Covered Bonds

The Australian Prudential Regulation Authority on Friday confirmed its anti-covered bond stance when it released its suite of prudential standards that represent the implementation of Basel II in the country. However, the regulator is becoming increasingly isolated in its position, particularly in light of the dislocations in the residential mortgage backed securities market during this year’s turmoil.

Deutsche Postbank has announced the launch of its Pfandbrief debt issuance programme, arranged by Citi. The programme will include both mortgage Pfandbriefe and public sector Pfandbriefe.

The exaggeration of The Cover’s death has been greatly reported, partly because in the absence of (disastrous) new issues, there was little else to gossip about. Our contacts therefore returned to some of their favourite topics: Spain versus Germany, core versus non-core, and winners and losers.

Alliance & Leicester and Bradford & Bingley released trading updates today (Thursday) that showed they have both covered their funding needs well into next year, when they will be placing greater emphasis on winning retail deposits. Such statements, along with news that UK houses prices experienced their biggest monthly fall in 12 years and Bank of England data showing mortgage approvals down 31% on a year earlier, should further dampen forecasts for UK covered bond issuance in 2008.

The prospect of the Pfandbrief Act being amended to raise the limit on the loan-to-value ratios of German residential mortgage collateral from 60% to 80% looks set to go the same way as the proposal to allow RMBS to be included in cover pools. As one investor said: “This would be the stupidest time to do that.”

Dominion Bond Rating Service today released its methodology for rating covered bonds. DBRS, the fourth player in the covered bond rating market, has been keen to emphasise transparency and predictability of ratings movements as its distinctive features.

Investors could be forgiven for playing it safe with regard to UK covered bonds given the mixed signals coming out of the country. Gloomy news included a damning report on UK mortgage brokers from the Financial Services Authority and a change to negative outlook for Alliance & Leicester’s senior unsecured rating by Standard & Poor’s, but there were rays of hope more directly relevant to covered bond holders from S&P’s report on prime UK RMBS and on Fitch’s covered bond rating for Abbey.

As Eurohypo’s Henning Rasche reminded us at a conference in New York in May, the Wall Street Journal once asked “Will Pfandbriefs, whatever they are, play in Peoria?” i.e. will they be acceptable to people in the average US city? Not if the media coverage they and covered bonds in general have been receiving in the past week is anything to go by.

Bank of Montreal is confident that it can repeat the success Royal Bank of Canada enjoyed with its debut when it becomes the second issuer of Canadian covered bonds in the new year. The bank told The Cover that it was encouraged by the reception given to RBC’s inaugural issue.