Investors run rule over RMBS and housing in the Netherlands
The RMBS market in the Netherlands has long been a cornerstone of the wider European RMBS market, but it faces some stiff headwinds. House prices have fallen 20% from their peak, putting a growing number of mortgage borrowers into negative equity. The government’s efforts at reforming the housing market and reducing the Netherlands’ high LTV/mortgage tax deductibility model have only added to the sense of uncertainty, making turnover of new sales and origination of new mortgages sluggish. Despite all of this, RMBS performance remains very robust with short term and long term arrears barely rising over the past year. A bigger problem could be the lack of primary supply this year. Issuers from the Netherlands are very well funded and, as a result, have publicly issued only €4bn of new RMBS this year to date. When the absence of UK issuance this year is also factored in, there is a danger some investors might rethink their commitment to the RMBS asset class as a whole. In this roundtable, EuroWeek asked a selection of leading investors and issuers in RMBS from the Netherlands for their take on the macroeconomic picture, the shrinking volume of paper and the problems this might create for liquidity and investor appeal, and where potential spread volatility could arise in this sector.
Bjorn Alink, managing director, head of FI securitization, Rabobank
Peter Atkinson, vice president, senior portfolio manager, State Street
Anuj Babber, director of fixed income, ABS credit research, M&G Investments
Mark van Binsbergen, managing director, FI & SSA origination, Rabobank
Danielle Boerendans, head of secured funding, ABN Amro
Max Bronzwaer, deputy director and treasurer, Obvion
Calvin Davies, head of securitised investments, ING Investment Management
Will Howard Davies, senior vice president, portfolio manager, Pimco
Menno van den Elsaker, European head of structured credits, APG
Rob Ford, portfolio manager, Twenty-Four Asset Management
Tom Hoefakker, vice president, corporate treasury, Aegon
Ruben van Leeuwen, senior ABS analyst, Rabobank
Joe McDevitt, moderator, EuroWeek
EUROWEEK: Ruben, would you like to run through the latest developments in the government initiatives to reform the Dutch mortgage market?
Ruben van Leeuwen, Rabobank: Several reforms have been announced regarding the housing market for both the owner occupied and rental sector. The owner occupied sector is the most important for RMBS. There, the main reforms apply to tax deductibility. Now all new mortgage loans have to be amortising to qualify for any tax deductibility. All loans originated before January 1 2013 will still benefit from the old system.
The government is also looking to decrease the maximum tax deductibility of the highest tax bracket, currently 52%, to the second highest tax bracket, which is currently 42%. But they will only implement this for 2014 by 0.5% a year, so it’s a very gradual change. And in my view this will hardly affect the issue of tax deductibility for all mortgage loans. Certainty in this area is quite important because the uncertainty was one of the reasons why house prices have declined so much.
EUROWEEK: Max, do you feel there’s certainty now from your perspective as a mortgage provider?
Max Bronzwaer, Obvion: I’m afraid there’s not yet enough clarity in the sense that the government is still contemplating, on the one hand, decreases in tax deductibility. On the other hand, they’re still looking at other alternatives to free up some borrowing capacity which, in my view, would be counterproductive. It would be much more desirable to have clarity and move in a straight line towards whatever you want to have, be it 90% LTV or 80% LTV, and be done with it.
There’s still uncertainty about the government’s plans and there is still pressure of consumer organisations to increase lending capacity, but lending capacity is not the problem. For the market to get restarted it needs more confidence. Affordability of housing has never been so good in the last five or six years due to decreasing housing prices. Interest rates are still very stable and low, and income has so far not decreased dramatically. So for most people, and certainly for first-time buyers who do not have the burden of an existing house, the opportunities are better than ever. But if you don’t have confidence in the market and in the government’s reforms then you will be more hesitant.
Will Howard Davies, Pimco: Would you argue you’ve got potentially almost 10 years of borrowers who are unlikely to make that second and third time move and sell to the first time buyer unless they’ve found some more equity from somewhere else?
Bronzwaer, Obvion: There are two ways to look at it. One is that once you turn the corner and people get the impression that the decrease in house prices has stopped, there’s no point anymore in waiting to buy. Certainly first time buyers will not really have a reason to refrain from buying. On the other hand, I think originators will have to come up with instruments and ways to help existing borrowers who are under water to make it possible for them to move to another house, if that is necessary. So movability can be increased even for people under water — within limits, of course.
