Covered Bonds

Amid pressure to revive Europe’s economy by supplying credit to small and medium-sized enterprises, covered bond issuers are coming up with innovative ways to pool SME assets. In the hunt for better ratings, they are looking to pass-through structures but as the definition of covered bonds broadens, Will Caiger-Smith examines what dangers lie in wait for investors.

The European Commission outlined on Thursday its plan to meet the long-term financing needs of the European economy, and said it wishes to improve the environment for covered bonds. A separate draft document makes it clear that the viability of an integrated European covered bond market is under consideration.

Bank of Nova Scotia’s inaugural legislative covered bond, issued this week, is unlikely to offer much performance and is not eligible for bank liquidity buffers, but it offered genuine diversification to a hungry market. At 9bp the deal was priced on the tight side of expectations with little scope for performance.

The European Banking Authority’s effort to improve transparency on balance sheet encumbrance has come to nothing. The draft guideline, which will be finalised by June, is practically useless because it doesn’t include emergency central bank liquidity which is the largest and most important source of encumbrance. But that’s probably just as well, for if this disclosure became public knowledge, it would create just the sort of negative feedback loop that brought down the UK’s Northern Rock.

Commerzbank has decided not to pursue a second deal from its newly established SME covered bond programme. The issuer’s faster-than-expected pace of deleveraging has freed up more liquidity than it expected.

The Dutch covered bond market could be poised to expand, after the Finance Ministry published draft proposals that would allow lower rated borrowers to issue bonds and set up programmes backed by small- to medium-sized enterprises. The news comes as NIBC Bank prepares for the return of its conditional pass-through structure, and amid talk that other Dutch issuers are now considering setting up such programmes.

Banco Santander Totta this week returned to the covered bond market after a four year absence, choosing a three year maturity and a spread that ensured it was an easy choice for risk-averse and yield-hungry investors alike. The €1bn deal is likely to replace central bank funding.

The European Banking Authority’s effort to improve transparency on balance sheet encumbrance has come to nothing. The draft guideline, which will be finalised by June, is practically useless because it doesn’t include emergency central bank liquidity, which is the largest and most important source of encumbrance. But that’s probably just as well, for if this disclosure became public knowledge, it would create just the sort of negative feedback loop that brought down the UK’s Northern Rock.

The risk weights for securitization have been halved, again, in the latest version of Solvency II. Naturally the market is pleased to be further out of the regulatory dog house, but the way risk weights (and therefore careers, businesses and economies) can be slashed at the stroke of a pen ought to give pause for thought.

A revaluation of Spanish properties that serve as Cédulas collateral would boost transparency, said Fitch on Thursday. More transparency would improve investors’ ability to analyse cover pools and be positive for the market.

The Dutch covered bond market could be poised to expand, after the Finance Ministry published draft proposals that would allow lower-rated borrowers to issue bonds and set up programmes backed by small to medium sized enterprises. The news comes as NIBC prepares for the return of its conditional pass-through structure and amid talk that other Dutch RMBS issuers are now considering setting up such programmes.

The European Commission outlined its plan to meet the long-term financing needs of the European economy, in a press release on Thursday. The Commission says it wishes to improve the environment for covered bonds which, based a separate draft document, will mean it will consider whether an integrated European covered bond market is possible.