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The CoveredTHE COVERED BOND REPORT Bond Report www.coveredbondreport.com May 2011MAY 2011WWW.COVEREDBONDREPORT.COMNUMBER 2 Measuring up? Labels and limits in quest for covered bond ideal CBIC Small banks Asia Takes transparency lead Weighing pros and cons Playing it, Safe?
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The CoveredBond Report CONTENTS32 Cover Story LABELS & LIMITS 32 The measure of an asset class As covered bonds become an increasingly important pillar of the new global ﬁnancial architecture, the need to deﬁne and delineate the asset class increases. A labelling initiative has been embarked upon to this end. But can the needs of regulators and investors be squared with those of issuers? By Neil Day5 FROM THE EDITOR 3 First things ﬁrst MONITOR 4 Legislation & regulation 14 Market 17 Ratings Q&A: DEXIA 20 Dexia rebuilds for a brighter future Gone are the days when Dexia sat atop the covered bond market. Its recent history has ensured that it now trades at the wide end of the French sector. However, the funding team is conﬁdent it can convince investors that the credit deserves better and a Eu1bn ﬁve year20 Dexia Municipal Agency benchmark on 11 May produced encouraging results. Neil Day spoke to the team about the challenges they face. May 2011 The Covered Bond Report 1
The CoveredCONTENTS Bond Report24 SUB-JUMBOS: 24 Jumbos: lowering the bar Growing acceptance of benchmarks being less than Eu1bn carries advantages for issuers old and new, and the leading index provider is being lobbied to follow the trend. But could this lowering of the bar result in the loss of privileged status for jumbos at the European Central Bank? By Maiya Keidan ANALYSE THIS: COVERED VERSUS SENIOR 29 Bail-in fears unheeded Bail-in fears are said to have driven investors from senior unsecured into covered bonds, but, according to Deutsche Bank head of covered bond research Bernd Volk, spreads for some jurisdictions fail to reﬂect this.40 ASIAN DEMAND: IN TRANSIT 40 Specially packed for Safe & Co. Covered bond issuers have long sought to sell their wares to increasingly wealthy Asian investors. But although the identities and behaviour of the biggest Asian players are, in the words of one banker, the bond market’s “worst kept secret”, the extent to which they want to buy covered bonds is unclear. Recent successes have nevertheless suggested attitudes could be changing. By Neil Day SMALL BANKS: REASONS TO BE FEARFUL? 44 Small banks size up pros and cons Some small ﬁnancial institutions in countries exploring covered bonds for the ﬁrst time have expressed concerns about being put at a disadvantage. But while bigger banks may have natural advantages in the asset class, mature jurisdictions suggest that these can be overcome or need not be a concern. By Neil Day44 FULL DISCLOSURE 48 Stockholm & Paris2 The Covered Bond Report May 2011
FROM THE EDITORFirst things ﬁrst W alk before trying to run. The wisdom quoted by Washington consultant Bert Ely, with regard to the development of a US cov- ered bond market, is advice that appears to have been taken on board by the covered bond market and those who regu- late and support it lately — albeit after they had already set off at quite a trot. While covered bonds have been put centre stage in the laws and regulations of a rebuilt global financial system, rules governing just what they need to do to qualify for this leading role differ from country to country. The labelling initiative being undertaken by the Eu- ropean Covered Bond Council with the support of the European Central Bank is not new, but has taken on renewed importance given the prominent role covered The Covered bonds are being given under Basel III, Solvency II and a variety of other regulatory overhauls. A push for greater Bond Report transparency from the Covered Bond Investor Council has only given the initiative further momentum. www.coveredbondreport.com Coming up with a template for what a covered bond is — or at least, one that deserves preferential treatment — would be hard enough even without having to take Editorial Managing Editor Neil Day into account the varied structures that have already been +44 20 7415 7185 developed. The Basel Committee on Banking Supervi- firstname.lastname@example.org sion faced a similar challenge in coming up with a glo- Reporter Maiya Keidan bal compromise that somehow balanced local differences email@example.com across a range of areas — and even after its December framework was announced the debate over implementa- Design & Production tion still rages. Creative Director: Garrett Fallon Senior Designer: Sheldon Pink But however difficult it might be — and whether the differences are down to natural national idiosyncrasies or Printing vested interests — a way of delineating the varied struc- Wyndeham Grange Ltd tures and legislations in the covered bond market will have to be found, even if it risks alienating some quarters Advertising Sales of the market. firstname.lastname@example.org Neil Day, Managing Editor Subscriber Services email@example.com The Covered Bond Report www.coveredbondreport.com May 2011 Editorial firstname.lastname@example.org The Covered Bond Report is a Newtype Media publication Measuring up? 25, Finsbury Business Centre Labels and limits in quest for covered bond ideal 40 Bowling Green Lane London EC1R 0NE +44 20 7415 7185 CBIC Small banks Asia Takes transparency lead Weighing pros and cons Playing it, Safe? May 2011 The Covered Bond Report 3
MONITOR: LEGISLATION & REGULATIONLegislation & RegulationLEGISLATIONCanada launches consultation after re-electionA consultation paper released by Canada’sDepartment of Finance on 11 May wasgreeted with enthusiasm by Canadianmarket participants, who said that it wasa positive outcome after several months oftalks with the government about the de-velopment of a covered bond framework. The consultation comes after the govern-ment committed to introducing legislationin its March 2010 budget. Canada’s Con- Finance Minister Jim Flaherty:servative government was re-elected earlier Plans announced in March 2010 budgetin a general election earlier this month. “It’s very positive and a welcome devel-opment for any Canadian covered bond “Canada’s adoption of a legislativeissuer,” said a funding official at a Canadi- framework should cover? Does the pro- framework for covered bonds will be aan bank. “This is something we have been posed framework strike the appropriate welcome development for issuers and in-working through with the Department of balance between the interests of cov- vestors alike,” he said. “Strengthening andFinance for several months. ered bondholders and other creditors of clarifying investor rights in covered assets “The next step is legislation, which we banks, both secured and unsecured? upon an issuer’s insolvency should bringbelieve should give Canadians a more lev- Canada’s position into line with otherel playing field in Europe.” countries that have adopted legislative The Department of Finance said that a ered bonds should be standardized by frameworks.”legislative framework will benefit Canadians. the framework to create a robust, deep Palmer said he found interesting the “The legislation will create a more and liquid market? proposed scope of eligibility criteria forrobust product that will retain investorconfidence in periods of market instabil- “The more modest scope of permitted assetsity by providing legal certainty and settingminimum standards for covered bonds,” will simplify the process”it said. “It will also help financial institu- covered assets and issuers.tions diversify their sources of funding by of the covered bonds registrar and what “Cover pools for legislative coveredincreasing investor interest in Canadian entity should