Rob Ford, Twenty-Four Asset Management: It feels like borrowers are suffering from a bit of a double-edged sword. They’re seeing house prices falling for the first time in a long time. Then they’ve seen their borrowing ability gradually being reduced by the proposed changes in either tax deductibility or lower LTVs. And we’re seeing rising unemployment. That’s the biggest worry for me in Holland, as unlike perhaps the jobless numbers that we see in southern Europe, there’s a pretty high likelihood that the numbers in Holland are relatively accurate.
Calvin Davies, ING Investment Management: What I pick up is a lack of clarity and a lack of certainty. Going back over the last two or three years, borrowers don’t know what the government is going to do. You’re talking about people making a sizeable financial decision which will affect their overall lives. When it comes to unemployment, it’s not just the rising rate, but it is the type of jobs that are being lost that is also important. We are seeing large scale job losses particularly in the financial services industry. Those are the sort of people that you would typically expect to have mortgages and homes, and that is a pretty significant concern. A disproportionate number of homeowners are getting caught up in that unemployment statistic.
Howard Davies, Pimco: But if one takes the other side, even if we argue that the increase in unemployment is very focused on the sort of borrowers that we care about, which is the maybe 35-50 age group, we all know there is significant support in the Netherlands to those who are out of work. When you can receive 60% of your previous net income — enough to support your mortgage, which itself is a stable obligation — it is a reason why I think that temporary blip in unemployment rates is easy to absorb in the Netherlands.
Even if you take a relatively pessimistic view that unemployment rates will increase by 3% and then gradually recover, I would say from our perspective that’s very manageable. Some of the problems Dutch issuers will face are the lack of confidence in high LTVs from potential investors outside the Netherlands. These investors don’t necessarily understand that the Dutch market has performed well because of a really strong recourse culture, strong support to the borrowers and a very strong social network for borrowers in default. Gaining the funding interest needed will be a hurdle the Dutch mortgage market will face over the next few years, and in my view is more material than even the most pessimistic view for the macro economy.
Davies, ING IM: It’s a fair point but people need to have the confidence that the safety net will stay in place and this is part of the problem at the moment. The broader government proposal in terms of cutbacks in expenditure is just not clear at the moment. Nobody has any great degree of confidence as to whether the system of unemployment benefit is going to be the same.
Howard Davies, Pimco: For me an important point is will the turkeys vote for Christmas for a second time? If you tighten the screws and it has a significant impact on mortgage defaults and house prices, will you be able to keep the screw tightening or will the voters push back, changing the scale of the correction over the medium to long term?
Bjorn Alink, Rabobank: But affordability is a different story in the Netherlands than it is in the US or in some other European countries. If your income doesn’t change you are not likely to default. As long as affordability is fine, house price developments do not matter too much. It impacts the loss-given default but not the number of households that experience financial problems and are forced out of their houses.
EUROWEEK: How is RMBS going to perform moving forward against this backdrop?
Menno van den Elsaker, APG: If you look at what has been placed with us, it’s mainly senior tranches, which only incur principal losses under very severe stress. That’s not our base case scenario and so from a fundamental perspective you can be comfortable with senior tranches of RMBS. On the other hand, although European ABS and Dutch RMBS have shown more stable spread quality compared to other asset classes, we all know if other sectors widen out because of a loss of confidence then RMBS will widen as well.
Ford, Twenty-Four AM: Fundamentally we saw prime RMBS in the UK suffer 10bp of losses back in the worst of the market in 2009, versus something like 17.5% of credit enhancement. And we’re not going to see anything worse in the Dutch market on a relative scale at least at the prime end.
With mostly senior bonds only being issued right now we certainly shouldn’t be concerned about that, but what does it do to spread volatility? Negative headlines, whether they are about LTVs, affordability, unemployment, or house prices can have an effect on spreads. The expropriation of SNS Bank certainly hasn’t helped the Hermes deals in any way at all from a spread performance point of view because now there’s uncertainty about whether those bonds will be called.
