The delineation between covered bonds and residential mortgage-backed securities in Europe is becoming increasingly blurred, changing the way investors are viewing the securities. While there used to be a clear difference in the capital treatment of the two different types of bonds, the Basel II accords have resulted in a spectrum of highly liquid resi-backed securities with varying degrees of structuring, according to market participants at the European Securitisation Forum's second-annual conference last week in Nice.
Bob Liao, head of financial institutions securitization at Citigroup in London, noted the spreads on the two asset classes have converged to where there is now only about three or four basis points difference on a new RMBS versus covered bond issue from a bank such as HBOS. Thomas Herbert, European head of covered bonds at Calyon in Frankfurt, pointed out investors will put the bonds where it makes sense for them to do so in their portfolios, regardless of any attempts to create definitions of what is a covered bond and what RMBS.
It makes sense for investors to view the securities more like one another because rating agencies use the same tools in rating both types of bonds, noted Hélène Heberlein of Fitch Ratings in London. "Many of the same issues arise in assessing legal aspects such as the bankruptcy remoteness of the assets, as well as the default probabilities of the loans and the operational aspects of the transaction."
And from the issue side, large mortgage lenders increasingly use both RMBS and covered bonds as part of their funding program. U.K. lender Abbey, which was recently acquired by Spanish bank Banco Santander, already has an RMBS master trust in place and is preparing a structured covered bond program widely expected to launch this year. Rob Collins, manager in the securitization and treasury advisory group in London, said Santander wants Abbey to be flexible in terms of the sources and duration of funding.
David Balai, head of securitization atHBOS Treasury Services, the first issuer of a structured covered bond in the U.K., noted slightly different assets can be included in the two programs since there are fewer limitations on the loans that can be included in a covered bond, which means the bank can use much more of its balance sheet by issuing both.