perform this role? bonds would be limited to residentialcovered bonds.” The funding official said he was mortgages, unlike the recent US proposal The volume of Canadian covered pleased to see all the points that had been that would open up the US covered bondbonds outstanding doubled last year, ac- discussed over the past several months ad- market to other asset classes, like autos,cording to the Department of Finance. dressed in the consultation document, in- credit cards, and student loans,” he said.Almost all of the growth in the Canadian cluding the matter of existing structures. “Finance suggests that the more modestmarket has come from the country’s banks “There was a vested interest in codi- scope of permitted assets will simplify theselling US dollar denominated covered fying existing structures in the proposed process and permit a more rapid imple-bonds, mainly to US investors. This year legislation,” he said. “Investors who hold mentation of a legislative regime.”National Bank of Canada and Caisse Cen- existing paper, the last thing they want is Other market participants agreed thattrale Desjardins de Quebec launched their to be uncertain about what’s happening the covered bond legislation should notfirst covered bonds. with their outstanding structures.” face problems moving forward. The consultation paper deals with a “It should not be a terribly controver-range of issues including asset segrega- Canada, Canadian issuers have restricted sial piece of legislation, aside from thetion, eligible assets, and overcollaterali- their cover pool to mortgages insured by standard discussion of trying to balancesation, for example. The Department of the interests of retail depositors,” said theFinance said that it is specifically seeking Aaron Palmer, a partner at Blake, Cassels funding official.feedback on three general questions: & Graydon, also welcomed the consultation. The consultation ends on 10 June.4 The Covered Bond Report May 2011
MONITOR: LEGISLATION & REGULATIONCIBCECBC acts after CBIC transparency pushThe European Covered Bond Council transparency standards even ahead ofhas been surveying its members for their the release of the data lists and had madeviews on transparency standards pro- progress on the topic. At a plenary sessionposed by the Covered Bond Investor of the ECBC in Stockholm at the end ofCouncil, which could form part of a la- March Grossmann unveiled an updatedbelling initiative being supported by the version of a part of the association’s web-European Central Bank. site where market participants can find The ECBC sent out the survey a week comprehensive information on coveredafter a meeting in Frankfurt on 29 April bond legislations and links to issuer data.focussing on labelling and featuring many “We have already done some work onof the association’s members as well as our own part, with the comparative data-European Central Bank officials and in- base website and looking into what dif-vestors, including Covered Bond Investor ferent issuers provide in terms of infor-Council representatives. mation,” said Grossmann. “We welcome At a plenary meeting of the ECBC at that investors have now put their ideas onthe end of March Michel Stubbe, head the table, which will enrich our on-goingof the market operations analysis divi- dialogue.sion at the ECB — speaking as an expert “If you speak to different investors youwithout prejudging any decision of the get different answers as to what they re-ECB governing council — had suggested quire, but now the CBIC’s transparencythat any covered bond label could involve standards provide us with something of“value-added services”, such as transpar- a consensus on what is the ultimate wish-ency about products. He added that a label list to work with. Now we will be meetingcould be “a big resource saver” for inves- in the technical issues working group totors and regulators. Andreas Denger: see how we can address this.” The ICMA Covered Bond Investor “Most of this can be provided The CBIC proposals are the fruit of aCouncil unveiled its plans for the trans- relatively easily” working group that has sought to identifyparency standards at the ECBC plenary the key information covered bond inves-and then released its data lists in April, The publication of the proposed trans- tors require, said the Council, which op-detailing information it believes issuers parency standards begins a consultation erates under the auspices of the Interna-should provide to investors. period that will close on 30 June, and the tional Capital Market Association. The voluntary transparency standards CBIC is aiming to have the standards fi- “It is expected that the informationset out three categories of information the nalised in September. required would be available on a regularCBIC expects from issuers: general issuer basis (e.g. a half yearly update) to meetdata; cover pool data; and explanations as “Providing consistent investors’ transparency and informationto how key concepts are defined. “It’s not just new covered bond in- data should favour needs,” it said. “Beside the quantitative information provided via a spreadsheet,vestors who are raising questions about issuers” some qualitative information is requestedtransparency,” said Andreas Denger, sen- to explain the figures and make the dataior portfolio manager at MEAG Munich “The CBIC believes that transparency more comparable.Ergo Asset Management. “Traditional standards are a milestone in the roadmap “The CBIC believes that issuers shouldbuyers also have also increasing needs for towards a better transparency regime in consider these qualitative elements andcomparable and standardised information Europe,” it said. ensure a certain degree of consistency,on the issuer, collateral pool characteris- Ralf Grossmann, head of covered most urgently at national level.”tics and key definitions. bond origination at Société Générale and General issuer information required “We believe that most of this informa- chairman of the working group, told The under the proposals includes sectionstion can be provided relatively easily by all Covered Bond Report that the ECBC had on: balance sheet data; wholesale fundingissuers.” been co-operating with the CBIC on the breakdown; customer loans; margin cal- May 2011 The Covered Bond Report 5
MONITOR: LEGISLATION & REGULATIONculations; and the legal status of covered the suggested data twice a year, it wouldbonds — whether they are repo eligible, make the market significantly more trans-and UCITS and CRD compliant. parent and comparable, with the extra in- The cover pool data standards require formation on issuers’ strengths and weak-issuers to detail cover pool composition nesses feeding through to prices moreand eligibility criteria, with a breakdown consistently.of the types of assets in the cover pool and “At the end of the day, this would helpallowed as collateral. Some examples are: investors and other market participants to form an opinion on individual issuers ble assets? and their covered bond programmes in- dependently of rating agencies,” he said. house prices to the current OC. “However, we would warn readers of the danger of basing their judgements of cov- soft or hard bullet structure? ered bonds on excessively ratio-driven Issuers are then required to explain analysis.key concepts underlying the data in the “The key question is ultimately allprevious two sections. They are required, about the long term intrinsic value of thefor example, to describe how NPLs are de- cover assets, which in turn is ultimatelyfined, how LTVs are calculated, and how subject to the economic developments.residential and commercial loans are de- And last but not least, we believe that thelineated. value of covered bonds also depends on The CBIC said that it hopes national the sustainability of