The Italian Covered Bonds Roundtable 2010

Italy’s obbligazioni bancarie garantite (OBG) market has avoided the worst of the eurozone peripheral sovereign volatility that has afflicted debt markets this year, with the country’s residential property market, banking groups and even fiscal position immunising Italy from the travails that have faced the likes of Portugal, Spain and, of course, Greece.

  • 17 Sep 2010
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During and after the European Central Bank’s Eu60bn covered bond purchase programme Italian financial institutions have debuted in or bolstered their presence in the covered bond market, with OBG issuance expected to reach a new high this year.

A widening of BTP spreads has nevertheless pushed the pricing of Italian covered bonds wider, prompting a debate over the extent to which Italian government bond levels should act as a floor to OBG pricing.

Meanwhile, developments in the wider public covered bond market have opened up new opportunities, not least the option of smaller issue sizes, so-called jumboliños of Eu500m or more. But while this could help banks address rating agency concerns, their suitability for new entrants has been questioned.

Italian issuers could issue even smaller sizes once established, with registered covered bonds and private placements a funding route being considered by some.

A recovery in residential mortgage backed securities issuance in some parts of Europe has, however, rebalanced the covered bonds versus RMBS playing field and made securitisation again a potentially viable option to be considered.

All these developments have been taking place against the backdrop of a fast-evolving regulatory framework, as the Basel Committee on Banking Supervision, ECB and others learn the lessons of the crisis and seek to prevent another.

These have created something of a moving target, making funding even more of a challenge.EuroWeek and The Cover, in association with Banca IMI and UniCredit, brought together leading Italian issuers and investors to discuss these and other issues facing the OBG market.

Giacomo Burro, chief financial officer, Banca Carige Paolo Cancellaro, head of secured funding, Intesa Sanpaolo

Pantaleo Cucinotta, head of DCM, Banca IMI

Giorgio Erasmi, head of ALM and funding, UBI Banca Luca Falco, head of DCM Italy, UniCredit

Giulio Favaretto, portfolio manager, Generali Investments

Roberto Lucchini, head of securitised products trading, Banca IMI

Massimo Molinari, head of treasury and capital management, Banca Monte dei Paschi di Siena

Matteo Riccardi, head of securities investment, Zurich Italia

Philipp Waldstein, head of strategic funding, UniCredit

Giuseppe Zàlum, head of securitisation, Banca Popolare di Vicenza Group

Neil Day, managing editor, The Cover, and contributing editor, EuroWeek

EUROWEEK: How well has the Italian covered bond market developed over the past year?

Philipp Waldstein, UniCredit: Considering all the volatility that we have seen, specifically with respect to peripheral sovereign prices, we can be very, very happy with where we are at this moment. The market is progressing and is growing — but it is doing so in a moderate way. We are steering a nice middle way by adding additional liquidity but without overstretching it. So as Italian banks we can be quite happy with where we stand today.

There needs to be further development in terms of building other points on the curve. It seems to be still the case that we all go in the same direction in terms of maturity: at one point it felt like we were all going into seven years, and then we were all going into five years. We need to build more diversity in terms of maturity, and over time I am sure that we will manage to do so.

Pantaleo Cucinotta, Banca IMI: In terms of issuance, year to date we are approaching more or less the same total supply as last year. In 2009, total issuance of Italian covered bonds was about Eu10bn; now we are in excess of Eu9bn. So the market is growing in terms of volumes.

EUROWEEK: Last year the market didn’t really get going until the European Central Bank purchase programme was announced in May, so that Eu10bn came out in what you could call a short year. Do you expect this year to exceed that, given issuance started earlier this year?

Cucinotta, Banca IMI: I certainly expect more issuance this year. But I would say that this year as well we had, as Philipp said, a lot of volatility on the sovereign peripheral markets and this has hit quite heavily the Italian covered bond market, because up to April we had a very positive market in terms of spreads, but then saw a lot of volatility on the market. And we had the summer break, as well. So we had kind of windows of activity. I don’t think we had stable activity throughout the year in 2010 either.