Anuj Babber, M&G Investments: The Dutch market faces a number of headwinds in the next few years. Despite these challenges you’re not seeing that significantly feed through to fundamental performance in RMBS deals. Reasons for this have been tabled but also RMBS transactions typically cherry-pick collateral off bank balance sheets according to eligibility criteria that best meet rating agency stresses. So I don’t think we’re going to see a one-for-one translation of fundamental economic underperformance through to RMBS performance, per se, in our transactions. But I think the general market will continue to weaken. The Dutch National Bank has said they expect house prices to fall by 6% this year and another 3% by next year, so we will see deterioration in performance in the wider residential market.
EUROWEEK: Peter, do you think the potential spread volatility that comes from those slightly weaker fundamentals is actually the biggest risk for investors?
Peter Atkinson, State Street: It depends what your risk appetite is. As a traditional bank treasury we invest on fundamentals so I agree we will see the headwinds in the Dutch market but it’s a normal cyclical thing; they will be well within normal expectations and well within anything deals are designed to cope with. So from a loss of principal perspective, I have no concerns whatsoever. The deals will work exactly as they say on the tin. However, spreads are a confidence game, pure and simple. I would argue the UK and Dutch differential certainly isn’t defendable in terms of pure credit fundamentals, therefore it’s about confidence.
Van den Elsaker, APG: It is important how foreign investors will look upon Dutch banks and whether they are willing to continue to fund them. And if you get headlines that foreign investors are moving away then that can make the perception worse. We don’t see foreign investors moving away at the moment given the technicals that we already mentioned but I do think we have to watch out for it.
Atkinson, State Street: That’s the classic case of internalising your own market. In many ways the Dutch are more worried about the Dutch market than the foreign investor. Maybe as insiders you know something we don’t, but I think the concern about the international investor being skittish is a little overdone.
Van den Elsaker, APG: You can easily picture quite a bearish outlook for the Netherlands. And for a foreign investor you have to explain it to investment committees and senior management. We can explain high LTVs and other particular Dutch features because we have Dutch roots, but I don’t know whether that is the case for foreign investors.
Atkinson, State Street: Dutch house buyers are not levered because they need to be levered like the first time buyer in the UK. They’re levered because they choose to be, for whatever reason, be it tax breaks, be it financial planning. It’s a different animal. The investors that have been there for a while understand that and if it’s the new investor that doesn’t then are they such a great loss?
Howard Davies, Pimco: If we’re talking about the Dutch mortgage market as a whole, there’s a huge funding gap that needs to be bridged over the next few years caused by the still generous tax incentive to maximize loan balances. And if you need and want more investors to come to the table you need a combination of two things: either yield compensation; or an understanding that high LTVs can be OK if the system supporting them is and remains strong. And the Dutch market needs more investors with confidence in the true credit quality of the underlying collateral.
Babber, M&G Investments: In my view the problem is the uncertainty with the changing landscape. Marginal investors that are concerned with the current mortgage dynamics are seeing these being addressed in recent modifications, but the over-riding concern is how much further can the rules be tightened? Will we see another round of adjusting LTV ceilings or tax deductibility thresholds?
Clearly there is a strong foundation within the Netherlands to support the housing market. But I think the uncertainty with respect to the final outcome is going to be a big factor in terms of trying to get people comfortable. With the latest changes I think you’ll get the marginal investor to the table but when will they be prepared to cross that comfort line?
EUROWEEK: Tom, have you found yourself increasingly having to talk to investors about the bigger picture rather than your deal structures and performance?
Tom Hoefakker, Aegon: When you see articles in the press about the funding gap, they often forget about the assets in our pension funds. The government is now looking at the problem from a holistic point of view, which combines the mortgage market and pension market, tries to lower LTVs and looks to the rental market. If you want to lower the LTVs to 100%/90%/80% you also need to change the rental market because people need to first save and then build up capital to invest in a house. People might also look at using their pension assets for this. We would support such an approach.
EUROWEEK: Calvin, do you think the spread differential between UK and Dutch senior tranches is fair or is it too wide?
Davies, ING IM: People tend to think pretty generically about Dutch RMBS and UK RMBS. For us, one of the main things is tiering, particularly in terms of spread but also in terms of underlying performance. The Dutch market isn’t experiencing a build-up of arrears or anything like that but there are clear differences between deals: differences in performance; differences in spread volatility; differences in underwriting.
It’s too simplistic to look at Dutch RMBS as an asset class versus UK RMBS. You’ve got to dig deeper than that and look at individual programmes and deals and look at how they’re behaving, the institutional support behind it, the underlying collateral performance and actually make much more of a line by line decision as to how you’re going to allocate to that sector. That to us is going to make a significant difference between whether or not you’re outperforming.
