There was a startling contrast in the market last week between two European issuers, 3CIF and Allied Irish Banks. At the very point that 3CIF was falling from grace, AIB glided, phoenix-like, back into the capital markets.
AIB issued the first unguaranteed bank bond for an Irish institution since 2009 through its Tenterden RMBS. Meanwhile, 3CIF’s covered bonds, which are collateralised by RMBS, were de-listed.
The French issuer boasts a robust core tier one capital, but the prospect of a multi-notch rating downgrade from Moody’s suggests its overall cost of funding will become uneconomic.
With Moody’s taking negative actions on 114 banks across 16 European countries, the burden of linking what is generally high quality collateral with an issuer is, only now, starting to dawn on the market.
The disastrous outcome for 3CIF — and who knows who else — illustrates just how reliant covered bonds are on the credit perception of the issuer. Compare that to securitisation, where de-linkage from the issuer is what it is all about.
The ability to create a bankruptcy remote vehicle was supposed to be a strength of covered bonds too. But with the assets remaining on balance sheet, the link could never really be broken.
It is worth noting that AIB's deal involved all-UK collateral. A truer test of securitisation might have been if the pool of mortgages had been Irish. But there were still other crucial aspects to the structure that drew on the strengths of securitisation and helped distance the link from collateral to issuer.
The use of a live back-up servicer that can be in place within a fraction of the time it usually takes, and the outsourcing of critical roles like cash manager and account provider, gave enhanced de-linkage.
Many factors were at work in the two very separate cases of 3CIF and AIB, but there can be little doubt that their respective choice of funding vehicle played a crucial role in determining the two very different outcomes.
Thankfully, it seems that some regulators, like the European Banking Authority, are starting to shift their stance. The EBA’s latest comments on the viability of securitisation funding (describing it as an important component of reducing the reliance on central banks) give reason to hope that it will only be a matter of time before the technique receives preferential treatment.
And not before time. After all, European prime RMBS has proved more rating-resilient than covered bonds. In the wake of the US subprime crisis, regulators in Europe were quick to tar the entire securitisation market with the same brush — and have been slow to recognise that the world has moved on. For the sake of the European banking sector, a change of heart is long overdue.