Waldstein, UniCredit: We also have to look at how the market has developed not only in terms of quantity, but also quality. Within two weeks we have seen three covered bonds from Italy, all of them positioned inside UK covered bonds, inside Spanish covered bonds. So we also have to see not only what we’ve done in terms of quantity, but at what kind of level, which is certainly essential for us going forward.

EUROWEEK: Banca Monte dei Paschi di Siena issued for the first time this year. How long had you been preparing it for? Did the markets hold up your debut?

Massimo Molinari, Banca Monte dei Paschi di Siena: We definitely believe that covered bonds is one of the channels we want to use for our funding needs on a regular basis. It was in March this year that we started working on this programme, and it took a while to establish it.

Touching on a point raised by Philipp regarding quality, in Italy the quality of the covered bond market is very high, because the programme does not only reflect the quality of the cover pool, but also the quality of the organisational structure that is behind the programme. You need to establish strong control procedures within the bank because the regulation, established by Bank of Italy, is not only focused on the quality of the cover pool, which is a topic covered by rating agencies, but also on your IT and your organisational structure. Unfortunately in Italy this can take a little bit of time compared with other jurisdictions.

But at the end the result is a very high quality programme for investors. And we have seen this reflected in the market these days, but I hope we will see it even more clearly in the future, as investors learn more about this.

We finished our programme in the second half of June and then we found an opportunity to launch our inaugural issue. We wanted to do the first transaction just before the closing of the programme, as is usual with an inaugural deal, and also after the roadshow where we presented the programme to the investor base.

EUROWEEK: UBI issued twice before this year. How did your experience this year compare with previously?

Giorgio Erasmi, UBI Banca: Now, in September, we found the opportunity to print our third covered bond issue, a seven year. But we had been looking for a new issue for some months.

The volatility this year has been very high, that is right. The first months of the year were easy months, where the market was positive. But in June and July the market was definitely not an easy one.

However, remember that even last year until September the market was not easy. So comparing this year to last year, the first half of last year was very difficult, and the same can be said of the months June and July of this year.

Now we are seeing more positive conditions for issuers, with good momentum, similar to those after August of last year. We have had the opportunity to issue Eu1bn. This is very important for an issuer who wants to have a liquid secondary market curve.

Last year we issued with a spread of 60bp and now we are 120bp. The reason why spreads are wider is because the spreads of government bonds are wider. For the future, we need the spread of government bonds to be less volatile than they were in the first half of this year.

EUROWEEK: Banca Popolare di Vicenza has not issued yet. What plans does the bank have with regard to covered bonds?

Giuseppe Zàlum, Banca Popolare di Vicenza: Let’s say we could be a prospective issuer.

Of course the OBG is quite an interesting funding tool for us as well, so we recently started to do work on looking into covered bonds, in particular regarding all the organisational requirements imposed by the regulator. We are in fact considering adding OBGs to RMBS, where we have already established our Berica series, having issued eight different deals since 2001.

We have to deal with a few different problems compared with securitisation.

For example, we would like to replicate the structure we used for our RMBS, which are multi-originator RMBS taking advantage of contributions from the two main other banks of the group, Cassa di Risparmio di Prato and Banca Nuova. We are now running a group restructuring plan to revise and simplify our business model, which should lead to significant cost synergies through the merger of CariPrato and Banca Nuova, so it could make sense to face the covered bond market with the new group structure in place.

Moreover, we need to monitor very closely the cost of funding achievable through OBGs. Due to the market nature of this product, for a group like ours — actually rated BBB+ both from S&P and Fitch, and probably the smaller group around the table today in term of total assets — the final cost of a covered bond issue might not be very different from going to the securitisation market again (bearing in mind the possible over-collateralisation required by the rating agencies, or the organisational cost of the programme — although this could be split between the different issues under the programme).

We are therefore studying all the different possibilities that we have at the moment.

Giacomo Burro, Banca Carige: I’d like to add something on the comparison between the market last year and this year: Carige issued a seven year covered bond last November, and we recently issued a three year covered bond. In today’s market, the longest we have seen is the one issued by UBI, a seven year. If there is a problem these days I think it is maturity.

