GlobalCapital: What’s your view on SME covered bonds?
El Amir, UniCredit: No one is saying that the underlying collateral performance of SMEs is the same as first lien prime residential mortgages. So to an extent I struggle to see why there should be so much resistance. If regulators really want to restart the SME market, they should try to find as many ways as possible to make it easy for people to refinance or sell down SME risk.
GlobalCapital: How should regulators treat SME covered bonds?
El Amir, UniCredit: If SMEs are permitted on a statutory basis, they theoretically should get some regulatory benefit compared to a purely structured deal and that should result in better pricing. I’m very much for letting the market decide, but my sense is this debate is not moving in that direction.
Costa CGD: Assets used in cover pools, including ship and aircraft loans, are usually of a long term nature, which make them more suitable for the purpose of being used as collateral for covered bonds. SME loans are usually of a short term nature, and there is a broader diversity of credit instruments offered to corporates.
Depending on the country, the SME loans may or may not have other forms of security associated to them, such as a lien on a property owned by the borrower. These two aspects — shorter maturity and non-existence of collateral on the loan — may deem SME loans to be less appropriate for covered bond collateral in the eyes of regulators.
Mugat, AGI: Extending the scope of eligible covered bond assets to SMEs loans would not be wise because of the difficulties with their analysis in comparison to traditional covered bond assets. Even aircraft loans are not so easy to monitor given uncertainty over repossession of the assets under international law. Assets, such as SME loans, are better suited to being refinanced via the ABS market which the ECB is keen to promote.
Boehm, Pimco: Most investors consider these assets as structured covered bonds. The term ‘structured’ is important because it highlights it is something which has a cover pool but it is not comparable to a covered bond backed by law. That is first and foremost.
The second issue is that we now have four asset classes backed by a covered bond law including mortgages, public sector loans, ship loans and aircraft loans. These are in the public domain. But now we are seeing small to medium enterprise loans such as the upcoming Figsco deal from Goldman which allows practically the entire fixed income universe as an eligible covered asset. So if we think a bit further, what could be next?
Hoarau, Crédit Agricole: I agree with Timo. However, Figsco has never been marketed as a true covered bond, but as a secured and top notch rated product using some of the covered bond features and technology. Yes, it targets rates and classical covered bond investors, but simply because they are suffering from a structural under-supply and missing alternatives to invest in.
In the final analysis Figsco’s differences, in terms of its eligible covered assets, are supposed to be reflected in the price of the offering, and the nature of the spread pick-up versus true covered bonds. This is how the issuer intends to offer value to investors.
GlobalCapital: Auto loans and credit card debt?
Boehm, Pimco: Exactly. And one reason issuers have considered these options is that the ABS sector was not so much in favour with many investors. The trouble is the more assets we see issued as structured covered bonds, the more the issuer’s balance sheet is encumbered, which is not good for the senior investors as their claim is reduced. But another thing to ask is whether these deals would be exempt from bail-in?
Burmeister, DeAWM: We have this discussion in Italy around the new OBC legislation which is to fund SME loans and that is quite distinct from the established OBG framework. It is good to see Italy has made a clear distinction between the various asset classes, collateral and even legislations.
Coyne, NAB: From an Australian perspective, our covered bond programmes are very similar and only include Australian prime residential mortgages as eligible collateral. This is a positive differentiator for our product offering, and we believe investors value the transparency we provide.
GlobalCapital: Ship and aircraft loans are recognised under German law but SME loans are not. Is this consistent?
Pimper, Commerzbank: Yes it is. Mortgages, ships and aircraft loans are entered into special registries that give investors legal certainty to execute their rights in the case of a default. SME loans are not registered. However, the success and the safety of covered bonds during the crises fuelled the desire of some legislators to broaden the assets eligible for covered bonds and to include non-registered types such as SME or student loans. However, so far the regulatory treatment is only in favour of the established covered bond asset types.
Segur, La Banque Postale AM: It would be consistent to recognise issues backed by SME loans as covered bonds. Granularity, maturity and liquidity will be less significant for such covered bonds, but they would offer the possibility for banks to issue bonds at a better level and for investors to diversify into a covered bond with different collateral.
GlobalCapital: Ship Pfandbriefe are in the Capital Requirement Directive, aircraft loans are not. Both are bound by law so should be Ucits compliant. Ultimately you have to ask, are these products really tempting investors?
Burmeister, DeAWM: We have to develop expertise and credit analysis on the underlying collateral so for us it is a question of how big these markets are and whether their small size justifies the associated investment costs.