The CoveredBond Reportwww.coveredbondreport.com      September 2011                                                  Rater...
An equation that always works. Even in troubled times, thePfandbrief is an especially sound investment with a tried and te...
The CoveredBond Report                CONTENTS26                 Cover Story                 RATING AGENCIES              ...
The CoveredCONTENTS                                                     Bond Report32                                     ...
FROM THE EDITORThanks, but no thanks                                        G                                             ...
MONITOR: LEGISLATION & REGULATIONLegislation & RegulationICMAECB hails CBIC transparency pushDisclosure on an electronic p...
MONITOR: LEGISLATION & REGULATIONAUSTRALIAAussie law could be done by ChristmasAustralian covered bond legislationcould be...
28 – 29 November 2011, Sydney Harbour MarriottCovered Bonds World Australia 2011 is Australia’s leading eventfocused on fu...
MONITOR: LEGISLATION & REGULATIONFEBELFINBelgian pandbrieven come into view                                               ...
MONITOR: LEGISLATION & REGULATION                 “Changes have clarified a few issues that                 were not in the...
MONITOR: LEGISLATION & REGULATIONASIAJapanese law planned with a public faceA push for covered bond legislation in Ja-    ...
The CoveredBond ReportThe Covered Bond Report is not only a magazine, but also awebsite providing news, analysis and data ...
MONITOR: RATINGSRatingsSPAINSevere S&P multi-cédulas cuts criticisedStandard & Poor’s downgraded 46 multi-          world ...
MONITOR: RATINGS                                                   “Norway’s economy is more                              ...
MONITOR: RATINGSFITCHDowngrade rate doubles on sovereign woesFitch downgraded as many covered bondprogrammes in the first ...
MONITOR: RATINGS                                                “There is so much more rating                             ...
MONITOR: RATINGSTREUHÄNDER & COActive or passive? S&P examines trustees    Covered bond trustee roles vary wide-          ...
MONITOR: MARKETMarketEUROSING leads covered rush as senior swoonsEuropean banks raised close to Eu20bnof funding through b...
The CoveredBond ReportThe Covered Bond Report is not only a magazine, but also awebsite providing news, analysis and data ...
MONITOR: MARKETDOLLARSSwedbank a euro opt-out in USSwedbank Mortgage launched the first dol-        market, and also insid...
MONITOR: MARKETSECURITISATIONRMBS pick-up more molehill than mountainMarket participants have cautionedagainst reading too...
MONITOR: LEAGUE TABLESLeague TablesEURO BENCHMARK COVERED BOND RANKING                             MULTI-CURRENCY BENCHMAR...
Q&A: UNICREDIT          UniCredit:          More than covered22   The Covered Bond Report September 2011
Q&A: UNICREDIT  A successful OBG issue in late Au-    gust allowed UniCredit market   access in the wake of Italy being  d...
The Covered Bond Report 4
The Covered Bond Report 4
The Covered Bond Report 4
The Covered Bond Report 4
The Covered Bond Report 4
The Covered Bond Report 4
The Covered Bond Report 4
The Covered Bond Report 4
The Covered Bond Report 4
The Covered Bond Report 4
The Covered Bond Report 4
The Covered Bond Report 4
The Covered Bond Report 4
The Covered Bond Report 4
The Covered Bond Report 4
The Covered Bond Report 4
The Covered Bond Report 4
The Covered Bond Report 4
The Covered Bond Report 4
The Covered Bond Report 4
The Covered Bond Report 4
The Covered Bond Report 4
The Covered Bond Report 4
The Covered Bond Report 4
The Covered Bond Report 4
The Covered Bond Report 4
The Covered Bond Report 4
The Covered Bond Report 4
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The Covered Bond Report 4

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

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The Covered Bond Report 4

  1. 1. The CoveredBond Reportwww.coveredbondreport.com September 2011 Raters stand firm Agencies dismiss protests, but face the consequencesNorway UniCredit TurkeyNorthern light More than covered SMEs bridge gap
  2. 2. An equation that always works. Even in troubled times, thePfandbrief is an especially sound investment with a tried and tested market infrastructure.In Germany and abroad, investors appreciate its first-class quality and the yield pick-up.Attributes it owes to the stringent German Pfandbrief Act and a strong interest group thatensures the Pfandbrief stays the benchmark on the Covered Bond market.For more information, go to: www.pfandbrief.org simply pfandbrief simply goodAareal Bank + BayernLB + Berlin Hyp + Bremer Landesbank + Commer zbank + CORE ALCREDIT BANK + DekaBank + Deut sche Apotheker- und Är ztebank +Deut sche Hypo + Deut sche P fandbriefbank + Deut sche Schif fsbank + Dexia Kommunalbank + DG HYP + DKB + Düsseldor fer Hypothekenbank + DVB Bank +Eurohypo + Hamburger Sparkasse + Helaba Landesbank Hessen-Thüringen + HSH Nordbank + IKB Deutsche Industriebank + ING-DiBa + Kreissparkasse Köln +LBB Landesbank Berlin + LBBW + Münchener Hyp + NORD/LB + Postbank + SaarLB + Santander Consumer Bank + SEB + Sparkasse KölnBonn + UniCredit Bank +VALOVIS BANK + WarburgHyp + Westdeutsche ImmobilienBank + WestLB + WL BANK + Wüstenrot Bank = ASSOCIATION OF GERMAN PFANDBRIEF BANKS