EUROWEEK: The universe of active Dutch programmes has been shrinking for the last few years. Does that raise issues of concentration risk in your portfolios?
Davies, ING IM: Yes for sure because we’re looking for good quality transactions. We’re looking for good quality, prime, first lien mortgages. But we’re also looking for good quality providers. So there are certain Dutch issuers that are not our cup of tea and we’re not interested in being involved. So the actual universe for us does shrink all the more. Then we have to be aware that we are running concentrations in terms of the top quality issuers. But we’d rather do that with top quality issuers, who have maintained their underwriting discipline and maintained their performance, rather than water down our own criteria taking on what we would view as second tier risk.
I’m not for a moment envisaging principal losses at a senior level, but the spread volatility that comes with the tiering of performance is there and our base case over the next couple of years is that it will continue to be present and will probably worsen.
Howard Davies, Pimco: How much of your investment decision involves your view on the pricing of extension risk, or a call option? If you believe it’s a fundamentally good investment, and you’re an insurance company, you might like an extension at twice the prevailing coupon. But speaking from our perspective, we don’t think that the call option is priced accurately by the market, particularly for some of the weaker originators.
Davies, ING IM: You have to be very, very careful and I think this is the problem going back to the transactions that weren’t called. OK, they were subsequently called very quickly thereafter but it’s still in the back of people’s minds that this has happened once and then with SNS you get another bank going through a similar process.
Ford, Twenty-Four AM: One of the good things about the Dutch market is that at least there has been a reasonable amount of issuance post-crisis at wider spreads. The vast majority of issues that we saw in 2010/11 and 2012 were all done 100bp wider than where the market is right now. And so I think that there shouldn’t be any doubt in almost everybody’s mind, regardless of how we might view the individual issuers as to their intentions to call deals and their stated intentions about continuing to use the market and continuing to support the market. The fact that they’re 100bp on-side means that they’re going to call and re-issue, regardless, for the moment. The real crux will come somewhat further down the line.
Howard Davies, Pimco: Especially if in two years’ time we have had much more of a systemic problem.
Davies, ING IM: That will also depend on whether there’s a market for that particular name and this again is what I mean about the tiering of programmes. Just because there’s a market for Storm doesn’t mean that there’s a market for Hermes, particularly when it comes to refinancing.
Atkinson, State Street: As long as the bonds remain ECB eligible then there’s always a financing way out. I agree with Rob, the probability of non-call is not something that keeps me awake at night.
Ford, Twenty-Four AM: If the next deal comes to the market at 60 over and here we are in three years time wondering whether that’s going to get called, then, potentially, depending what happens in the next three years with further unemployment and growth in arrears, we might be concerned. Tiering is always considered much more important in tight spread markets than it is in relatively wide spread markets.
Babber, M&G Investments: We could also see tiering in the market from a collateral perspective. When changes in LTVs, interest tax deductibility and the other modifications that are being proposed actually feed through to new originations, will we start seeing tiering between a deal which contained collateral from 2007 to 2012 and a deal that has collateral originations under the new underwriting regime?
EUROWEEK: Danielle, is it more efficient for ABN Amro to do fixed rate covered bonds against fixed mortgages than to do floating rate RMBS and have to worry about swap risk?
Danielle Boerendans, ABN Amro: Not really. It’s more that we have this covered bond programme outstanding and that we want to come at least once a year with a benchmark to the market. We had a covered bond of €2bn maturing in January. So it’s more that we want to maintain that market, which is why we issued a benchmark last week.
We’re mostly focused on senior unsecured, given the spreads for ABN Amro are at or below RMBS level so given all the discussions about asset encumbrance, we decided not to encumber assets.
EUROWEEK: When investing in RMBS, do you look at relative value to other asset classes, such as covered bonds?
Howard Davies, Pimco: Speaking from the perspective of a global house with significant flexibility, that’s critical. It is important to consider not just the volatility adjusted risk return of the different asset classes, but also deal structures and sector frameworks, the latter particularly with respect to covered bonds. And I include in that senior unsecured financials and even sovereign bonds. So yes, totally, from a global asset manager perspective, but it is also important we carefully consider relative value within the constraints of dedicated ABS funds that don’t have the same degree of flexibility or diversification.
