terms people appreciate it even more.
Furthermore, an investor called me up and said, look,
it’s even more impressive when you consider that if the ECB
were not there for BTPs then they would be much higher,
so some would consider that the deal effectively even came
through BTPs if looking at the pure market level.
September 2011 The Covered Bond Report 23