GlobalCapital: How rapidly do you think an administrator could sell the mortgage portfolio of an insolvent bank?
Coyne, NAB: Forced sale scenarios are the last resort and it would be hard to accurately model this and even harder when you think about the history of covered bonds where, even though you have had issuer events of default, we have never actually seen a programme event of a default. There are no practical reference points.
Ségur, La Banque Postale AM: It could be difficult to sell a mortgage portfolio in a stressed market, but will ultimately depend on the magnitude of the price drop and the expected recovery.
El Amir, UniCredit: I think what would probably happen is that the trustee will go back to investors and ask whether to liquidate and take a haircut, or allow the portfolio to amortise, so that it effectively becomes a pass-through. I believe the majority of investors will prefer to wait and get a good or full recovery rather than bearing a loss. If you’re going to have forced sale of mortgages the root of the problem is more likely to be systemic than idiosyncratic.
Costa CGD: If it is issuer specific it should be easier to sell the portfolio as opposed to a situation where all issuers of a given country/region are affected. It may also depend on how quickly the local authorities are able to act when facing this type of situation.
GlobalCapital: Do you think that recovery on a forced sale of mortgages can be accurately modelled?
Costa CGD: As we have never witnessed the default of a covered bond issuer it is difficult to predict how the process would go, which makes it harder to accurately model such a situation, especially as this would depend on the regulator and on the approach taken by the administrator. He would have to act in the best interest of covered bondholders, but there are no concrete rules to proceed with the sale of assets.
Being forced to sell the cover pool assets at the worst possible moment might mean that the recovery will be insufficient to compensate bondholders. The conditional pass through structures, such as the one used by NIBC, give more clarity about this process because it establishes a hard set of rules that the administrator must follow. In a situation where it is better to wait investors might be in a stronger position.
El Amir, UniCredit: To a certain extent you can model recovery on a forced sale. If you look at our covered bonds and take into account credit enhancement of 30% and LTVs of roughly 55%, you have got a massive cushion against losses. So in order to lose money you would need to see an absolutely enormous drop in prices.
And on the proviso you don’t have to sell your whole portfolio immediately and you can bide your time, a loss severity of, say, 70% is unheard of. So I think our covered bonds are modelled pretty conservatively. And in countries where you haven’t had huge asset bubbles, like Italy, I think you can be more confident over the accuracy of modelling recovery.
Burmeister, DeAWM: You can look at models like the agencies do and come up with a prudent approach but how in reality it actually turns out you will never know. I think it is fair to say you can model a forced sale but you need to ask whether a sale can effectively can take place in the first place, that’s the reality check.