Overall it is a very complex equation looking at relative value, which may offer up many different potential headwinds for the long-term funding of the Dutch mortgage market.
EUROWEEK: Given the tight spread environment we’re in right now, are there places in the Dutch market where investors can find some extra yield?
Ford, Twenty-Four AM: It depends on your fund remit. If you concentrate on high value prime only, then what’s in the market place is great. But I would love to see some yield: mezzanine notes with the right structure, the right levels of credit enhancement and, of course, the right price. The UK market has seen a huge contraction in the amount of issuance, in fact more so than in Holland, but at least the UK has a whole other sphere of issues out there in non-conforming and buy-to-let.
We have funds which concentrate at the prime senior end of the marketplace, but we also have funds which concentrate at the junior, illiquid and possibly non-investment grade end of the marketplace and I’d like to see Dutch product for all of those. Not necessarily all the time on every single deal, but certainly from time to time.
Hoefakker, Aegon: We now get a large part of our funding also from our pension business and we like that very much because it’s more matched funding. Before the crisis, the first optional redemption date was at seven years and since then it has moved to five years. Investors are talking about moving down the credit curve, but would you also be interested in longer first optional redemption dates — or even no call dates at all — and getting more spread in that way? From a matched funding perspective, that would be a pretty ideal transaction for us.
EUROWEEK: Menno, would you buy a longer term deal perhaps with no call option?
Van den Elsaker, APG: Potentially, yes, we can look at it but I do think in general and also in the ABS market that there isn’t much of a term premium. The difference between a 10 year spread and a five year spread is not overly attractive and I would rather be at three, four, five years where the sweet spot seems to be.
On the other hand, I’m getting increasingly concerned about the lack of available paper in the market. Bigger accounts are really struggling to put cash to work and while that’s good for spreads, if an environment like this continues for too long, at some point senior management will say there’s just no liquidity in that asset class and we will reduce your allocation to ABS.
EUROWEEK: Anuj, would you agree there’s a lack of liquidity in the Dutch market?
Babber, M&G Investments: I think there’s a difference between a lack of liquidity and lack of issuance. Secondary liquidity when product is available has been very good in the sector, but there’s been a real lack of recent primary public issuance compared to this time last year. I think there’s a couple of contributing factors to this. Firstly, Dutch mortgage origination volumes are about 50% lower than they were back in 2008 and secondly banks seem to be well funded at the moment. The LTRO and other central bank schemes have taken a lot of funding pressures away from most issuers.
Liquidity concerns are likely to surface in greater degree when during the 2015 and 2017 debt maturity wall when around €40bn of RMBS securities come to their call dates.
In terms of primary market we’ve seen structural innovation with the recent Orange Lion trade which issued term securitised funding with no calls or step-ups and it looks like we could see more deals of this nature in the future. Overall, unless there is a marked shift in general sentiment I’m not overly concerned with liquidity at this stage.
Boerendans, ABN Amro: Right now funding is not really the problem for banks, it’s capital.
Bronzwaer, Obvion: I agree. Then again, hopefully in the not too far future origination levels will inevitably be back to €60bn, €70bn and then you suddenly need another €30bn, €40bn and I guess the funding gap will certainly be back at that point in time. So it’s a temporary thing.
Van den Elsaker, APG: But don’t you think that you run the risk that you lose investors because they haven’t been able to invest for, let’s say, a year or two years?
Bronzwaer, Obvion: Issuers should try to keep a minimum level of issuance open out there for investors to maintain a programme and in that respect the Dutch have done a better job certainly than the UK at the moment, where people basically made a cold calculation and haven’t issued with little concern about continuity.
Hoefakker, Aegon: I would totally agree that it is important to maintain the market. There are, of course, talks about the new Dutch mortgage institute to issue some guaranteed bonds. For us, we have our euro funding, our dollar funding and we have our pension business and this would be a very nice addition to that. As an insurer, in times of market stress we cannot tap the ECB market so this institute for us is a potentially useful tool in difficult times.
EUROWEEK: Given that banks are very well funded and there is the prospect the Dutch mortgage institute could further reduce the need for RMBS, can you see investors being put off in the long term because there just isn’t enough paper around?
Atkinson, State Street: We’ve debated what liquidity means for years and years. We shouldn’t confuse not seeing trading activity to suggest that liquidity wouldn’t be there if someone wanted to execute a trade. The challenge is the supply. The prices are there. BWICs are generally very well bid and sometimes you scratch your head at the prices at which they’re executed because somebody’s chasing them in because there is demand for the paper.