A year ago, the market considered five to seven year maturities as something of a starting point for covered bonds; now seven years seems to be the longest one. Thus the market is somehow failing to live up to its expectations. Covered bonds are suited to matching the long end of your funding needs, but these days it seems to be a little difficult to achieve this goal.

However, we started the roadshow for our transaction with an open mind. We said: let’s see what investors like, and during the roadshow we saw that the preference was for the short part of the curve.

Luca Falco, UniCredit: We have heard complaints about the spread being achieved on covered bonds. However, it is worth considering the investor perspective because — taking the example of UBI — last year they did a seven year at a spread of 60bp over mid-swaps, but that was with a coupon of 3.625% and today the coupon is 3.375%. So while issuers look at the spread, investors also look at the return.

What is also important is that the spread over BTPs has narrowed compared with last year. That is a reflection of the quality of the OBG versus the BTP.

EUROWEEK: Do investors consider covered bonds a better buy today than a year ago, versus whatever comparables they consider relevant?

Giulio Favaretto, Generali Investments: Let me first mention that, although we currently look at Italian covered bonds as instruments belonging more to the credit side than to rates, we tend to agree with those who believe that, under the current macroeconomic environment, this asset class should provide a pick-up over Italian government bonds for it to be potentially attractive. The recent re-opening of the primary market has in almost all cases confirmed a tendency towards pricing at a premium to BTPs, despite the fact that at times of sovereign risk aversion this year covered bonds of some systemically important Italian banks have even traded at lower swap spreads than govvies on the secondary market.

Having said that, the level of rates today compared with one year ago means that some new issues, particularly short dated ones, are not always attractive for us, given the higher pre-set yield target on managed funds. In future, covered bonds might increase their attractiveness for insurance companies not only because of a possible normalisation in rates, but also due to regulatory changes under the progressive implementation of Solvency II: the current framework in fact looks to be envisaging the possibility of triple-A Ucits 22 (4) eligible covered bonds being treated more favourably than theoretically comparable triple-A corporate bonds, as far as capital absorption is concerned.

Roberto Lucchini, Banca IMI: I would just add that we have to consider that the Italian covered bond market in general gives us the possibility of having a pick-up over other markets, due to the spread over the Italian governments. And this is also mainly due to the fact that after the macro crisis seen in April to June, we can burn the books where it says that government bonds are risk-free assets.

We have to rethink this concept and every time an investor looks for new assets for diversification, covered bonds are becoming much more eligible than in the past for these purposes — especially if we consider that in various parts of Europe, including Italy, we have banking groups that are so safe that they can basically represent a nice government proxy. And in that way we can achieve spreads and liquidity that in the past was a characteristic of state-related assets only.

Matteo Riccardi, Zurich Italia: I will start by saying that from an insurance point of view, I definitely agree with what was said before. The most natural benchmark for us on covered bonds in terms of spread is the BTP. So the comparison that we usually do — from a naïve point of view, if you like — is between the BTP and the covered bond in the same maturity. Rather than being more focused on the asset swap spread, we prefer looking at the spread to the BTP, which is a natural alternative to a covered bond investment.

Consequently, the current environment of high volatility in government spreads is seen in negative terms because high volatility in government bond spreads can imply high volatility in covered bond spreads as well.

In absolute terms, looking at the yield or coupon on covered bonds, they are very tight, especially at the short end of the curve. For insurance portfolios — especially on the life side where the minimum guaranteed returns of the in-force life policies are still based on the previous yield environment — the short end of the covered bond market is not very attractive because of the low yields in absolute terms. But there is nothing that can be done about this if interest rates continue to be so low.

And finally — if I may add a comment more as an asset manager than as an insurance portfolio manager — I am also a little bit concerned about the liquidity of covered bonds. I remember what happened in the last quarter of 2008 and the first quarter of 2009: the market simply disappeared. I recognise that the Italian covered bond market was not as developed in that period as it is now, so maybe the comparison is not completely right; in addition to that, after the crisis the central banks intervened in the market to improve liquidity conditions. However, a concern that a similar situation could occur again remains, and this could be a negative point regarding investment in covered bonds.

