With the covered bonds becoming increasingly heterogeneous, investors and other key market players met in August to discuss the market’s evolution.
Once the domain of triple-A rated deals with bullet maturities backed exclusively by public sector or mortgage loans, covered bonds have morphed into a multi-faceted asset-class in which migration is now visible on many different planes.
Ratings have moved down the entire credit spectrum from triple-A to sub-investment grade. Collateral now includes small and medium sized enterprise loans, aircraft loans and even green assets are being considered. The structure has also shifted as hard bullet maturities have evolved to extendible soft bullets, and conditional pass-through maturities will soon be on the menu.
Change is inevitable but the preferential regulatory treatment must be nurtured and protected and the safety of assets must therefore be beyond reproach. This gives weight to the industry’s efforts to delineate the meaning of covered bonds with a labelled definition.
Though mortgage and public sector assets will always be at the core, this does not necessarily mean investors will be excluded from buying SME backed deals that are issued by strong banks with a sustainable business model.
Nor does it mean investors will necessarily be obliged to buy labelled covered bonds from lower rated banks that depend heavily on central bank funding. Investors, who are presently starved of supply, will ultimately always call the shots.
The global covered bond market shrank by €55bn this year, and with deposit growth and bank balance sheet deleverage exerting negative influences, the market could shrink again in 2014. So unless there’s an unexpected breakthrough and US legislators enact a law that catalyses local supply, which seems unlikely, issuers will probably continue to test appetite for variations – but still with a covered bond theme.
The migratory nature of the asset class, therefore, seems set to continue.
Participants in this roundtable were:
Andreas Denger, senior portfolio manager at Munich Ergo Asset Management (MEAG)
Attila Juhasz, principal portfolio manager at The World Bank
Florian Eichert, head of covered bond research, Crédit Agricole CIB
Hélène Heberlein, managing director and head of European covered bonds, Fitch Ratings
Joaquin Cortazar, portfolio manager, Banco Bilbao Vizcaya Argentaria Asset Management
Jozef Prokes, portfolio manager, BlackRock
Mariano Goldfischer, head of global debt markets, Crédit Agricole CIB
Ralf Burmeister, portfolio manager, Deutsche Asset & Wealth Management
Vincent Hoarau, head of FIG and covered bond syndicate, Crédit Agricole CIB
Yvan Lavastre, ABS and covered bonds portfolio manager, Caisse des Dépôts et Consignations