One market where the Dutch need to be careful is the US. Experience suggests that if you don’t regularly go and meet the US investor and keep your name in front of them that they have a very short term memory as they have a much wider choice of investments to focus on. If you stay out of the US market for any length of time you almost have to start again.
In Europe, if you own five year Dutch paper you’ll still own Dutch paper and so when you come back they’ll still remember who you are. The traditional investors who have been there through the cycle will still be there.
Davies, ING IM: But the lack of new investors is a concern that we’ve had. We’ve seen an erosion of the specialist investor base in the Netherlands. Guys who are working at smaller institutions who were previously ABS specialists have reinvented themselves as covered bond guys, or financials analysts, or credit analysts, or whatever. They are not doing ABS specifically now, and even if they are doing ABS at all, they are doing so while wearing different hats.
The fact that there are three or so specialist investment teams that are functioning in the Netherlands isn’t good for the health of the market and it’s not going to be good for the issuers because at some stage, if the bigger players are starting to get concerned about it, and more particularly our clients and our senior management are getting concerned about it, it has implications for the asset class as a whole.
Ford, Twenty-Four AM: On the liquidity and maturity issue, one of the things that might be interesting is the ability to do tap-able deals in the way you can in the covered bond market, to bring bigger and more liquid deals. In the UK the unfolding of the Granite programme has been the best thing that has happened to liquidity in the UK RMBS market because it just provided us with £17bn of easily tradable bonds across the capital stack.
One of the problems about tapping deals is how to achieve that as deals get shorter. So one of the ways to potentially do that is to issue slightly longer. Instead of issuing a three year and a five year, you could issue ‘A1s’, ‘A2s’ and ‘A3s’ and get a longer dated ‘A3’, or issue your ‘A1’ with a seven year call on it so you’re getting your ‘A2’, which looks pretty much like a seven year bullet, especially now CPRs have fallen to much lower levels because of what’s going on in the housing market. And then at some point you can add a tap-able tranche to that seven year piece which is still in a reasonable place in terms of maturity. So even in two years’ time you could still be tapping that.
In terms of maturity, if you bring a structure that’s got shorter dated seniors with some longer dated mezzanine and subs at the back end of it then again I think it would hit most of the different investor risk appetites out there.
EUROWEEK: Will, have you been able to buy the bonds you want in the Dutch market?
Howard Davies, Pimco: Short term secondary liquidity, particularly for familiar names, can satiate investor demand, however a dearth of primary supply can mean that the Dutch market can slip off the radar of investors who will look elsewhere for opportunities. This could drop the funding capacity of the market, before even considering the impact of over-regulation and harsh capital treatment over the long term.
And that’s why I have my PCS tattoo now. It’s really important that we find a way to get the right message in front of the right people. We shouldn’t be overregulated for the sake of using a technique called securitization. It’s very important to find a way to get some credible people knocking regularly on the door of regulatory powers and showing that these deals are backed by prime collateral that offer funding for the real economy, for the voter who has typically been working now for 20 years and wants to buy a normal house at standard leverage terms. We have to find a way to stop regulation pushing against high quality deals as hard as they have since the crisis began.
Alink, Rabobank: It is clear that regulations on securitization need to be changed to make securitization levels comparable to other asset classes. But who’s running this campaign? It’s a small industry and it has the disadvantage that it’s considered to speak for its own book.
EUROWEEK: Do investors pay attention to whether something has the PCS label now, and has it factored at all in terms of pricing in the market?
Atkinson, State Street: Without a doubt it’s a positive development. Does it change the way we look at the fundamentals of a deal? Absolutely not. But anything that can help inform the minds of the regulators is helpful because I worry much more about potential impact of bank regulations than I do about the market for Dutch mortgages. Going back to Rob’s point that he likes mezzanine tranches, they’re potentially much less attractive to me now because of their treatment under new capital rules.
If any one of the labels — PCS, TSI or whatever else — gets the credibility with the regulators that generates a better capital treatment, then that would be a great thing so we would quite happily support it. It doesn’t change whether the deal hits our return or not, it doesn’t change what the analyst does, but for the development of the market — and we’re long term players — we think anything that can help is a good thing so we do support PCS. We support them all but I guess the fear is, how do we get them to create that momentum?