As I said, I am perhaps not the right person to mention this issue, as I manage an insurance portfolio and I am not forced to sell bonds in bad market conditions if my asset-liability model works, and nor are the portfolios I manage forced to have a daily market value NAV, but, in any case, the idea that the market could simply disappear is not very nice for an investor.

Burro, Carige: I think that the problem of the secondary market and market-making for covered bonds is still on the table. We issued a Eu500m covered bond recently and although the first one was a benchmark transaction, for Eu1bn, I cannot tell you that the bigger deal is more liquid than the smaller. So the problem is still there. I don’t think a benchmark transaction is something that is enough to give liquidity to the market. The real problem is market-making.

Favaretto, Generali Investments: I agree. Liquidy has been shown to be an issue for the secondary market during times of volatility. Among other things we noted how in the weeks of mounting sovereign risk aversion between May and June, when some covered bonds of systemically important banks managed to be quoted at swap spreads below those of BTPs, traders tended to offset at least partially this delta via a material increase in bid/offer spreads.

Cucinotta, Banca IMI: I think it was a result of illiquidity. The prices didn’t move as much as what governments implied.

Cucinotta, Banca IMI: In that period, secondary market levels were not a real proxy of where new issues could have come to the market.

If I can add something regarding investors: what we are seeing, yes, is that Italian insurance companies prefer longer term bonds because of the absolute level of rates, but we have on the other hand seen bank portfolios buying in shorter maturities because the spreads are really attractive for building asset swap portfolios.

EUROWEEK: Intesa debuted with a public covered bond. Is there an argument you can make about that being comparable to a BTP?

Paolo Cancellaro, Intesa Sanpaolo: Well, Intesa Sanpaolo could already be said to be quite a proxy for the Republic of Italy. So if you add an underlying that consists almost entirely of Italian public sector assets, this point is of course reinforced. Anyway, at the time we managed to print at 17bp over BTPs.

For the reasons that at least from an Italian investor point of view were mentioned before, it is quite difficult to expect to print a deal through the BTP, even if our distribution wasn’t so skewed towards domestic investors. But in any case — if I am not mistaken — there are not many examples around of covered bonds being issued through the related sovereign debt, so I think it is really very difficult to go through, even if UniCredit on its 12 year was very close to go through the BTP. UniCredit is not the typical example of an Italian bank, which explains partially at least this occurrence.

EUROWEEK: Does the general make-up of the UniCredit group make your execution and distribution different to other Italian banks?

Waldstein, UniCredit: I think it probably is. Our distribution is a bit different, in the sense that typically we are taken in our home markets as a core credit. That includes Germany, and even a smallish market like Austria has 10%-15% participation.

But— not surprisingly — I would like to challenge the pricing discussion because I feel people are a bit obsessed about this BTP comparison, which is not in all circumstances justified.

Covered bonds certainly are a credit product, so if you only go for liquidity and for a trading portfolio, BTPs would definitely be the preferred asset class.

However, aside from the "emotional" fact that the banks here are typically systemically relevant, if you look at the public sector covered bond of Intesa, there is over-collateralisation of 125%, so even if you look at it from a purely quantitative perspective, it is more secure than a BTP where you have coverage of only 100%. Why should something that is over-collateralised not trade inside a 100% collateralised bond? It is with good reason that the rating agencies have triple-A/triple-A ratings for this instrument.

So, yes, if you only look from a domestic perspective and you take a sort of emotional view that these banks are anyway systemically relevant, fine, then I think you should buy BTPs. However, if you see it in relative terms against other covered bonds — if you invest in French covered bonds happily 50bp below BTPs — why wouldn’t you invest in an Italian covered bond?

Cancellaro, Intesa Sanpaolo: In fact, I think that from this perspective there could be some room for pricing methodologies to evolve, but it is a long way away. I agree with you, it depends on the point of view. If you look at comparable covered bonds — to similarly strong bank names with cover pools of comparable quality — the fact Italian covered bonds have the BTP as a floor in terms of yield being offered make them something of a bargain.

Falco, UniCredit: One of the reasons the pricing persists in this way is the country limit that investors have, even if they may also have product limits.