  3. 3. The CoveredBond Report CONTENTS26 Cover Story RATING AGENCIES 26 Raters feel the heat Neil Day8 FROM THE EDITOR 3 Thanks, but no thanks MONITOR 4 Legislation & regulation 12 Ratings 17 Market20 21 League Tables September 2011 The Covered Bond Report 1
  4. 4. The CoveredCONTENTS Bond Report32 Q&A: PHILIPP WALDSTEIN 22 UniCredit: more than covered Neil Day NORWAY: SAFE HAVEN 32 Northern light44 Susanna Rust EMERGING MARKET: TURKEY 40 SMEs bridge Turkish gap Maiya Keidan ANALYSE THIS: 44 Has the market got Denmark wrong?402 The Covered Bond Report September 2011
  5. 5. FROM THE EDITORThanks, 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. 6. MONITOR: LEGISLATION & REGULATIONLegislation & RegulationICMAECB hails CBIC transparency pushDisclosure on an electronic platform as forward to working with the ECBC andenvisaged in a transparency initiative by national associations,” she said.the ICMA Covered Bond Investor Coun- The only buy-side feedback publishedcil is of “utmost importance”, according on the CBIC’s website was from Pioneerto the ECB, which said that the CBIC’s Investments, whose letter assessed thework 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 onsultation on the CBIC’s proposed trans- the CBIC’s website as “supporting en-parency standards and were just one of hanced transparency standards in theseveral 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 thatthat this was important to help foster the the CBIC’s transparency template shouldobjectives 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 Bondneed for a balance to be struck between Council (RCBC) set out a preference — inproviding “comparable, timely, frequent ECB calls for CBIC and ECBC to line with the CBIC’s — for aggregate coverand 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 beto all (investors, issuers, rating agencies, tion of a label for covered bonds as its improved, for example by better definingmarket 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, theutmost 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 asmarket’s Short Term Paper Market in Eu- launched in late 2009,” it said. issuers may report certain informationrope (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 attentionwould be pleased to share its experience “on to the existence of other covered bonda catalytic basis”. The Covered Bond Report should allow transparency initiatives put forward byunderstands 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, toand 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 appropriateof 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 rushedprospective 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
  7. 7. MONITOR: LEGISLATION & REGULATIONAUSTRALIAAussie law could be done by ChristmasAustralian covered bond legislationcould be in place by Christmas, accord-ing to a Treasury official, laying the foun- Parliament could seedations for the first issuance from the bill in spring sessioncountry in 2012. Speaking at a conference in mid-August,John Lonsdale, general manager, finan-cial system division, markets group, at theTreasury, said that the department is work-ing towards giving Treasurer (and deputyprime minister) Wayne Swan the option ofintroducing a bill into parliament early inthe Spring session, which started in August. That could allow passage of the billby the time the session ends in late No-vember, with Royal Assent being givenby Christmas. Lonsdale said that alterna-tively the legislation would probably bepassed 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 ofards to facilitate covered bond issuance Lonsdale said that the issue of asset en- the Banking Act 1959”. However, he notedand 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 bondsubsequent 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 isclosely 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 smallerof the bill that will be introduced to parlia- tion of a permanent financial claims ADIs to issue covered bonds into thement. 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 requestedto obtain international best practice, it covered bonds might breach the previous regulatory disclosure requirements fordoes not simply replicate the European “depositor preference” concept hitherto covered bonds, and that he expects theframework, which in general is highly pre- enshrined in the Banking Act. Australian Securitisation Forum to workscriptive, and is adapted for the Australian Lonsdale expanded upon APRA’s over- to develop such a framework, similar tocontext,” said Lonsdale. “One benefit of the sight of covered bonds under the proposed one developed for residential mortgagediversity in offshore jurisdictions is that we legislation, saying that it will have the power backed securities (RMBS).6 The Covered Bond Report September 2011
  8. 8. 28 – 29 November 2011, Sydney Harbour MarriottCovered Bonds World Australia 2011 is Australia’s leading eventfocused on funding and investment strategiesfor covered bond issuers and investors.Covered Bonds World Australia 2011 provides a platform where investors and issuerscan explore possible partnerships and can gain valuable insight into covered bondsand its future within the Australian debt market landscape.Issuers and investors attend this event to:Covered Bonds World Australia 2011 is a priority for all covered bond practitioners.So what are you waiting for? Register now to become a part of the discussion onthe latest industry trends and issues and expose yourself to this new and emerging market. Mark your calendar for the Researched and produced by: 28 – 29 November 2011, Sydney Harbour Marriott, and confirm your seat now. ww www.terrapinn.com/coveredbonds BOOK NOW! online www.terrapinn.com/coveredbonds | email cs.au@terrapinn.com | phone +61 2 9021 8808 | fax +61 2 9281 3950 Gi13714
