Commerzbank last week managed to sell €500m of five year bonds backed by a pool of loans to German SMEs — assets not normally eligible for covered bonds. The deal was structured outside the German Pfandbriefe framework, making the bonds non-compliant for Ucits, ineligible for Basel III liquidity buffers and more expensive to repo with the ECB than normal covered bonds due to a higher haircut.
But despite all these apparent disadvantages, the deal attracted a €1bn order book through more than 60 different investors. Interest came from Germany, France, the UK, Benelux and other European countries. Commerzbank was able to price the bond at 47bp over mid-swaps, midway between its senior unsecured and covered bond levels.
The European securitisation market simply cannot compete with this pricing or breadth of distribution. Already, some observers reckon that banks in other European countries — including Italy and Spain — are looking at covered bonds as an SME funding option. Those assets would previously have been automatically earmarked for securitisation.
The securitisation market has spent the past year or so convincing regulators that it is not only economically useful, but economically vital. Without it, credit to corporations, small businesses and consumers would dry up, weighing down on European growth, the argument goes.
Tough competition
The message has started to get through to those in the European Commission tasked with devising policies for growth. A forthcoming green paper, seen by EuroWeek, specifically lists securitisation as an important tool for growth, and even says there is a direct correlation between the level of securitisation and the level of lending to the real economy.
But the paper also cites covered bonds as important. And successful execution of an SME-deal in the capital markets will only engender more confidence among policymakers in the potential versatility of covered bonds. Since the 2008 crisis only Lloyds has publicly sold a European SME-backed ABS.
That means the momentum remains firmly behind covered bonds, even if the ABS market has clawed back some respectability.
The latter must now pin its hopes of not being completely usurped by covered bonds on three factors.
First, Europe’s funding gap is enormous. The IMF said last October that the eurozone crisis would force banks to sell off €4.5tr of assets by the end of 2013, making prospects for lending very dim. With so much credit needed to compensate for the bank retreat, covered bonds and securitisation will both have to play a role to get European lending moving.
Second, covered bond practitioners are innately conservative. The covered bond market has historically resisted any changes to the definition of a covered bond, including broadening eligible asset classes beyond mortgages and public sector loans. Fear of muddying the covered bond label might keep the door open for securitisation.
Finally, European regulators are increasingly anxious about encumbrance of bank balance sheets.
It could be in everybody’s interest, including bank depositors, to ensure securitisation in Europe is not driven to extinction.