the issuer’s businessassociations will take the data lists into model and lending standards.”consideration when developing their own Grossmann said that the ECBC surveynational templates. Associations in Ger- Ralf Grossmann: and working group would be looking atmany and Sweden have already developed “Some items probably sensitive what data is already included in standard fi- for the stock market”standardised ways of calculating some of nancial reporting by issuers and what is not.the key concepts in the CBIC’s proposals. “There are also some items that will “The CBIC is well aware that not all Bank of England that for UK issuers take probably be sensitive to the stock mar-jurisdictions or issuers will be in a posi- in covered bonds as well as asset backed ket, perhaps,” he added. “For example, iftion to provide all of the requested data,” it securities, which were seen as the original we would all disclose our margins in theadded. “Nonetheless, the CBIC invites all main target of the central bank’s new re- mortgage business, that would probablyissuers to be as accurate and comprehen- quirements. By chance, on the same day as bring the equity analysts in. And alsosive as possible in filling in the data list. the labelling meeting, the ECB introduced some of the information probably needs “Providing consistent data and trans- to be approved by auditors or by internalparency for their covered bond products “We would warn compliance.should favour issuers and their respec-tive jurisdictions in increasing investors’ against excessively “These are all things we need to take account of. The national delegations andconfidence in their product. To accom- ratio-driven analysis” associations will play a pivotal role in de-modate the differences between markets termining what can be produced in what JÖRG HOMEYand jurisdictions and deviations from time-frame and by the different countries.the data list which potentially could oc- loan-by-loan information requirements We are now doing our homework.”cur, additional remarks in the data list at for commercial mortgage backed securi- Feedback to the ECBC’s survey was re-the ‘Additional comments’ section could ties and SME securitisations, but it has not quested in time for a meeting of its techni-be given.” yet imposed any such requirements in the cal issues working group scheduled for 27 Some market participants have noted field of covered bonds. May.that the CBIC requirements are not as Jörg Homey, covered bond analyst at See cover story for more on the labellingstringent as those being introduced by the DZ Bank, said that if all issuers provided initiative6 The Covered Bond Report May 2011
MONITOR: LEGISLATION & REGULATION “The market will still prefer Eu1bn deals because they are more liquid” page 26GARRETT-MALONEYUS Bill passes subcommittee intactAttempts to address concerns surround- sued relative to the size of a bank’s bal-ing the US Covered Bond Act of 2011 are ance sheet.set to take place ahead of a full hearing of Garrett pointed out that the bill givesthe House Financial Services Committee, regulators the ability to set such limits,after its Capital Markets & Government but Campbell said that he would preferSponsored Enterprises subcommittee any limits to be statutory.passed the bill with only two “non-con- Garrett and Maloney had already saidtroversial” amendments on 3 May. that they are open to exploring avenues The amendments were put forward by to address ways in which such concernsthe sponsors of the bill, Republican Scott among members of the committee, theGarrett, who chairs the subcommittee, Federal Deposit Insurance Corporationand Democrat Carolyn Maloney, follow- and others might be addressed throughing a first hearing of the bill on 11 March. changes to the bill before it is discussed However, John Campbell, a Republi- by the full House Financial Servicescan Representative from California, said Committee.that he was “not thrilled with this bill or “We have reached out to – and theythis concept”. have reached out to us – to the regula- “I have concerns about this because of tors and specifically to the regulator thatthe way that covered bonds work, because you referenced as well, to try to hear whatof the substitution of collateral issue,” he their concerns are and understand thatexplained. “So you’ve got this pool of they have the concerns, some of whichmortgages upon which Wall Street loans you listed there,” said Garrett. “And whatmoney to the bank and then if one of we’d like to do is to continue the dialoguethose mortgages goes bad the bank has between now… and the full commit-to take a good mortgage out of the bank tee markup, and keep involved all thoseand put it in the pool and then the bad folks.” John Campbell: “not thrilled withmortgage goes over into the bank. This appeared to satisfy Maxine Wa- this bill or this concept” “So if you have a situation like we had ters, the ranking Democrat member ofin 2008 where a lot of things are going the subcommittee, who had also citedbad, then the Wall Street loans on this, concerns about the bill. amendment” and Garrett’s as “really to-they have to be covered by the bad loans Proponents of covered bonds had tally non-controversial”. However, Gar-going into the bank and good loans com- feared that the FDIC might seek to have rett said that his amendment, amonging from the bank going into this pool. an amendment tabled, potentially intro- other things, “conforms [sic] the FDIC’sTherefore, potentially — which is why ducing an overcollateralisation limit so authority to recover losses through exist-the FDIC has concerns with this — be- low as to render covered bonds unwork- ing law” and “clarifies how the cover poolcause it potentially creates a problem for able. is treated during the FDIC’s exclusivitythe security of that bank and for eventu- “They will go on saying that they period”.ally the FDIC and potentially even tax- like covered bonds,” he said, “but only The bill was passed by voice vote andpayers if you have a bad situation.” on their own terms. They are trying to Garrett said it would be “favourably re- He said that while the two amend- get away with the argument that it must ported to the full committee”. He alsoments improved the original version of be possible for these things to happen said that there could be progress on cov-the bill, he was not prepared to support and for them to be happy, but the real- ered bonds in the Senate.the legislation yesterday. He suggested ity is that it’s going to be very difficult to “I’m optimistic about this actually get-two limitations be placed on issuance, square their requirements with what the ting over to the Senate as well,” he said.one limiting the extent to which good market currently needs.” In mid-March Democrat Senatorloans can be substituted for bad, and The two amendments were not dis- Charles Schumer said that he was con-another placing an absolute cap on the cussed in any detail, with Maloney de- sidering introducing a covered bond billvolume of covered bonds that can be is- scribing hers as “basically a clarifying in the Senate. May 2011 The Covered Bond Report 7
The CoveredBond ReportThe Covered Bond Report is not only a magazine, but also awebsite providing news, analysis and data on the market.Did you know that The Covered Bond Report has its own databaseof benchmarks?Did you know that we link directly from bond data to relevant coverage?Did you know that we include price guidance, book sizes anddistribution statistics?Did you know that you can run league tables by country and currency?To register for trial access to The Covered Bond Report, visitnews.coveredbondreport.com or contact Neil Day, Managing Editor, email@example.com. And don’t forget: if you are an investor incovered bonds you can qualify for free access to the website.