Cucinotta, Banca IMI: And then perhaps there are credibility issues with the rating agencies.

Waldstein, UniCredit: There certainly are some issues. However, there are many, many good reasons why Italian covered bonds are appreciated so highly.

The problem we have with pricing is that even those investors who don’t consider BTPs as an investment are distracted by this discussion about the BTP spread being a reference, even if ultimately they are buying it because they see relative value compared with other bonds. They see value against Germany and France, or they see positive value in terms of asset quality against Spain. Those are the arguments that we need to push.

Cancellaro, Intesa Sanpaolo: According to many observers a very important success factor in covered bond frameworks is the strength of the domestic investor base. And so — given what we have heard from Italian investors about having the BTP as a strong competitor in terms of liquidity — it will be very difficult to have the OBG segment take off and reach the spreads of the very core parts of the covered bond market. We have to aim for this anyway, but I’m quite sceptical about it happening given that the domestic investor base requires a substantial pick-up to somehow compensate for the liquidity differential versus government bonds.

However, it is also worth remembering that the liquidity issue right now is not just one for Italian covered bonds; it is a key issue for a number of asset classes.

Falco, UniCredit: It is certainly positive that compared with last year, the participation of Italian investors in order books this year has almost doubled, if not more.

Cucinotta, Banca IMI: The fact is that, with only a few exceptions, Italian investors didn’t invest in covered bonds before the Italian issuers’ market developed; now they have become more familiar with the product as more issuers have used this instrument. Moreover, some need to diversify away from BTPs is emerging.

Falco, UniCredit: The development and knowledge of the market is better. We have more issuers, and that means that the OBG market is becoming one that everyone needs to participate in, and this is clearly positive.

For the market to grow and to justify tighter spreads, it needs a strong domestic investor base. If we always rely on French and German investors, then we will always pay a pick-up because they will only buy foreign names offering a good pick-up over their own covered bonds. And then if they decide that someone should be excluded, like Spain, for example, they will have to pay a huge premium. To avoid running the same risk, we have to develop an Italian domestic investor base. And the best way to do that is to develop the Italian issuer base.

Waldstein, UniCredit: If I am running a treasury, part of the treasury is typically a BTP investment portfolio. Wouldn’t you say that in terms of diversification it’s a welcome opportunity to put a bit aside and invest in covered bonds if you already have a huge concentration risk in BTPs? I would say yes. Wouldn’t it be helpful for external counterparties, in terms of the collateralisation of derivative contracts, for example, if you could, apart from being able to deliver BTPs, which counterparties view as being highly correlated, deliver something based on mortgages? I think it is welcome.

So even if it’s flat to BTPs, I would see an incentive to buy covered bonds. It doesn’t necessarily have to be at a pick-up. Now I’m talking my book, of course, but why not?

Zàlum, Banca Popolare di Vicenza: I agree with Philipp. The spread could be also zero against BTPs. As he pointed out before: first of all, it’s an over-collateralised deal, with all the technical implications that we know. Moreover, as a few of the people around the table here have already pointed out, the quality of the underlying assets, considering that the are almost all residential mortgages, is very high, and this has also been demonstrated in the last couple of years in terms of relative performance versus other European states (with the outstanding exception of Dutch mortgages).

So combining a few factors — the underlying, the dual recourse of the issue, the much higher diversification in terms of risk compared with BTPs, and the strict requirements imposed by the OBG law — this makes Italian covered bonds a very good product. As Philipp also said, they are triple-A rated, compared with BTPs which are not and whose yield works as a floor for the OBG.

Favaretto, Generali Investments: We fully agree on the fact that the Italian covered bond framework and the average characteristics of the collateral set the pre-requisites for a good quality product, and that both the segregation of the assets and the over-collateralisation level within most programmes are important points to be taken into account when evaluating them.

Notwithstanding the above, we tend, however, to share the point of view of those who argue that the current different levels of liquidity between covered bonds and govvies, together with the existence of a certain level of correlation in terms of swap spreads and their respective probabilities of default, justifies the presence of a pick-up in today’s economic environment. Looking at other European frameworks, there are examples of covered issued by systemically important banks trading at swap spreads above those of the respective government bonds. In addition, looking in general at the wider investor community, past downgrades from triple-A on some European covered bonds might have convinced some investors to mantain a conservative approach in this particular market phase when dealing with relative value considerations versus lower rated government paper.

