Covered Bonds

Covered bond legislation proposed by the Australian government forms a solid basis for issuance, said Fitch, though it still lacks provisions for liquidity gaps, minimum overcollateralisation and transparency requirements.

Distressed Portuguese and Irish issuers could have the option to postpone the repayment of maturing covered bonds, according to UniCredit analysis, due to ambiguous wording about failure to pay the final redemption amount.

The US Covered Bond Bill 2011 will head to the Subcommittee on Capital Markets on May 3 for a mark-up, where the legislation will be subject to amendments by subcommittee members. European covered bond specialists expect the mark-up may contain changes to mitigate Federal Deposit Insurance Committee (FDIC) concerns but Republican congressman Scott Garrett’s office says it is not possible to predict those changes.

Despite heightened concerns around a possible Greek restructuring, sentiment in the covered bond market remains constructive as many investors are cash rich. The market is definitely open for issuance from core jurisdictions but there is also decent ongoing interest for higher yielding national champions. However, syndicate bankers are reluctant to take advantage of this bid and the lack of competing supply due to the short working week.

Moody’s fifth covered bond monitoring overview suggests that Norwegian covered bonds have the highest collateral quality, according to Bernd Volk, head of European agency and covered bond research at Deutsche Bank. The report also indicates the collateral risk of Portuguese and Irish bonds, has deteriorated, while the cover pools of Spanish and Greek issuers have the highest loss expectancy, said Volk.

Core European covered bonds remain highly sought after, with the long end of the French market in particular, seeing great interest. In contrast, the periphery remains untouched as Greek restructuring concerns linger on. In any case, investors are cash rich suggesting that primary activity will spring forward with leap in early May – marking a contrast with the late April torpor.

The South African Reserve Bank is re-examining whether it should enact covered bond legislation. This follows increasing pressure from domestic banks which face the prospect of failing to meet Basel III requirements thanks to a dangerous over-reliance on short term senior debt and a lack of high quality assets, such as sovereigns bonds, available to buy.

Recent amendments to Germany’s Pfandbrief Act have stirred the interest of covered bond market participants. Transparency requirements have been fine-tuned to enable like-for-like comparison between different cover pools. New powers have been granted to the cover pool administrator allowing it to issue Pfandbrief in its own right and access central bank funding in the event of an issuer’s insolvency. Onerous third party liquidity arrangements are avoided, ensuring full and timely payment. Jens Tolckmitt, chief executive of The Association of German Pfandbrief Banks (Verband deutscher Pfandbriefbanken — vdp) talked to EuroWeek’s Bill Thornhill about the amendments and how they tie in with the association’s own initiatives.

The South African Reserve Bank is re-examining whether it should enact covered bond legislation. Domestic banks have formed working groups and submitted comprehensive studies on the implications of covered bond issuance to the central bank and, given the overriding liquidity and net stable funding requirements of Basel III, it’s possible that a covered bond framework could be in place within 18 months.

After announcing plans to introduce a covered bond law last year, and then putting out a draft framework this year, the Australian government expects to receive all feedback by the end of this week (April 22). Depending on the amount of feedback, a second draft may follow. In any case, legislation is expected within a few months, and the first Australian covered bond should be launched in November.

Despite renewed peripheral widening, the covered bond market remains in good shape. With around Eu27bn of cash coming into the market in the next four weeks, spread tiering within jurisdictions and between jurisdictions is possible. Some players are betting that the UK could be a big beneficiary.