MONITOR: LEGISLATION & REGULATIONAUCTIONSDanish offer daily move in Basel bidThe Association of Danish Mortgage “And if we do a refinancing on a dailyBanks (Realkreditrådet) is proposing a basis, we would do refinancing on aboutmove to daily auctions to refinance ad- 220-240 days,” said Hjortshøj-Nielsen, “andjustable rate mortgages as one of various in that case we could only lose half a percentoptions it is exploring in a bid to win bet- of our funding on one day. That’s much lesster treatment for its system under Basel III than a retail bank has the risk of losing.when the new framework is implemented “So we would very much like to use thein the European Union through CRD IV. argument that if you actually refinance on The possibility of having “day-to-day” a daily basis it would be as safe as if youauctions was raised by Peter Engberg Peter Engberg Jensen: “We have a have retail deposits. We are going to useJensen, chairman of the Association of system with low liquidity risk” that argument in the NFSR debate.”Danish Mortgage Banks and Nykredit Arnth Jensen said that a Europeangroup chief executive, at its annual meet- The Danish mortgage banks also believe Commission proposal for CRD IV is ex-ing at the end of last month. that such a move would help their case with pected just before or after the summer “We are discussing such a proposal with regard to the NSFR as well as Liquidity holidays, with discussions in the Euro-the Danish Mortgage Banks’ Federation and Coverage Ratios under Basel III. Accord- pean Parliament to follow.public authorities,” he said, “with a view to ing to Henrik Hjortshøj-Nielsen, head of “If we can prove that they are liquidimplementing it in due time for us to dem- group treasury at Nykredit, a possible move then we think that will help us argue ouronstrate to the European authorities that we to daily auctions is just one of three options case,” she said. “It’s a long way before wehave a system with low liquidity risk which being explored and prepared for. actually know what’s happening but it’sshould fall within the Next Stable Funding Nykredit Realkredit, which has very important that we are fighting.”Ratio under the Stable Funding rules.” three auction dates, is reweighting its A move to daily auctions could, how- Currently, Danish issuers hold up to sales so that within the next two years ever, carry disadvantages for the Danish.three covered bond auctions a year — in the March, September and December “There is an advantage in trying to getMarch, September and December, with the auctions will be of equal size, and it is investors’ interest at certain times of yearlargest concentration being in December. considering introducing a fourth auc- by having big liquid auctions, and havingThe December sale issued 96% of Danish tion. The mortgage bank has also pre- big liquid bonds is actually advantageouscovered bonds until 2009, but the associa- pared to bring its auction dates forward for investors,” said Hjortshøj-Nielsen. “Sotion agreed to further distribute refinanc- a month, because in order to satisfy the you could argue that on average we woulding auctions and to refinance new loans at LCR institutions have to be financed 30 have higher funding costs by spreading itother times of year after the Danish central days forward. out. That is the risk.”bank, Danmarks Nationalbank, raised con-cerns over the reliance on a single auction. “That moved quite a few bonds,” saidAne Arnth Jensen, managing director ofthe association, of the move away fromhaving only the December auction. “Thatwas a good first step.” However, the central bank is under-stood to be keen on spreading the auc-tions even further. “The Danish central bank has beenagainst these very large auctions,” saidGustav Smidth, senior analyst at Dan- Denmark’s Nationalbank “has beenske Bank. “It tends to put the country’s against these very large auctions”finances at risk if an auction happens tocome at a bad time for the market. So thisis all a result of the crisis. May 2011 The Covered Bond Report 9
MONITOR: LEGISLATION & REGULATIONCRD IVStick to LCR limits, says Basel memberA member of the Basel Committee on considered as liquid under the new regula-Banking Supervision has said that the tion more popular, and assets that are notEuropean Commission should stick to considered as liquid assets less so.the limits placed on covered bonds in the “This can shift demand to sovereignBasel III framework when implement- bonds, covered bonds and high qualitying it through CRD IV — although he corporate bonds and away from less liq-said that they could play a greater role in uid assets, such as other bank bonds, se-countries lacking Level 1 and 2 assets. curitised assets and lower quality corpo- Speaking at a European Covered Bond rate bonds. All this can have implicationsCouncil plenary meeting in Stockholm at for credit spreads and investors’ returnsthe end of March, Lars Frisell, chief econ- Frisell: Basel III “a global compromise” on particular market segments.”omist at the Swedish Financial Supervi- Wellink said that the prospects forsory Authority and member of the Basel shortage of Level 1 and 2 assets. He said that term funding could improve if the liquid-Committee, said that the Basel III frame- Denmark and Sweden were “pretty close” ity of long term paper improves relativework represented a “global compromise”, to qualifying for special treatment on this to short term paper.and that “it was an achievement to get an basis, adding that it would be “absurd” to “This could be stimulated by transpar-explicit role for covered bonds at all”. punish countries that had kept government ent, collateralised and straightforward Under the Basel Committee’s frame- debt low. asset structures,” he said. “For these rea-work, covered bonds can be included in sons covered bonds have become popularLiquidity Coverage Ratios as Level 2 as- “It’s hard for them to recently, although we are not sure on thesets, meaning that they can constituteup to 40% of LCRs and face haircuts of see differences precise impact on unsecured investors. In the first quarter Eu100bn of coveredat least 15%. The ECBC and others have between RMBS and bonds was issued in Europe and observ-been campaigning for improved treatmentof covered bonds in LCRs, with a Danish- covered bonds” ers expect this asset class to grow further. “The recognition as liquid assets inGerman initiative calling for certain cov- “My main advice is not to worry too the LCR supports the issuance of coveredered bonds to be treated as Level 1 assets, much,” was his advice to Danish con- bonds.”on a par with sovereign bonds, which do cerns about the impact of Basel III. He then raised the prospect of MBS innot face the same limits and haircuts. Frisell pointed to the way in which the future being included in the LCR. “It is important that the Commission Australia is planning to cope with such “As you probably know, MBS securi-stands by this agreement,” he said, add- a situation as a model. The Reserve Bank ties are not recognised in the LCR buff-ing of the 40% limit that the EU would of Australia will have a new committed er,” said Wellink. “Increased transpar-“have to live with that” and “same thing secured liquidity facility that banks can ency and market liquidity, for instancewith the haircut”. use to meet the LCR, and this could be through market quotation, would in- Frisell said that there had been “candid” secured on covered bonds. crease the likelihood that MBS securitiesdiscussions within the Basel Committee would be recognised as liquid assets.”about covered bonds, where it had been MBS in LCRs? The shortfalls in liquid assets thatnoted that covered bonds, too, had suffered Nout Wellink, chairman of the Basel some countries are facing were also ad-during the crisis, and that it was at times Committee, highlighted how Basel III dressed, with Wellink highlighting howdifficult for non-European members to see will boost demand for covered bonds in “tailor-made” solutions were allowed bywhy covered bonds might deserve special a speech in mid-April, and also discussed the new liquidity regulation.treatment given that “it’s hard for them to how the chances of mortgage backed se- “For instance, the Reserve Bank ofsee differences between RMBS and covered curities being recognised as liquid assets Australia has established a liquidity facil-bonds in their own country”. could be improved. ity to help local banks meet the LCR re- However, Frisell said that there remained “The LCR will change the relative prefer- quirement,” he said, “while Denmark in-plenty of time for carving out a role for cov- ences for banks to hold certain asset classes,” tends to give special treatment to coveredered bonds before the final implementa- said Wellink, who is president of De Neder- bonds; the possibilities to do so will be fle-tion of Basel III for those countries facing a landsche Bank. “It will make assets that are shed out over the observation period.”10 The Covered Bond Report May 2011