EUROWEEK: Has the Basel Committee has got it right on where it has put covered bonds relative to government bonds in the Liquidity Coverage Ratio? Some market participants, notably the Danish, have said that the treatment is unfair.

Cancellaro, Intesa Sanpaolo: In terms of haircuts, I agree with the Danish, but I think everybody agrees that the haircuts are too punitive, are not consistent with the quality of the instrument, at least for liquidity purposes.

EUROWEEK: We’ve talked a lot about the attractions of OBGs for investors relative to other instruments. How do they stack up against other funding instruments for issuers, such as RMBS and senior unsecured?

Cancellaro, Intesa Sanpaolo: Compared with RMBS, in this very moment it is not just a matter of cost; it’s a question of the effort you have to devote in setting up a securitisation. Whereas the covered bond works under a programme — so you have an effort up-front, and then the maintenance, of course — the securitisation, at least in Italy without the master trust concept, is quite an effort. And I don’t think that bringing a very large RMBS transaction to market, like we did in 2007 for instance, is on the cards again right now. So you have a considerable fixed cost and may end up just raising just Eu1bn — although that is less of an issue for an institution of our size.

Of course, if you manage to do senior unsecured, it is quite a straightforward exercise, even if — unlike securitisation — you would not achieve a significant diversification in the investor base.

Molinari, Banca Monte dei Paschi di Siena: We have issued RMBS before and I agree with my colleague: it’s certainly more complicated — especially once you have established a covered bond programme — to use securitisation.

But I think it could be important in the future for diversifying the investor base. We see signals in the market in this moment that there is demand from investors for ABS, and not only for covered bonds. So while you may have to pay 20bp or so more for an ABS versus a covered bond in a similar tenor, it is worth bearing in mind that nowadays there is a general preference among investors for secured instruments. This is a structural change that we have experienced, so the wholesale markets in the foreseeable future will become more oriented towards secured forms of funding. That can be covered bonds, but RMBS can also be another important source of funding for banks.

Burro, Banca Carige: We issued three RMBS transactions before starting covered bond issuance. The main difference, which is also in terms of cost, is that when you set up a covered bond programme you have to establish processes internally that are strictly laid down by the Bank of Italy. The board has to take responsibility for the whole process, and you have to set up new organisational procedures in the bank. That makes sense if you are a regular issuer. RMBS transactions are normally standalone transactions and therefore quite different in this respect.

EUROWEEK: Under CRD IV self-originated RMBS will be eligible as up to 100% of cover pools until at least 2013, something that some Italian issuers have considered. The ECB has said it is not happy with this. Are the ECB’s concerns justified?

Cancellaro, Intesa Sanpaolo: Their opinion is quite surprising. I think there was a basic misunderstanding in their reading of what the European Parliament had approved. The ECB had the perception, curiously, that if you stick to the 10% limit you are constrained by the criterion that the senior RMBS units must be Step 1, meaning at least double-A rated, but that if you want to go beyond 10%, provided that the RMBS are self-originated and that there is a retention of the equity tranche, there is no rating constraint at all. That is not exactly what is written in the rule!

They were also objecting on the basis that the constraints are not actually enforceable. That is a bit strange, because you would have quite a reputational risk if you stated that you had used self-originated loans and it was not the case.

And then another objection was that you can easily get rid of the first loss risk anyway by using derivatives. Again, we do not agree. Apart from cost considerations, of course you would have to report the hedging to the regulator if you want to get advantage in terms of capital relief from transferring the risk. In summary: quite a strange position.

Molinari, Banca Monte dei Paschi di Siena: In my opinion, there is a need for clarity about this whole matter of what you can use with ECB because, as you can imagine, it has been quite a nightmare managing a treasury recently. But on top of that it’s a nightmare thinking about CRD II, CRD III, CRD IV, Basel III, ECB press releases, etc. Every day we learn something new about this, but we still don’t know where the regulator wants to go in terms of what is eligible in normal days, and what is eligible during a period of stress.