  9. 9. MONITOR: LEGISLATION & REGULATIONFEBELFINBelgian 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 PfandbriefBelgian bankers are waiting for the coun- Belgian bank. “We hope that it will revert Act, the draft Belgian legislation acceptstry’s central bank to release a draft cov- by late August/early September.” securitisations as cover pool assets underered bond law that, according to Dexia The Covered Bond Report under- certain conditions, such as 90% of the poolanalysts, 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 originatedwork 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 andsince 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 forEuropean 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 legislationanalysts. “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 compliantinstitutions 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 athe 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, andto 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 thesociation (Febelfin) — comments on the have been set, with Dexia’s analysts only analysts. “These distinct types of covereddraft 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 thatthe central bank had indicated that it banks confirmed that the NBB would in practice the Belgian credit institutionswould probably not revert before the end have full discretion in this context. will only be able to issue CRD-compliantof the summer,” said an official at one The draft law also provides for the covered bonds.”8 The Covered Bond Report September 2011
  10. 10. MONITOR: LEGISLATION & REGULATION “Changes have clarified a few issues that were not in the original legislation” page 42LATIN AMERICABanks lobby for Brazilian LFIsThe 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 formata long term funding instrument that can calls for tax exemption on investmentssupport a fast growing real estate financ- in longer maturity papers, primary thoseing 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’swith the country’s banks mandated to in- banks have no incentive to securitisevest at least 65% of these into real estate their mortgage portfolios because theylending, 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: receivedof Brazilian covered bonds, to be called 2007 — in contrast to an 18% increase Abecip proposalLetras Financeira Imobiliarias (LFI), is in savings deposits, with Brazil’s largesta credit positive for the country’s banks banks standing to benefit the most from and Banco do Brasil. Caixa Economicabecause it provides for an alternative long the introduction of covered bonds, said Federal, with a 60% market share, isterm funding instrument that will allow Moody’s. These are: Banco Santander the largest player in this market, saidBrazilian 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
  11. 11. MONITOR: LEGISLATION & REGULATIONASIAJapanese law planned with a public faceA 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 theto keep up with developments elsewhere, proposed framework and how it can bebut its goal contrasts with that of many squared with concerns about structuralother 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 onlyered bond jurisdictions, with Shinsei to DBJ or to DBJ plus the three largestBank having in 2008 aborted a struc- private banks, then it may not be thattured, 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 thehaving 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 grouping 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 structuredon 7 July published a report setting out to avoid a conflict with Japan’s existinga range of considerations raised by its bankruptcy laws, under which depositmembers — representatives from major taking banks can be placed under legalbanks, 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 recenttold 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, whichefforts, 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, ofits 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 loansbond legal frameworks across the world, hind the initiative, DBJ, does not lend toincluding in Australia, Canada, Korea consumers; and financing of residential tend to have veryand 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 Financenot introduce our own framework then Agency, which purchases fixed rate mort- tion both private sector banks and DBJJapanese institutions will be at a disad- gages from originators and securitises have been able to raise funding of up tovantage from a competitive viewpoint them. 10 years at very tight credit spreads in thecompared 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 groupfinance, 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 manyprimarily 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
  12. 12. 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, atnday@coveredbondreport.com. And don’t forget: if you are an investor incovered bonds you can qualify for free access to the website.