MONITOR: LEGISLATION & EGULATION “It’s easier for the big banks given that rating agencies have linked approaches” page 46SOUTH AFRICARBSA prohibits coveredThe Reserve Bank of South Africa has possible use in South Africa.prohibited the issuance of covered bonds However, the Reserve Bank said that:by banks in the country, saying that they “Since a covered bond structure in termsare potentially “materially inconsistent” of which covered bonds are issued by awith the mission of its bank supervision bank will in essence subordinate the in- Coovadia: “covered bonds provide adepartment (BSD). terests of depositors to the interests of the useful tool” The Banking Association South Africa covered bond holders, a covered bondhad been lobbying for covered bonds, but structure is regarded by the BSD as pos- engaging the banking regulator on thisthe RBSA revealed the decision in a guid- sibly being materially inconsistent with aspect,” Cas Coovadia, BASA managingance note in late May, informing banks the objectives, duties and responsibilities director, had told The Covered Bond Re-that it has a “policy not to allow the use imposed on the BSD in terms of the pro- port in early May.of covered bonds and similar structures visions of the Banks Act, 1990 (Act No. “Covered bonds provide a useful toolby banks in South Africa”. 94 of 1990 — the ‘Banks Act’).” to lengthen the term of bank funding The central bank said that the mission The central bank added that it would whilst at the same time add to the stockof the BSD is to “promote the soundness of “continue to monitor and appropriately of liquid assets in a country that has lim-the domestic banking system and to mini- consider all relevant international devel- ited options to meet the new internation-mise risk through the effective and efficient opments related to covered bonds”. al banking legislation.”application of international regulatory and The move comes in spite of lobbying Some market participants had, how-supervisory standards and best practice”. from The Banking Association South ever, already raised objections to the The guidance note acknowledges the Africa, which had been in talks with the push for covered bonds. Andrew Canter,position covered bonds are given under Reserve Bank. chief investment officer of FuturegrowthBasel III and their use in other jurisdic- “Covered bonds are not yet offered Asset Management, for example, had saidtions, suggesting that these prompted re- in South Africa and we, The Banking that covered bonds would prejudice ex-cent enquiries it has received about their Association South Africa, are currently isting creditors. MOODY’S Better LCR treatment credit positive Moody’s would view any inclusion of minimum 15% haircuts that Level 2 assets troubled issuer meaning that access to, covered bonds in Level 1 assets for li- – which covered bonds fall under accord- and costs of, reﬁnancing for existing pro- quidity coverage ratios as credit posi- ing to the Basel Committee on Banking Su- grammes is reduced. tive, the rating agency said after a Ger- pervision’s proposals – for covered bonds man ﬁnance ministry representative was meeting certain criteria. reported as saying that covered bonds Moody’s said that, if implemented, meeting certain criteria should be treat- the initiative would be credit positive as it ed as high quality liquid assets for the would reduce investor losses arising as a purposes of LCRs. result of reﬁnancing risks. The rating agency said that an article “If some covered bonds have the ben- in Recht der Finanzinstrumente in March eﬁt of an exemption from the 40% cap, this quoting state secretary Jörg Asmussen exemption will materially increase and sta- supports an initiative by the Association bilise the potential investor base for these of German Pfandbrief Banks (vdp) and covered bonds and reduce yields,” said Association of Danish Mortgage Banks the rating agency. “Prospective covered (Realkreditrådet) aimed at gaining better bond issuers with access to a strong inves- treatment of covered bonds under Basel tor base, able to fund at low yields, will be Asmussen: Supports Danish-German stance III. This would remove the 40% cap and more willing to reﬁnance the assets of a May 2011 The Covered Bond Report 11
MONITOR: LEGISLATION & REGULATIONREGULATED COVERED BONDSUK promises enhancements, clarityThe UK Financial Services Authority and creditor’s residual unsecured claims after re-HM Treasury launched a review of the alisation of collateral or recoveries under aUK covered bond framework in April, guarantee would be subject to bail-in. As in-which they said aims to make UK cov- ternational negotiations about bail-in pow-ered bonds more attractive to investors ers progress, the authorities should considerand to allow UK issuers to compete on a carefully the mechanisms by which creditorslevel playing field. could call upon any guarantee forming part The review had been flagged in the of a covered bond arrangement in respect ofUK budget in March. the original unsecured claims.” “Making sure banks and building so- The RCBC’s Fielding welcomed this.cieties lend to families and businesses “There has been a misplaced worryis vital for sustaining the recovery,” said Mark Hoban: “Review that in the case of a bail-in the assets inMark Hoban, Financial Secretary to the demonstrates the government’s the cover pool could in some way be re-Treasury, on announcing the review. “To- commitment” claimed,” he said, “but the consultationday’s review demonstrates the Govern- makes it crystal clear that the segregationment’s commitment to supporting the of assets in a bail-in, the secured creditor’sUK’s growing covered bond market. The as funding instrument for UK banks.” rights to collateral, is not in question.”review will bring out the strengths of the Claus Tofte Nielsen, chairman of the However, market participants saidUK’s covered bond regime and help lend- Covered Bond Investor Council and that it was unclear how the review mighters raise the funds they need to lend.” senior portfolio manager Norges Bank affect the levels at which UK covered Investors and issuers reacted posi- Investment Management, said that bonds trade.tively to the review, saying that it should the transparency improvements being “The rules are really positive, but thestrengthen the UK product. sought are aligned with the CBIC’s trans- spread impact is hard to quantify,” said “We welcome the recognition of the im- parency initiative (see separate article). Frank Will, senior analyst at RBS. “Theportance of covered bonds as a funding tool UK has already performed well, but there’sand the statement of intent to build upon Bail-in angle covered probably a little bit of room to perform bet-the strengths of the existing framework, as