The case for structured covered bonds

First Sakrileg, now Sacrilegio. Covered bond purists have had an unsettling few weeks. The cry for structured covered bonds is not only getting louder but has moved across the covered bond bastion of Germany into Italy.

  • 18 Oct 2011
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Italian banks have bemoaned their treatment at the hands of rating agencies and lobbied for an end to the regulatory bias against the securitisation and senior unsecured markets. Indignation and consternation abound. But this will not remedy their funding woes, which grow more acute with every week they are locked out of the wholesale markets.

While the idea may rile purists, a form of funding that allows issuers to use a wider range of assets, and fund themselves at cheaper levels than both the senior unsecured and securitisation markets makes sense.

Crucially, structured covered bonds would be exempt from bail-in regimes, giving them an important advantage over senior unsecured bonds. And, with recourse to both the issuer and the collateral pool, they would provide greater protection for investors compared to the securitisation market.

The structured covered bond idea has been seized on in Italy partly because both the securitisation and the senior unsecured markets have failed to attract much funding. There have only been two Italian securitisation deals this year and, though the senior unsecured market has fared marginally better, there have been no new deals since June.

As with Germany, where banks like Eurohypo, Deustche Pfandbriefbank and HypoRe are looking at a similar initiative, a big factor driving the debate is the vast availability of assets.

Though Italian banks have eligible covered bond assets left on their balance sheets, these represent just one fifth of their total balance sheet on average. The remainder is split equally between non-residential assets such as SME loans, consumer loans and lease receivables as well as residential assets that are not eligible for inclusion in the legally enshrined obbligazioni bancarie garantite covered bond framework.

Just because these assets do not qualify as eligible collateral under the existing law does not mean that they should sit idly on the balance sheet. If the best SME and consumer loans can be collateralised for a new form of secured funding, such as structured covered bonds, then banks must consider the option.

And, this could all be done without amending the OBG law that has earned investors’ confidence and served Italian banks admirably.

But ultimately, for both Germany and Italy, it will be the buyers who dictate whether a new type of structured covered bond has traction in the market.

Traditional covered bond investors are less likely to participate because of the riskier collateral on offer. But if ratings for structured covered bonds are high and pool data is transparent, the hop from covered bonds to structured covered bonds should be smaller compared with the leap some investors have already made from senior unsecured into covered bonds.

Though it’s likely some traditional investors will not want to get involved, this loss could be more compensated by incremental demand from disaffected senior unsecured investors, who are looking to avoid bail-ins and may be interested in something which offers a pick up over normal OBG covered bonds.

And securitisation investors, who have been starved of supply and are probably best equipped to value the collateral, might also be interested.

  • 18 Oct 2011

Bookrunners of Global Covered Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Natixis 2,220.67 8 6.41%
2 UniCredit 2,187.22 10 6.31%
3 UBS 2,159.55 11 6.23%
4 Credit Suisse 1,824.93 10 5.26%
5 Barclays 1,806.80 7 5.21%

Bookrunners of Global FIG

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Goldman Sachs 12,745.74 25 9.57%
2 Morgan Stanley 11,952.09 26 8.97%
3 Bank of America Merrill Lynch 9,510.22 21 7.14%
4 Barclays 9,168.66 18 6.88%
5 JPMorgan 8,863.17 26 6.65%

Bookrunners of Dollar Denominated FIG

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Goldman Sachs 12,192.75 22 13.89%
2 Morgan Stanley 10,975.91 20 12.50%
3 Bank of America Merrill Lynch 9,178.29 19 10.45%
4 JPMorgan 8,170.99 20 9.31%
5 Citi 7,477.94 20 8.52%

Bookrunners of Euro Denominated Covered Bond Above €500m

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Natixis 2,071.95 7 9.04%
2 UBS 1,682.16 6 7.34%
3 UniCredit 1,662.07 7 7.25%
4 LBBW 1,541.66 6 6.73%
5 Deutsche Bank 1,380.66 4 6.02%

Global FIG Revenue

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 02 May 2016
1 Morgan Stanley 365.83 497 7.62%
2 JPMorgan 332.66 618 6.92%
3 Bank of America Merrill Lynch 299.89 590 6.24%
4 Goldman Sachs 276.71 375 5.76%
5 Citi 264.54 592 5.51%

Bookrunners of European Subordinated FIG

Rank Lead Manager Amount €m No of issues Share %
  • Last updated
  • Today
1 Credit Agricole CIB 1,031.57 1 27.24%
2 UBS 439.82 3 11.61%
3 Goldman Sachs 356.49 2 9.41%
3 Bank of America Merrill Lynch 356.49 2 9.41%
5 Lloyds Banking Group 249.35 1 6.58%