  13. 13. MONITOR: RATINGSRatingsSPAINSevere S&P multi-cédulas cuts criticisedStandard & 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 strategist1 August, surprising market participants at UniCredit. “Going from as high as at Dexia Capital Markets, agreed that theby the severity of its actions, with ana- AAA to BBB- is tough, but rating agen- merger of the institutions was more likelylysts 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 morecédulas, totalling some Eu103bn, from sessments on Probability of Default rath- emphasis on the deterioration of theCreditWatch negative. They were put on er than on expected loss.” creditworthiness of the cajas, than on thereview 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, whichsee 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 todowngrades 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 notCédulas deal launched in March 2007, “They didn’t take into account the me- be sufficient to pay interest on all bondsfell 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’s12 The Covered Bond Report September 2011
  14. 14. MONITOR: RATINGS “Norway’s economy is more sheltered from abroad” page 34ECB REPOGreeks tweak to avoid Fitch junkingGreek banks have restructured their uncertainty surrounding recent develop-covered bond programmes in success- ments in Greece”, and the RWN status offul bids to stave off downgrades below the four banks’ issuer ratings.investment grade by Fitch, keen to keep Alpha Bank, Eurobank EFG, Nationalinvestment 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 releasetheir issuer ratings faced pressure in spite by Fitch on 14 July, which had said that Greeks under pressureof the second rescue package for their the changes were expected by 29 July andsovereign, and particularly with Moody’s that the ratings would be cut were the grammes so that the maximum Assethaving already stripped their covered restructurings not implemented by then. Percentage commitment is contractuallybonds 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 thebanks 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 byNegative. 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
  15. 15. MONITOR: RATINGSFITCHDowngrade rate doubles on sovereign woesFitch downgraded as many covered bondprogrammes 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 inasset class. allocation of France in March. The 33 downgrades made by Fitch overcollateralisation” The rating agency noted that Canadawere 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 regardingagency in an EMEA structured finance than those witnessed in the senior unse- introducing legislative frameworks — butsnapshot 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 moreereign rating downgrades and/or down- tite is fuelled by risk aversion and regu- closely at the wider impact of coveredgrades of the relevant issuer default rat- latory incentives. Historically, legislative bond issuance. Fitch pointed out that theings,” said Hélène Heberlein, managing covered bonds have attracted a low capi- Reserve Bank of New Zealand has set adirector of covered bonds at Fitch. “In tal charge at EU investing banks. Also 10% limit on the amount of assets thatfewer 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 ofquidity 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, shethose 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 stakeholdersdowngrades 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 tofor issuers and investors that have been Regulation de rigueur an initiative to introduce covered bondsdriving 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 Unitedcertainly be the first argument cited by tive frameworks rather than contractual States Covered Bond Act of 2011 passedbank 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, Dealogic14 The Covered Bond Report September 2011
  16. 16. MONITOR: RATINGS “There is so much more rating shopping going on” page 31USWaMu covered fall on collateral deteriorationFitch cut the rating of mortgage covered Chase, the rating of the covered bonds suer default cannot be bridged. This isbonds issued off a former Washington is based on a Discontinuity Factor (D- because as an institution insured by theMutual programme to one notch above Factor) of 100%, which captures Fitch’s Federal Deposit Insurance (FDIC) Act, JPthe 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, whilerioration 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 programmecovered bonds at the beginning of Au- 67% is commensurate with a AA stress only provide for an extension period of 60gust from AA+ to AA, one notch above a scenario on a recovery basis. days. This does not give the mortgage bondAA- long term issuer default rating of the The rating agency has assigned the indenture trustee sufficient time to enforcesponsor 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 bondincreased loss expectations assessed on asset and liability mismatches after an is- redemption, said Fitch.the cover pool assets on account of thedeterioration in observed performanceof US payment-option and interest-onlyhybrid adjustable rate mortgages,” saidFitch. “As a result, the level of overcollat-eralisation in the programme is no longersufficient to provide expected recoveriesabove 91% on defaulted covered bonds inan 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