As well as the framework governing cov- ter and this is a step in the right direction.well as ensuring their attractiveness to in- ered bonds, the consultation document “However, I don’t think it’s a game-vestors.” Chris Fielding, Regulated Covered discusses how covered bonds should be changer. It will probably do more for wid-Bond Council executive director, told The treated in a bail-in scenario, with the au- ening the investor base and engenderingCovered Bond Report. “We appreciate eve- thorities noting that bail-in powers are more confidence in UK products.”rything said by the Financial Secretary with an important issue for many investors.regards to the flexibility covered bonds of-fer and how they can complement unse- “If a bail-in power were introduced into the UK’s Special Resolution Regime UK review proposals:cured funding and securitisation.” (SRR) for failing banks, the power would Buy-side market participants were also be subject to the same creditor safeguardsencouraged by the government’s move. that apply more generally within the SRR, “We welcome the joint initiative by including the safeguard that protects cov-the FSA and HMT to review the UK cov- ered bond holders,” says the consultation.ered bond regulation and are supporting “In addition, the UK believes that, in thethe authorities in their effort to make exercise of any bail-in powers, securedthe current framework even better,” said creditors’ rights to collateral should notGeorg Grodzki, head of credit research be over-ridden, and that the claims of cov-at Legal & General Investment Man- ered bond holders in relation to the assetagement. “LGIM believes that covered pool of a covered bond, including under abonds could become an important asset guarantee which forms part of the coveredclass for long term institutional investors bond arrangement, should not be affected.and play an increasingly significant role “This would mean that only a secured12 The Covered Bond Report May 2011
MONITOR: LEGISLATION & REGULATION “You have to decide between two objectives”page 37AUSTRALIAAussies press on despite limit let-downThe Australian Treasury has set an 8% Analysts noted that the draft legisla-limit on the amount of assets that can be Australia’s Treasury could hold tion did not deal with minimum liquid-encumbered by covered bond issuance in second consultation ity requirements or the maintenance ofdraft legislation, disappointing covered a minimum overcollateralisation level.bond proponents, who have blamed the Fitch said it believes that these issues willAustralian Prudential Regulation Au- be addressed through consecutive draftsthority for the restrictive stance. and result in a future rating of Australian Some market participants criticised covered bonds of up to triple-A.the limit, saying that the government S&P said that unlike under coveredhad been swayed by APRA, which had bond legislation in other jurisdictions,previously said that covered bond issu- eas such as asset quality (<80% LTV for special purpose vehicles (SPVs) envis-ance was prohibited as it was counter to residential loans), third party asset monitor aged in Australian structures do not pro-the Banking Act 1959 that is now being and maintenance of the cover pool are all vide a guarantee of the ADI’s obligationsamended by the government. welcome as a means to ensure the Austral- to covered bond holders. “An 8% limit will be inadequate for those ian covered bond is best of breed.” “The exposure draft refers to the ADI’sADIs that could and should be making use debt obligation as being ‘secured against’of covered bonds,” said one. “It’s a bit silly re- “APRA is clearly an the pool of assets and the explanatoryally, but it came at APRA’s insistence.” on-going opponent memorandum refers to the bondholders’ The restrictive proposals come af- right to enforce a charge,” said the ratingter APRA in February excluded covered of covered bonds” agency, “but neither document stipulatesbonds from its initial eligibility criteria for “There is flexibility through Regulation how any ‘security’ will work or be enforced.liquidity buffers under Basel III, when it to see how an 8% limit works in practice “If the intention is for the SPV tosaid that no asset classes met the required and then seek amendment if required,” he grant a third party security, the mecha-standards to qualify as Level 2 assets. added. “However, much of the detail has nisms for enforcing and applying pro- “APRA is clearly an ongoing opponent been left to APRA Prudential Standards ceeds from the security interest held onof covered bonds, despite having said that and we look forward to working construc- behalf of bondholders will need to beit was only the Banking Act that caused tively with APRA and the Government in explicitly dealt with, for example, in thetheir prior objections,” said a market par- the development of those standards.” programme-specific documentation.”ticipant. “This is just the latest manifesta- S&P also said that the exposure drafttion of their attitude to covered bonds.” A solid ﬁrst step, but no more does not appropriately tackle funding He was also disappointed by the discre- A consultation on the exposure draft fin- and refinancing alternatives followingtion afforded APRA in the exposure draft, ished on 22 April and although this was insolvency.which allows the regulator to impose ad- originally expected to result in a version “We believe that it does not explicitly pre-ditional requirements on ADIs. Critics that could be presented to parliament, the clude the SPV from addressing maturity mis-said that this could create uncertainty for launch of a second consultation round matches following an ADI’s insolvency – fornot only issuers but also investors regard- before that is understood to be possible. example, by incurring new debt or creatinging the levels of overcollateralisation that In the meantime observers said that security over the cover pool assets in favourmight be permitted, for example. while the country is progressing positive- of other lenders,” it said. “We anticipate that However, Commonwealth Bank of ly towards a viable covered bond frame- the relevant programme documentation andAustralia chief executive Ralph Norris work, it needs to address several issues structure of a covered bond issuance wouldwas reported to have described the 8% where uncertainties remain. specify any mechanisms or frameworks bylevel as “a good number”. Fitch considered the draft as being “a which the SPV may incur new debt or source Australian Securitisation Forum chair- solid first step”, adding that this was par- funding to meet any liquidity needs.man Stuart Fuller said: “The relatively light ticularly true with respect to segregation “In addition, the proposed frameworkhanded approach is to be welcomed as is of assets. However, a lack of clarity in does not discuss matters concerning thethe protection afforded to unsecured ADI several areas of the proposed framework eligibility of the cover pool for repurchasecreditors through an 8% cap. Provision to led UniCredit analysts to declare the arrangements with the Reserve Bank ofprotect covered bond investors in key ar- draft “no more than a first step”. Australia.” May 2011 The Covered Bond Report 13
