Representatives from the issuer, investor and rating agency communities are confident the European covered bond market will diversify geographically, undermining Germany's dominance of the industry. Germany is the market leader by issuance and investor base, but panelists at The 10th Euromoney Bond Congress in London last week said other European countries are catching up. Specifically, supply will pick up in Spain, France and the U.K., they say.
Claus Nielsen, a senior portfolio manager at Norges Bank in Oslo, and a veteran of the industry, expects supply in Germany will start to decline at the middle of next year due to legislative changes that remove federal guarantees from the landesbanks. On the demand front, he points out the loose global monetary environment is positive for this kind of paper.
Jean-Claude Synave, director general of Dexia Municipal Agency in Paris, says supply will grow in France, driven by the need for access to cheaper sources of borrowing in national mortgage markets. He sees demand coming from investors looking for lower risks than corporates offer and higher returns available in government bonds.
In the U.K., covered bonds are seen as a complement to securitization and other forms of financing. They offer issuers a way to diversify their funding programs and access a larger investor base, as well as extend by two years the duration of traditional funding options (which typically run at three and a half years). Chris Fielding, head of securitization at Abbey, questions whether the HBOS offering's 60% loan-to-value ratio can be replicated by other issuers. He worries that LTVs closer to 75% would undermine a deal's triple-A rating and lead to weaker execution.
Torbjorn Mortinsen, director of analysis at SpareBank 1 in Oslo, expects proposed legislation in Norway will increase investor confidence in covered bonds. The legislation limits the assets which can be financed with covered bonds, determines a maximum level of interest rate risk and rules out currency risk altogether; it enters its final hearing at the end of next month. Mortinsen predicts that covered bonds could come to represent 30% of the residential loan market in Norway, or E40 billion.