  17. 17. MONITOR: RATINGSTREUHÄNDER & COActive or passive? S&P examines trustees Covered bond trustee roles vary wide- there,” added Daehn, “as long as the bankly 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 bondreleased in late August, reaffirming the programmes in Spain use different ap-rating agency’s view that not all covered proaches but cédulas hipotecarias andbonds are created equal. cédulas terrioriales, for example, do not While all covered bond programmes employ trustees when solvent, but ratherbenefit 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 foraccompanied 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 supervisoryissuance — in Germany’s case it is the In the UK, the bond trustee and se- authority, appoints a trustee to managecover 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 mortgagetrustee 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 theoff on new issues the Treuhänder super- and servicers. cover pool and has the same rights overvises the portfolio to ensure that it com- “When we, however, look at a country the mortgage loans as the insolvent bankplies 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
  18. 18. MONITOR: MARKETMarketEUROSING leads covered rush as senior swoonsEuropean banks raised close to Eu20bnof funding through benchmark coveredbonds in seven business days at the endof August as the asset class left the seniorunsecured market trailing. Ballooning spreads on senior unse-cured debt meant that market was yetto 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 themarket on 24 August with the first bench-mark since 5 July, issuing a Eu1.25bn 10year 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 wideningbank 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 thetransaction 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 exactlythe 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 orthe market had opened,” said John Paul was a reflection of market conditions – a in senior unsecured,” he said, “these bizarreColeman, head of capital raising and combination of heavy supply and a shakier discussions around new issue premiumsterm funding at RBS, which tapped the credit market overall,” said Arve Austestad, seem to be very misguided. The questionsmarket a week later. “It was an excellent chief executive at SpareBank 1 Boligkreditt. are not relevant, especially when seeing suchdeal 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 upmark since Italy was drawn towards manager said the new issue premium on with many different types of investors, sothe centre of the euro-zone sovereign ING’s reopener — put at 15bp by several what this really shows is that it is a reallydebt 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 350ed deal from a German or Scandi issuer Banks SEN A iBoxx € Covered 300 Banks SEN AA iBoxx € France Coveredto reopen the market,” said a syndicate iBoxx € Banks iBoxx € Germany Coveredofficial, “but it was a 10 year, and then 250you’ve got all these other things coming 200 bpout like a 10 year OBG. It does show quite 150a strong reopening for the market.” 100 Deals for Eurohypo, UBS and Nordea 50Bank Finland also came that week, but 0with Abbey National Treasury Services, Dec-09 Mar-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Source: UniCreditBarclays Bank, BPCE SFH, Caisse de Re- September 2011 The Covered Bond Report 17
  19. 19. The CoveredBond ReportThe Covered Bond Report is not only a magazine, but also awebsite providing news, analysis and data on the market.Are you a covered bond investor?Then you could be receiving free daily news bulletins fromThe Covered Bond Report and access to its coverage of the market as wellas its proprietary database of new issues and cover pool data links.If you would like to gain complementary access toThe Covered Bond Report’s website and to receive freecopies of The Covered Bond Report’s magazine, contact Neil Day,Managing Editor, at nday@coveredbondreport.com or visitnews.coveredbondreport.com to register*.*Investors directly linked to covered bond issuers may not qualify for this offer.