MONITOR: MARKETMarketEUROSResurgence in prospect after supply ebbA record surge in covered bond issuance night, when only four benchmarks hadthat ran from January into March eased hit screens. As The Covered Bond Reportto a trickle throughout April and the first was going to press the European Centralhalf of May, with Eu96.3bn being issued Bank appeared to be at loggerheads within the first three months and only a fur- the European Commission and Ecofin,ther Eu18.4bn up to 19 May, according to apparently rejecting the latter bodies’figures from Crédit Agricole. suggestion of a “soft restructuring”. However, the primary market gained “Looks like people are having troublerenewed momentum in mid-May, with with the whole Greece story again andissues from CIF Euromortgage, Bayer- again and again,” said one banker.ische Landesbank and Eurohypo hitting Dhiren Shah on Credit Suisse’s cov-the market on the same day. Market par- ered bond and SSA syndicate said that theticipants suggested the trio’s deals could slowdown was attributable partially to a re-herald a second wave of supply. newed focus on senior unsecured issuance. “I would expect this could last until “There was so much covered bond is-the summer break now,” said a German suance at the beginning of the year” saysfund manager. “But I’d expect, after how Shah, “and hardly any senior. Now we’rewell the market held up at the beginning seeing more senior than at the beginningof the year in the face of heavy supply, of the year and fewer covered bonds.that things should go OK.” “Banks are diversifying their funding.” In spite of the market having been Stéphane Bataille, head of origina-quiet for some time, the few deals that tion and syndicate, DCM at Landesbankdid hit the market in the wake of two Baden-Württemberg, was positive aboutlong weekends in April showed it to be the covered bond market as a whole, inopen. BPCE SFH, for example, launched spite of the brief slowdown.the first deal after a two week hiatus and “Yes, April was subdued, but with allmet with a strong reception for what was the holidays it’s not surprising,” he said.the first obligations à l’habitat bench- “On the positive side, we’re seeing themark in euros, a Eu2bn issue. covered bond investor base expanding, Market participants cited several rea- with more and more senior investorssons for the quiet period alongside the switching to covered, and even clients Vincent Hoarau: “Everyone is prettyholidays. Vincent Hoarau, head of cov- who had been traditionally very active well advanced in their funding”ered bond syndicate at Crédit Agricole, prior to the crisis now returning.”said that most issuers were in a “wait-and-see mode”. iBoxx spreads against swaps “At the beginning of the year most of 350the European covered bond issuers front- Spain 300 UKloaded massively and logically the paceof the supply decelerated significantly 250 Italy Basis pointsover the months of March and April,” he 200 Netherlandssaid. “Everyone is pretty well advanced in 150 Canadatheir funding programmes — well above 100 France60% for most of the tier one European Scandinavia 50frequent borrowers.” Germany 0 Dexia analysts on 18 May pointed 0 10 0 0 1 10 0 1 1 -1 -1 -1 -1 -1 -1 -1to the latest concerns about the fate of n- p- ar ar ay ul an ov ay a e M -J -M -M -J -M -N -J -S 04 -Greek debt as a possible explanation for 04 04 04 04 04 04 04 04the lack of issuance in the preceding fort-14 The Covered Bond Report May 2011
MONITOR: MARKETDOLLARSSpareBank 1 last but tightest in Nordic quarterThe focus of dollar covered bond issu- Bank 1 Boligkreditt, told The Coveredance turned from Canada to Scandinavia Bond Report.as the first quarter turned into the sec- Thor Tellefsen, senior vice presidentond, with three Nordic issuer hitting the and head of long term funding at DnBmarket at the tail-end of March and Spare- Nor, said that the funding achieved on itsBank 1 Boligkreditt issuing in May. 144A deal was in line with that achievable As The Covered Bond Report was go- in euros.ing to press, the only other issuer with “We are the only Nordic issuer thatconcrete plans to tap the US market was has been able to twice issue $2bn five yearCredit Suisse, which had roadshowed deals, which is very good,” he said. “Andahead of a dollar debut. while there are some key investors in the Market participants suggested that any US that participated in both transac-lack of supply in the second quarter was tions, we saw a widening of the numberno reflection of any dissatisfaction with of smaller investors that were involved,the asset class among US investors. Indeed with some 55 to 60 accounts in the booka banker said that it could only serve to and more than 90% of the bonds sold inhelp any potential issuers, with secondary Arve Austestad: ”We had been looking the US.”paper tightening. at US for some time” The other Scandinavian to issue was A Swedbank Hypotek $1bn five year Nordea Eiendomskreditt, the Norwe-fixed rate benchmark launched in late gian issuer of the Nordea group. It soldMarch — alongside a $1bn three year SpareBank 1 Boligkreditt to price its a $2bn three year split into fixed andFRN — had tightened from 71bp over $1.25bn five year inside its peers, at 62bp floating rate tranches at 42bp over Li-Libor to the low 60s by mid-May, while over mid-swaps. bor. Crédit Agricole sold the only othera $2bn five year fixed rate deal came in “We had been looking at the US mar- dollar covered bond in the period tofrom 66bp over to the high 50s over the ket for some time, but we felt that the dif- mid-May (see obligations à l’habitat ar-same interval. ferential to Europe was too large,” Arve ticle for more), which was also a float- Indeed the tighter levels enabled Austestad, chief executive officer of Spare- ing rate note. KOREA KHFC eyes second pooling deal Korea Housing Finance Corporation Korea, and indeed Asia, after Kookmin rea’s Financial Supervisory Service to this could launch its second covered bond Bank sold a $1bn issue in 2009. KHFC, end. Korea has no covered bond law, but in June or July as the country’s banks a government institution, pools collateral KHFC issues under the law governing the are showing a renewed interest in taking from Korea’s banks in its issuance. Its ﬁrst institution. advantage of the funding instrument. issue was backed by mortgages originated “The KHFC Act authorises KHFC to KHFC launched its ﬁrst, $500m ﬁve by Standard Chartered First Korea Bank, issue mortgage backed bonds,” said year issue in July 2010. That was led by Shinhan Bank and Woori, although its Moody’s in a pre-sale report ahead of BNP Paribas and Standard Chartered, forthcoming issue is open to all its mem- KHFC’s debut. “These are dual recourse and the new issue is mandated to those bers, which also include Kookmin Bank, obligations that represent both (i) a claim two banks as well as Nomura. The issuer Korea Exchange Bank, Industrial Bank of on the general assets of KHFC and (ii) a is understood to be considering issuing in Korea and Hana Bank. priority claim on the residential mortgages dollars again or turning to the Japanese Korea’s banks nevertheless remain which are designated to secure payment yen market. keen to be able to issue on a standalone of the mortgage backed bonds, which are KHFC’s debut was only the second basis, according to market participants. segregated and managed separately from covered bond to have been issued out of They have been in discussions with Ko- the other assets of KHFC.” May 2011 The Covered Bond Report 15