It’s important to have this clear division for the industry. They can say that they want to embark on an exit strategy and no longer accept certain kinds of assets that were accepted during the period of stress, but in my opinion you need to say to banks what you are going to accept if we experience another crisis. Otherwise, you start changing to one strategy and maybe you will need to change that again.

Also, I cannot imagine that a European central bank wouldn’t accept self-originated RMBS transactions from a bank that has funding problems and instead let it fail.

Waldstein, UniCredit: To add to the discussion of RMBS versus covered bonds: the underlying in both cases in Italy are excellent, and the performance of outstanding deals clearly demonstrates the supreme quality of the Italian residential market.

Now apart from that, whether you might like it or not, the system clearly prioritises covered bonds. I think that is not justified, but it is a fact of life. As you said, the Liquidity Coverage Ratio, for example, is one of the key criteria in which this priority is expressed.

So if we want as banks to maintain the RMBS market, we need to be quite pro-active, trying to push market-led initiatives for more transparency and trying to rebrand RMBS going forward. If not, I am very sceptical that securitisation will survive as a market — unless we talk about different asset classes.

Lucchini, Banca IMI: Regarding RMBS, in order to define the differences we should go back to basics. The main difference that you have from an investor point of view when you buy an RMBS is that you have to be ready to have assets that — apart from having a floating rate coupon instead of a fixed one, and having an amortising bond in your portfolio — you have to monitor constantly, on a monthly or quarterly basis regarding the performance, from the investor reports, etc. You have lower liquidity, and obviously after two years of crisis you have also a kind of idiosyncratic risk that obviously doesn’t help at all.

But if we look at the markets with the longest ABS history, we have seen that the Dutch market, for example, is already starting to see RMBS programmes again this year. And you have to consider also that the ABS market can’t be fully substituted by covered bonds; you have other assets classes that can’t be substituted by covered bonds.

I believe that the RMBS market will recover, but obviously we have to standardise reporting, and we have to better define many of the rules in order to trade and structure some bonds. And you obviously have to face the problem that you don’t have the same investor base that you did in the past.

Zàlum, Banca Popolare di Vicenza: There are two further points that should be considered.

First of all, the Italian covered bond market is not a market for all issuers, in terms of the relative size of the potential issuer. We do not have something like AyT, which they have in Spain, in Italy, which smaller borrowers could join. So for smaller players, RMBS or ABS in general could potentially remain as funding tools.

On the other side, when issuers go to the market with both covered bonds and RMBS, they could access, as also stated by the investors at our roundtable, a different investor base, thus making the RMBS and OBG not only alternative funding tools, but also quite complementary ones to enlarge an issuer’s funding capacity.

Cucinotta, Banca IMI: For medium sized banks, keeping the two tools "live" could be a problem. On the ABS side it is understood that it is an illiquid market, but on the covered bond side we need a liquid market. So keeping the two instruments running alongside each other could be a problem probably for all but the biggest banks.

EUROWEEK: Do so-called jumboliños make it easier for smaller and medium sized issuers to come to the covered bond market?

Zàlum, Banca Popolare di Vicenza: Not really in my opinion, at least for a debut issue.

When you access the covered bond market, you have to go with a jumbo issue, because you need to gain recognition among investors with an inaugural issue. If you start with a jumboliño, I think that there could be some difficulties in placement — that is, of course, my personal view.

Moreover, the new ECB haircuts for assets eligible for use as collateral in Eurosystem market operations that will be in force from January 1, 2011 will penalise non-jumbo covered bond issuance compared with jumbos. It has been said before that we are looking for liquidity on the market, and I think the ECB is also trying to push in that direction.

Burro, Banca Carige: We recently issued a jumboliño transaction and from the investor side, during the roadshow, we saw no resistance. People were very flexible and willing to discuss the size of the transaction. So size is not a constraint for investors.

And then, coming to the liquidity: even if we consider that the issue size is important, if the liquidity in the market disappears, it disappears for both jumobliños and jumbos.

Falco, UniCredit: But it was not Carige’s first issue.