Ford, Twenty-Four AM: Yes, it doesn’t happen quickly and even worse with Brussels bureaucracy is it changes every three or four years because they elect a whole new load of politicians and you have to start again with the education process. That takes two years and then you’ve only got two years to get through the next set of changes.
Van den Elsaker, APG: But initiatives like PCS have already delivered part of their objectives. The first discussions around PCS were in 2009 when if you used the term ‘securitization’ towards a central banker or a regulator you might as well have not been in the room. And now we’ve seen the green paper from the European Commission talking about real economy assets, SME securitization, that’s quite an improvement from a couple of years ago and they finally seem to grasp the idea that securitization is a very useful instrument for transferring real economy assets to institutional investors.
Ford, Twenty-Four AM: No one in this room cares whether it’s going to make a difference to each individual investment. But when I meet issuers the first thing I ask them is, ‘are you going to put a PCS label on it?’ Because I want to see PCS labels on these deals and I want to see PCS work and meet its objectives.
Howard Davies, Pimco: I understand some of the new Asian investors do bring up PCS. That’s interesting because for them it’s an extra check. They’re looking across at different countries in Europe and, if they have that label, it just is an extra tick.
Ford, Twenty-Four AM: And if PCS brings some regulatory recognition as well it’s an even bigger tick because it says it meets the regulator’s definition of a high quality securitization.
Hoefakker, Aegon: It’s a good thing because it’s more transparent and creates standardisation in reporting and documentation, so you have seen regulators looking more favourably on securitizations. I think the relative value with covered bonds has to be improved further, but it definitely helps.
EUROWEEK: Max, does the DSA – the Dutch label – share the same goals as PCS?
Bronzwaer, Obvion: Yes, but actually it was two things that led to the creation of the DSA. One was to organise Dutch issuers and investors to unite them in a trade organisation and have one voice towards regulators and policymakers alongside PCS. Secondly it was to co-ordinate on a local level and have one voice towards other initiatives like PCS where we were the first in terms of jurisdiction-specific criteria which took into account the specific situation in the Netherlands with our high LTV on the one hand and responsible lending practice and full recourse environment on the other.
You shouldn’t forget there’s a constant dialogue with local regulators or supervisors like the Dutch Central Bank, who are obviously part of the Basel Settlement, so it’s very important also on a local level to have a voice from the securitization community.
Mark van Binsbergen, Rabobank: One of the goals of the DSA is also the standardisation of loan level reporting. Is that something investors and issuers really care for?
Babber, M&G Investments: The transparency in the Dutch market was very good to begin with. The bigger issue is in the peripheral economies. There are a lot of pro-securitization efforts being made through the DSA, PCS, Bank of England data requirements and ECB data requirements. The question is at what point does it become too onerous for issuers to provide data across several platforms.
Bronzwaer, Obvion: It certainly becomes too onerous if information is required that is not recorded in the process of originating mortgages. There is a risk that the regulators or ECB go overboard in terms of the information they require. The second thing is comparability. As a Dutch issuing community we have a tendency to try to be the best in class and we try to solve issues like non-available data while some of our southern European colleagues don’t have a problem with just putting in zero.
Non-availability will be clamped down on by the ECB, but if it’s an inaccurate number then that will still meet the requirements. People who discuss or devise the formats for these information platforms should talk to investors and discuss what is really necessary and useful instead of just increasing the amount of information that has to be delivered.
Davies, ING IM: If some of the requirements that are being applied to securitized investments are a good idea then they are a good idea for other mortgage-related products as well. Apply them consistently across the board for covered bonds and for people who are investing in pools of whole-loan mortgages.
Atkinson, State Street: The concern that we have with mandatory fields is that the data may not be available. I would rather see a smaller data set than a larger one which precludes issuers from issuing due to non-availability of data. But the second concern is that there’s so much data out there now, the first time someone cross-references the data loan tape to other publically available data sources and identifies the borrowers then the game may be over. You only have to do it once and the data protection laws in every country in the EU means at that point the industry has a massive problem.
Ford, Twenty-Four AM: Some of the UK issuers did a lot of research on this because they were very concerned about what they were being asked to provide to the Bank of England initially. Even using something like half the postcode and cross-referencing with the Land Registry they had an incredibly high success rate in finding the identity of the borrower.