MONITOR: MARKETFRANCEGrand Départ for obligations à l’habitatNew French covered bond legislation in- told The Covered Bond Report that thetroduced to bring its common law cov- issuer had been working on the US dollarered bonds under dedicated legislation project for a couple of months.was inaugurated shortly after the Au- “The dollar market opened up lasttorité de Contrôle Prudentiel (ACP) on year and there have been many issuers28 March gave the go-ahead for issuance that have chosen to go to the US dollarby granting authorisations to potential market as well as euros,” she said, “andissuers. we thought that, being the biggest home A stepping stone to the new instru- loan lender in France, it was a logicalment was put down on 30 March when next step to diversify our investor base byCrédit Mutuel Arkéa Covered Bonds going to the States.”sold a Eu1bn 10 year issue accompanied The issuer held a roadshow starting inby a letter to investors committing to the week of 21 March, just ahead of thetransforming the issue into obligations à expected approval from France’s Autoritél’habitat. de Contrôle Prudentiel (ACP) on 28 “This first step will be followed by the March for Crédit Agricole to issue obli-transformation of the company itself,” gations à l’habitat and convert Crédit Ag-said the issuer. “We undertake to seek all ricole Covered Bonds to Crédit Agricole HSBC, Natixis, Santander and UniCreditnecessary internal decisions to transform Home Loan SFH. priced the Eu2bn five year benchmark atCrédit Mutuel Arkéa Covered Bonds into “We didn’t want to launch the deal 63bp over mid-swaps.a SFH, which shall be renamed: Crédit before our bonds could be issued as obli- Rather than merge the two issuers ofMutuel Arkéa Home Loans SFH.” gations de financement de l’habitat,” said BPCE that had previously issued outside The deal was priced at 90bp over mid- Fedon. “It would have been more com- a dedicated legal framework — Banquesswaps by leads Crédit Agricole, DZ Bank, plicated to say that we are issuing a con- Populaires Covered Bonds and GCEJP Morgan and Crédit Mutuel Arkéa. tractual covered bond but will soon be Covered Bonds — the group created a “We are very pleased with the result operating under a legal framework. new issuer, BPCE SFH, to issue under theas the issuer only has one outstanding “We wanted to be able to go to inves- legislation.benchmark,” said a syndicate official at tors and provide them with clarity on “We priced very close to the two oldone of the leads. “More and more people what covered bonds they are buying.” curves,” said the syndicate official at onenow are getting comfortable with buying BPCE gave the new product a home of the leads. “For me, the success of thisthe name and are keen on this kind of launch on 3 May, issuing the first obliga- transaction is an indication that the newrare exposure (French residential home tions à l’habitat in euros. Danske Bank, law will make them trade better.”loans in Brittany). “This is a very positive signal looking BPCE SFH ﬁnds a home in French covered bond landscapeforward. The change into OH will obvi- Cover pool: pledge of Eligible Home Loansously speed up the process of penetrationof the name into the investor base.” Crédit Agricole Home Loan SFH Eligible Regional Home Bank #1launched the first obligations à l’habitat Loansproper on 13 April, debuting its new issu- Obligations deer in the dollar market with a $1.5bn three Eligible Regional Secured Financement de Home Loans l’Habitat Investors Bank #nyear 144A floating rate note. Lead manag- Loans (OFH)ers Barclays Capital, Citi, Crédit Agricoleand Merrill Lynch priced the FRN at 75bp Eligible Assets BPCE Replacementover three month dollar Libor. Securities Capital Nadine Fedon, chief executive officer, Guaranty and solidarity systemCrédit Agricole Home Loan SFH, and of Groupe BPCE Derivatives (swaps)global head of funding, Crédit Agricole, Source: BPCE SFH Investor Presentation – April 201116 The Covered Bond Report May 2011
MONITOR: RATINGSRatingsFITCHInvestors fear senior subordinationEuropean investors are concerned about It noted that planned resolution regimes How concerned are you that bankan increased use of covered bonds, ac- would make structural and legal subordi- senior unsecured creditors willcording to a survey conducted by Fitch, nation an even more important issue. become increasingly structurally subordinated as banks increasealthough the rating agency said that it “Holders of bank senior debt are un- the use of secured funding toolsbelieves that for the majority of “sound derstandably concerned about the growing such as covered bonds?banks” there should be no material threat use of covered bonds, given that these have Not at all concerned because the access toto unsecured creditors from the trend. a preferential claim over selected bank as- this additional funding source lowers the default risk of the bank:13% In its latest quarterly European senior sets,” said Bridget Gandy, co-head of Fitch’sfixed income investor survey, released in EMEA financial institutions group. Very concerned because higherearly May, Fitch found that 87% of respond- However, Fitch said that legal constraints asset encumbranceents were concerned about an increased use limit how high much issuance can rise, ref- increases the loss given default forof secured funding by banks, which could erencing “regulatory limits on banks’ use of unsecuredlead to structural subordination. secured funding and availability of qualify- creditors: 16% “Within this sample 16% described ing assets”. It also said that broad risk aver- Moderately concerned: 71%themselves as ‘very concerned’ as higher sion should fall as economies recover, which Source: Fitch Ratingsasset encumbrance increases the loss would make unsecured funding cheapergiven default for unsecured creditors,” relative to secured funding.said Monica Insoll, managing director in “Fitch would expect to see an equilibri- The rating agency said in a report inFitch’s credit market research group. um being reached, which, for the majority March that although in extreme cases Fitch said that it believes covered bond of sound banks, is unlikely to be a material covered bond issuance could be a “curse”,issuance will only continue to grow, citing threat to the status of unsecured creditors,” it was in general benign, and in most casesinvestor risk aversion and regulatory incen- said Gerry Rawcliffe, managing director in well below levels that might give cause fortives as the primary reasons for the trend. Fitch’s financial institutions group. concern. MOODY’S ‘Incomplete’ data stokes cédulas worries Some Spanish covered bond issuers are there continues to be discrepancies be- slowly but steadily we are running out of not complying with Bank of Spain dis- tween different issuers’ published data.” reasons to maintain our sympathy. closure requirements introduced in De- Moody’s said that inconsistencies in “Currently, we see a market with a cember 2010, resulting in discrepancies reporting made comparisons of pro- large share of troubled issuers, in combi- in data between different institutions, grammes a challenge. nation with a claim against a pool of as- according to Moody’s. “Some of the areas where data pres- sets, which – put nicely leaves some open The rating agency said that it had been entation is inconsistent include (i) the in- questions and a cover pool that turns out to hopeful that the law, Circular 7/2010, clusion of securitised loans in cover pools; have massive inconsistencies with regards would lead to greater disclosure through (ii) the amount of collateral relative to the to total size available as well as eligible el- its requirement for extra information in an- covered bonds issued; and (iii) the deﬁni- ements. Spain, please, please, please give nual reports on the assets backing cédu- tion of an ‘eligible’ asset,” said Moody’s. us a reason to regain trust in Cédulas!” las. However, the rating agency said that UniCredit analysts described the in- Moody’s nevertheless noted that it does important data continues to be obscured. accuracies as “shocking” and said that not expect the reporting inconsistencies to “Although the new law (effective De- they undermined a sector that is already affect ratings and said that it acknowledges cember 2010 signiﬁcantly improves facing several challenges. that making data consistent across a wide the disclosure requirements of Spanish “Regular readers of our research range of issuer is “an onerous challenge” covered bond issuers in their annual re- might know that we have a certain pen- and that Spain has set “an extremely high ports,” said Moody’s, “the fact that some chant for the Spanish market, despite the standard” in disclosure, which had im- issuers are not yet compliant means that points mentioned,” they said. “However, proved “markedly” in recent years. May 2011 The Covered Bond Report 17