Burro, Banca Carige: Yes, we also issued an initial transaction of Eu1bn. But if there is in the market the opportunity to issue also smaller sizes, I think it is interesting.

Falco, UniCredit: But when first establishing a name, it is better to come with a jumbo. Then you also can build a curve with non-jumbos and be more opportunistic. And then, once your name is known, you can perhaps talk about the possible development of registered covered bonds, of private placements direct to single investors. That may also allow you to go into longer maturities that normally you don’t reach with a jumbo or jumboliño.

Burro, Banca Carige: We have established a registered programme, but we haven’t issued anything yet. We are in discussions and are ready to issue.

Erasmi, UBI Banca: UBI is analysing the possibility of issuing registered covered bonds. The process is not easy, and we need legal counsel. Our analysis is not yet finished, but the idea would be to issue longer maturities rather than saving something on the spread of public deals. The size would be Eu50m or more.

Waldstein, UniCredit: The key problem has been that the OBG law was originally interpreted as saying that the covered bonds need to be "a security", and hence it could not be any form of loan, which is what a registered covered bond effectively is. Now the interpretation of this has developed, and that opens up an opportunity.

It is a fundamental development, because it opens up a way to speak selectively to investors. If you do a public deal you are always limited to 24 hours of execution in which you need to approach investors and convince them to buy a bond. If you have a product like this, you have much more time to prepare the ground, they can go to their credit committee, and then finally they buy you and they are happy with you, and then they establish a relationship with you. And on top of that they buy public bonds, too. So beyond any price advantage, it is extremely important for us to develop that from a strategic point of view.

EUROWEEK: Returning to the jumboliño discussion, do the investors here find the liquidity of a Eu1bn issue better than a Eu500m issue?

Riccardi, Gruppo Zurich Italia: At the moment of issuance of a bond, we do care about the amount issued, considering it a hint of the possible liquidity of the bond. On the other hand, as it has been said before, in case of a good name with a history of having already issued liquid covered bonds, a single amount of Eu500m instead of Eu1bn can be considered fine as well.

Waldstein, UniCredit: UniCredit has also issued jumboliños, not in Italy but in other jurisdictions such as Austria. I think they are perfectly fine. They are especially appropriate for this period in which it is a fact of life that maybe the market just isn’t ready for Eu1bn. Rather than artificially create a billion for demand that is not there, it is better to do a jumboliño.

However — and this has also been discussed in various ECBC workshops — in the long run, as an issuer community, I think we want to go back to the Eu1bn concept. There is room for both, for sure, but at some point we should try to keep it as a concept in terms of inclusion in the benchmarks.

Burro: If the market happy with transactions like that, I think it’s important to have this flexibility. And ECB and Basel III regulations specifying a minimum amount may compromise in some way this flexibility. Should the ECB adopt tighter rules excluding issues under Eu1bn from eligibility or increasing their haircut, this could make the market less flexible.

EUROWEEK: Does a Eu500m size help issuers manage asset-liability mismatch risk, which the rating agencies are looking at more closely?

Erasmi, UBI Banca: The smaller the issue, the better it is for S&P’s methodology. Especially if you are not a big issuer, if your cover pool is not large. For the major banks, this is not a problem. For our group, even Eu1bn for each issue is not a problem.

  • 17 Sep 2010

All International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Citi 31,385.40 114 7.52%
2 JPMorgan 29,232.19 105 7.00%
3 Goldman Sachs 27,645.83 55 6.62%
4 Barclays 26,090.00 67 6.25%
5 Deutsche Bank 23,883.15 74 5.72%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 ING 767.18 3 9.30%
1 BNP Paribas 767.18 3 9.30%
3 UniCredit 735.89 2 8.92%
4 Santander 467.33 2 5.66%
4 SG Corporate & Investment Banking 467.33 2 5.66%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Goldman Sachs 1,607.28 5 20.37%
2 Credit Suisse 1,301.65 4 16.50%
3 UBS 970.80 3 12.31%
4 BNP Paribas 522.35 4 6.62%
5 SG Corporate & Investment Banking 444.17 3 5.63%