EUROWEEK: Senior unsecured spreads have tightened considerably versus covered bonds but is this sustainable?
Goldfischer, CA-CIB: If the environment continues to be favourable you will see more banks issuing unsecured than secured. And in present conditions there will always be a pricing issue between the secured and unsecured spread. One and a half years ago, there was no pricing issue as many banks were unable to access the market in unsecured format.
Lavastre, CDC: The bail-in perspective will change the view of investors in the near future. The last tests from the European Commission showed a significant expected loss for senior unsecured investors in the event of a bank’s default. This has huge consequences for the pricing of senior unsecured debt and hence unsecured spreads will have to widen.
Burmeister, DeAWM: The lower a bank is rated, the higher the spread should be between its covered bonds and its senior unsecured bonds. But this is a complex and heterogeneous topic that does not lend itself easily to generalisations.
Cortazar, BBVA AM: The senior unsecured to covered bond spread will depend on the liability structure of the bank concerned. If the bank has less than 8% of loss absorbing debt below senior unsecured then the risk of a senior bail-in becomes material and should be reflected by a wider spread.
Goldfischer, CA-CIB: Despite the recent risk of bail-in having decreased significantly from last year, the fact is that covered bonds are basically carved out of bank resolutions. This is very positive for the asset class and will exacerbate the gap versus unsecured in periods of turmoil, particularly for weaker banks.
Lavastre, CDC: Eurozone banks are vulnerable to fragile economic conditions and are still dealing with the recession. We think it’s more likely that covered bond spreads versus senior will widen. The stability of ratings on European banks and, consequently, on the covered bonds, is therefore likely to remain delicate.
Prokes, BlackRock: Much will depend on if the new bail-in rules are triggered and if they are, the senior market is potentially looking very expensive as an asset class, at which point borrowers could turn to covered bonds. But at current prices it makes perfect sense for banks to issue as much senior as possible. If I was a treasurer, that’s exactly what I would try to do.