For the debut trade from a new asset class in a new jurisdiction, it is only natural for an issuer to choose a currency that will give it access to the widest investor pool. And when it comes to debt markets, dollars tends to be the obvious candidate.
Not so with covered bonds, though, which have always been predominantly a European product. Euros boasts by far the deepest investor base for this type of secured funding.
The dominance of the single currency is obvious from looking at the volume data. Year-to-date, banks globally raised a combined $15.9bn from 18 dollar-denominated deals, according to Dealogic. That was easily trumped by the €15.75bn ($17.3bn) raised from euro-denominated deals in July alone. The 109 euro deals that have priced this year have raised €78.2bn.
So it was something of a shock when DBS, Singapore’s largest bank and the first from the city-state to issue a covered bond, made its debut in dollars.
The greenback is perhaps a better fit for the issuer since that is what it needs most of other than Singapore dollars. And bankers on the deal argue that DBS has not rejected euros outright, but plans to establish euro and dollar covered bond curves in the future.
The difficulty is that not only is DBS entering new territory for itself — it is also providing a reference for the rest of the country's banking sector in how to approach covered bonds.
As it stands, the Monetary Authority of Singapore (MAS) only allows its banks – domestic and locally incorporated foreigners – to use up to 4% of their total assets as collateral for covered bonds. That effectively caps the size of the asset class at S$25bn-S$30bn ($18bn-$22bn), and DBS will be a big chunk of that. The bank’s total assets amounted to S$440bn as of June 30, and 4% of that is about S$17.6bn.
It's clear that DBS has enough assets to back up its pursuit of two covered bond curves. The problem lies with the rest of the sector. Adopting a dual currency approach is not suitable given such a limited asset pool between them.
That would be fine if issuing covered bonds was only ever going to be a one-off event. But that is definitely not the signal being sent out by MAS or the three domestic Singapore banks – DBS, OCBC (Oversea-Chinese Banking Corp) and UOB (United Overseas Bank). They have made it clear on more than one occasion that they intend to develop a covered bond market and for it to become a regular source of funding.
Maintaining a curve matters: investors tend to reward repeat issuers, not least because of the easier credit work. If the other banks are to achieve that, they will need to dedicate their cause to one currency, and the best one would be euros.
When it comes to covered bonds, the euro market is simply much bigger and deeper than dollars. It also offers an extra layer of currency diversification. Singapore banks do occasionally fund in dollars; they never do in euros.
If Singapore's banks are serious about making the best start in covered bonds and establishing an alternative source of funding in preparation for when market conditions turn sour, euros is definitely the safer bet. DBS might have found cover in dollars, but for the rest of the sector it will be euros that offer real protection.