However, by just reporting the old traditional areas — north-west, south-east, Greater London etc — they got the hit rate down to a level that they, and I assume their lawyers, felt was acceptable.
EUROWEEK: Would a Dutch pass-through covered bond hold any investment appeal for RMBS investors?
Van den Elsaker, APG: For a covered bond account it can make sense. It’s an improvement. Instead of a fire sale within one year they can take their time and for these specific banks they can get a triple-A rating and it offers a bit of a pick-up versus a hard bullet covered bond, so for these accounts it can make sense. But for accounts that play the whole universe, including RMBS, in my opinion it doesn’t make sense to invest into that.
Atkinson, State Street: It’s positive in the sense that the only time it will happen is when things have gone wrong. Selling collateral in the jaws of a crisis is not pretty, so anything that gives flexibility is a positive. The other attraction is you can get triple-A ratings from issuers that wouldn’t, under the traditional rating agency criteria, be able to get those ratings. It potentially adds greater stability to ratings, so there are benefits.
Ford, Twenty-Four AM: I might be interested in it if it was a floater. I certainly have funds where we can buy a broad range of secured assets, and covered bonds could go in there. But I don’t put covered bonds in there because they’re all fixed rate and that raises duration and interest rate hedging issues.
EUROWEEK: What’s your threshold for structural innovation? For instance, if a deal matched its assets and liabilities and didn’t use a swap, would you still be interested?
Babber, M&G Investments: Potentially. At M&G we run a variety of funds that could look at different deals with the right structural features and priced accordingly. But we’ve traditionally been a FRN investor in this space and would have less demand in Euro fixed rate tranches at present.
Do I think there could more deals like the Orange Lion trade we saw in July? Absolutely. Away from external investors, there should clearly be a domestic investor base and some originators will even have internal clients that can easily provide matched funding terms.
Whether there is depth in demand for asset liability matched funding is another thing. Given the funding gap, there clearly needs to be another funding solution especially when you consider the 2015 to 2017 RMBS maturity wall.
Davies, ING IM: To look at it from the other end, a couple of things strike me. One, the market in Europe has grown up as a floating rate market, that’s why investors are there. Two, when we’re talking to potential new investors and people who are looking at the asset class for the first time one of the reasons they are looking is that it is floating rate. If you’re concerned about normalisation of interest rates over the medium term there are not a lot of other floating rate assets out there. It’s a very attractive feature in the asset class, particularly at the moment, so I struggle with the idea we can convert ourselves to some sort of fixed rate norm because the asset class would lose one of its key competitive advantages.
EUROWEEK: Tom, Aegon has done a dollar RMBS in 144A format. Do you plan to return to the US? And Max and Danielle, do you have any plans to start using the dollar market?
Hoefakker, Aegon: As I said before, we think it’s important to maintain the market and we have definitely seen some benefits from issuing in dollars. For the Saecure deal you’re referring to last year, the key component for us was diversification of the investor base and that still makes sense. If you look at all the deals right now and also in 2010/11, and you take out the big US and Japanese investors, there is still plenty of room for more diversification.
On the economic side, last year with the basis swap at that time was fairly beneficial to bring a deal. Right now the basis in three or five years is around 20-25. If you take into account the swap cost I think investors probably will realise that the spread on a dollar note cannot be far away from the spread on a euro note otherwise for us it’s not economic to use that currency.
Having said that, we also hear that maybe other Dutch issuers are looking at the 144A framework, potentially in euros. We will certainly follow that closely. It’s interesting to see if that also has the same broad investor base, so we will wait for the results and if it’s a broad investor base we would also be interested in that. It takes away a lot of discussions over the swap which is tough to do also from a collateral perspective.
Boerendans, ABN Amro: We have looked to the US for a covered bond programme. We amended it into 144A language but when we were finished the market had shifted. For our Dolphin programme we also looked at 144A and wrote the language into the programme, but given that we haven’t been very active in the European market lately, it is not very likely that we will do a transaction in the US market. Tom already mentioned swap costs and I think our European investors wouldn’t be very happy if we were to do something in the US market, so that’s more or less off the table for us right now.
Bronzwaer, Obvion: We’re still looking at the US. It is an interesting market with a very big investor universe, even in euros. You have to be a consistent issuer there, but in terms of diversification it’s an interesting space that we will continue to devote attention to.