  20. 20. MONITOR: MARKETDOLLARSSwedbank a euro opt-out in USSwedbank 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 theavailable in Swedish kronor or euros. most cost efficient,” he said. Leads Bank of America Merrill Lynch, As well as the dollar market beingBarclays Capital, Credit Suisse and JP cheaper, Rydin said the issuer expectedMorgan 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 toand 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 werein 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 movethree year FRN was priced at 45bp over was that we thought we’d be the one onlythree month Libor and the five year fixed ones looking at the dollar market, while therate 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 soundbank, told The Covered Bond Report that finances, which means that there is a safethis was to be expected given the challeng- haven bid regarding Sweden,” he said, “anding 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 oftained funding that was around 10bp Nova Scotia at 42bp over mid-swaps oncheaper 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
  21. 21. MONITOR: MARKETSECURITISATIONRMBS pick-up more molehill than mountainMarket participants have cautionedagainst reading too much into a pick-up inEuropean RMBS issuance in the first halfof the year, suggesting that tough condi-tions, regulatory disincentives and the at-tractions of covered bonds could stymieany continued recovery. Standard & Poor’s in mid-August notedthat European issuance of residential mortgagebacked 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 currentagency said improving collateral performance conditions issuance will improve”and recovering investor sentiment could bepartly responsible for the moderate revival. “As RMBS issuance has slowly returned,there has been some shift in post-crisistransaction structures,” said S&P, using theexample 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, atDierick, 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 bonds2010 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 actuallyhuge 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 thatonly 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 31limited 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 inclinedRMBS issuance in H1 of 2011. S&P expects RMBS markets” to considering any favourable coveredthis 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 veryUK and the Netherlands with Italy and try a non-public way of issuing — probably difficult to get investors to acknowledgeSpain — the two other European markets through finding funding with the ECB.” RMBS because of the regulatory treatmentthat 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 pensionwe have seen one or two Italian deals but cess the market more swiftly, thus enabling funds,” he said, “but for bank investors, inthat’s it,” he said, “while pre-crisis Italy was them to act during a brief market upturn, all their investments they take into accountquite 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 Forumwe haven’t seen those either, although Market participants have complained (ESF) and lobbyists have approached thethat’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
  22. 22. MONITOR: LEAGUE TABLESLeague TablesEURO BENCHMARK COVERED BOND RANKING MULTI-CURRENCY BENCHMARK COVERED BOND RANKING1 January 2011 to 31 August 2011 1 January 2011 to 31 August 2011Rank 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 7.812 Natixis 55 12,343.33 7.65 2 Barclays 53 13,660.90 7.383 Crédit Agricole 41 10,550.00 6.54 3 Natixis 56 12,524.17 6.774 UniCredit 48 10,517.86 6.52 4 HSBC 55 12,339.64 6.675 HSBC 46 10,152.02 6.29 5 Crédit Agricole 41 10,550.00 5.706 Barclays 39 10,096.67 6.26 6 UniCredit 48 10,517.86 5.687 Deutsche 36 9,724.52 6.03 7 Deutsche 39 10,220.34 5.528 UBS 36 8,492.08 5.26 8 UBS 41 10,194.51 5.519 Société Générale 30 7,412.50 4.60 9 RBS 30 7,892.82 4.2710 RBS 23 5,902.50 3.66 10 Société Générale 31 7,631.63 4.1211 Commerzbank 28 5,454.58 3.38 11 Commerzbank 29 5,635.42 3.0512 DZ 24 5,390.36 3.34 12 DZ 24 5,390.36 2.9113 Danske 14 4,166.67 2.58 13 Citi 17 4,298.36 2.3214 ING 16 4,087.50 2.53 14 Danske 14 4,166.67 2.2515 LBBW 22 4,047.50 2.51 15 ING 16 4,087.50 2.2116 Citi 14 3,710.42 2.30 16 LBBW 22 4,047.50 2.1917 BayernLB 14 2,876.19 1.78 17 JP Morgan 17 3,685.22 1.9918 Nomura 14 2,791.67 1.73 18 Santander 12 3,179.35 1.7219 Goldman Sachs 10 2,566.67 1.59 19 Nomura 15 2,910.33 1.5720 BBVA 9 2,550.00 1.58 20 BayernLB 14 2,876.19 1.5521 Santander 10 2,525.83 1.57 21 BAML 12 2,794.12 1.5122 NordLB 11 2,216.67 1.37 22 Goldman Sachs 10 2,566.67 1.3923 JP Morgan 11 2,150.00 1.33 23 BBVA 9 2,550.00 1.3824 Credit Suisse 9 1,904.17 1.18 24 Credit Suisse 11 2,219.34 1.2025 Banca IMI 6 1,683.33 1.04 25 NordLB 11 2,216.67 1.20Criteria: Euro denominated fixed rate syndicated covered bonds Criteria: Fixed rate syndicated covered bonds of 500m orof Eu500m or greater, including taps greater, including taps, in euros, dollars and sterlingThese league tables are based on The Covered Bond Report’s database of benchmark covered bonds. For further details visit ourwebsite at news.coveredbondreport.com. Please contact Neil Day on +44 20 7415 7185 or nday@coveredbondreport.com ifyou have any queries. Don’t forget to visit our website at: www.coveredbondreport.com September 2011 The Covered Bond Report 21
  23. 23. Q&A: UNICREDIT UniCredit: More than covered22 The Covered Bond Report September 2011
  24. 24. 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 theasset 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

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