Abbey National and Northern Rock are considering covered bond programs, say market participants. The move comes after HBOS announced its plans to issue the U.K.'s first-ever covered bond (BW, 6/2). Matt Young, a spokesman for Abbey National, says the bank is keeping an eye on how the HBOS covered bond proceeds in the market before issuing its own. Calls to Chris Storey in Northern Rock's treasury department in Newcastle-upon-Tyne, were not returned.
The U.K.'s top mortgage lenders cannot ignore the new covered bond structure for a few reasons. HBOS' covered bond, which is slated to be E1.5 billion or larger, will garner cheaper pricing than senior unsecured debt, will expose it to an entirely new investor base and extend its liability profile, says Stefan Dreesbach, executive director of fixed income, currency and commodities at Goldman Sachs in London. Goldman, Citigroup and Dresdner Kleinwort Wasserstein are lead mangers on the HBOS deal, the road show for which begins today.
HBOS' covered bond will be issued by HBOS Treasury Services--the bank's financing unit. The bond's proceeds will be loaned to a newly created entity, HBOS Covered Bond LLP, which will buy mortgages from Halifax--HBOS' mortgage lending arm. The mortgages will be ring-fenced in HBOS Covered Bond LLP, which is bankruptcy remote in the event HBOS becomes insolvent, thereby guaranteeing the covered bonds issued by HBOS Treasury Services.
The HBOS deal will be a benchmark size to guarantee liquidity and will be between five and 10 years depending on investor feedback, says Goldman's Dreesbach. The bonds will be as liquid as pfandbrief issued by German banks, he adds. The covered bonds will be the first in HBOS' program, which is expected to become a multi-billion euro funding program.
"There will be a lot of interest for this U.K. covered bond, not just as an instrument, but in the issuer. U.K. banks are some of the best performing in Europe, especially in contrast to some of the problems the German banks have been having," says Luis Maglanoc, deputy head of credit research at Hypovereinsbank in Munich.
HBOS' covered bond will be triple-A rated by Moody's Investors Service, Standard & Poor's and Fitch Ratings. Moody's rates the bond eight notches higher than HBOS Treasury Services' senior unsecured debt rating, which is double-A. That means HBOS Treasury Services would have to be downgraded to below Baa2 before the covered bond would be in danger of losing its triple-A rating. Mortgage-backed pfandbrief are only rated three notches higher than the issuing banks.