GlobalCapital: What are the drivers for change on the funding mix between senior, covered and capital?
El Amir, UniCredit: Covered bonds are already a significant portion of our group wholesale funding plans. In Germany for example, in public benchmark format, the only issuance we have done in the last few years has been in covered format. In Austria we issue mortgage and public sector Pfandbriefe and in Italy we’ve issued close to €3bn of mortgage covereds — this outnumbers what we do in senior. In the senior space, as cited before, we issue no senior in Germany, we generally issue one senior deal from Austria and we will do two to three senior deals out of Italy.
Pimper, Commerbank: As long as senior unsecured spreads trade so close to covered bond spreads, as they are now, banks are going to favour senior over covered bonds. But one of the biggest drivers of change should be the bail-in regime. But that is already known today and still senior spreads trade very tightly to covered bonds — which shows that the hunt for yield is a stronger driver than bail-in regulation.
Burmeister, DeAWM: There is certainly a regulatory incentive to issue capital and have a certain degree of bail-in-able debt that includes senior unsecured. Then there’s the question of asset encumbrance. What we see is that each bank is trying to optimise funding based on its own loan book and by trying to reduce asset-liability mismatches. Senior unsecured should be more difficult to execute than covered bonds but it is getting cheaper and cheaper, so I think it is prudent to preserve good assets for covered bonds and increase OC while trying to fund as much as possible in the unsecured space while conditions remain strong.
Ségur, La Banque Postale AM: As long as spreads between senior secured and unsecured bonds are tight, issuers will continue to prioritise senior funding. In addition, some banks, in particular in peripheral countries, are not able to issue cover bonds, because of the minimum over-collateralisation defined by law.
Costa, CGD: Based on the assumption that core economies will recover more quickly than peripheral economies, issuance of covered bonds in core countries should also increase more and the imbalance between supply and demand should decrease faster than in peripheral countries over the next few years. Moreover, financial institutions in the periphery will probably take advantage of the TLTRO, so we should not expect a significant increase in covered bond issuance in these countries.
GlobalCapital: How will the implementation of BRRD impact senior issuance relative to covered bonds for different types of bank credits?
Pimper, Commerzbank: Some banks will probably have to increase their senior funding in order to have sufficient bail-in-able debt and this may heighten the need to issue senior unsecured instead of covered bonds. However, right now the market is quite in favour of such strategies as senior spreads trade very close to covered bond spreads.
GlobalCapital: What duration will issuers target for senior funding versus covered bonds?
Pimper, Commerbank: We target the three to five year bucket for senior and five to 15 year bucket for covered bonds.
Costa CGD: Depending on market conditions, most issuers use maturities up to five or seven years for senior debt and beyond that for covered bonds, given the long term nature of collateral normally comprising cover pools, such as mortgages, public sector or shipping loans. The use of other forms of collateral of shorter term nature, such as SME loans, may lead issuers in the future to use shorter maturities also for covered bonds.
Coyne, NAB: In terms of recent trends, we have seen an extension of investor appetite for floating rate [senior] product. In March we executed a successful senior €500m five year euro FRN. At the time we saw pricing for this transaction comparing well to alternative markets. This has not always been the case for euro denominated issuance, where the basis swap is a major determinant.
GlobalCapital: To what extent can unsecured funding provide access to competitive term funding?
Costa, CGD: At times when spread compression between senior and covered debt is stronger, banks can take advantage of it by issuing more senior debt at slightly higher funding costs but without having to encumber more assets in their balance sheets. This can be especially fruitful for shorter term maturities up to five years.
Boehm, Pimco: I was a bit surprised by the strong performance of senior, so presumably the low yield environment played a role here as well. I expect covered bonds to continue to outperform senior due to the banking resolution regime. When this development surfaced, the natural expectation was that all covereds, which are bail-in exempt under the new banking resolution regime, would perform and remaining assets underperform. What we saw was that all covered bonds including those not in the resolution regime, such as Swiss deals, have performed. The intuitive trade would have been to sell securities not protected — but we have yet to see this happening.