Crucial year ahead for green covered bonds

The Covered Bond Directive is reaching a critical stage that will determine the market’s form and shape for years to come. Luca Bertalot, general secretary of the European Mortgage Federation and European Covered Bond Council, discusses this — and other key factors that will drive the market in 2019.

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Within the next few months the European Mortgage Federation-European Covered Bond Council’s Energy Efficient Mortgage (EEM) Initiative will have taken root and a large number of lenders will be originating mortgages suitable for green covered bonds or RMBS. The market’s strategic importance as a long term funding tool for global issuers will also advance, with further expansion in Brazil and Japan, where debut deals were recently launched.

More immediately, the European Commission’s proposed Covered Bond Directive is entering its final legislative phase. At the end of November 2018 the European Council and the European Parliament’s Committee on Economic and Monetary Affairs (ECON) articulated their respective versions of the directive.

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The final compromise text will now be negotiated in tripartite meetings, or trilogues, between ECON, the European Council and European Commission.

This process may be delayed if Austria, incumbent president of the Council of the European Union until the end of 2018, hands over the reins to Romania in the midst of negotiations.

Talks must be concluded by mid-February, in time for the European Parliament to vote by end of March or April and before European parliamentary elections in May.

As a new parliament would likely insist on starting the entire process from scratch, if this tight deadline is not met then the directive could be postponed for years. “The question is if we succeed in having a final vote by April,” says Luca Bertalot, general secretary of the EMF and ECBC.“That’s a really big question mark.”

One of the biggest stumbling blocks in the talks involves the assets eligible for inclusion in cover pools. ECON had proposed separating the market into two categories.

These are premium covered bonds, which are secured on assets currently stipulated in the Capital Requirements Regulation (CRR), and ordinary covered bonds that comply with the looser definition set out in the Undertakings for Collective Investment in Transferable Securities (Ucits).

Whilst it is likely that this specific wording will disappear, the directive must accommodate both types. “Ucits-compliant covered bonds are important in Denmark and Luxembourg, so if we want to defend the status quo these bonds will need to remain an option” says Bertalot. He is hopeful that a compromise text will be agreed linking these markets to high quality assets.

Bertalot says there is a strong consensus between the European Council’s version of the directive and what the industry thinks is best for the market.

However, ECON’s version is still giving cause for concern and some parts “still need fine tuning”. ECON’s version of Articles 10, 15 and 16, which respectively deal with the homogeneity of asset pools, liquidity buffers and the use of derivatives, could prove troublesome.


Mortgage milestone

Concurrent to this, the ECBC has progressed towards a new milestone with its EEM Initiative. In early December the ECBC published a definition of an energy efficient mortgage. There were 41 lenders, responsible for originating 55% of the European Union’s outstanding mortgages, involved in the pilot phase.

From early December they have been able to start applying this definition and tag eligible mortgages on their balance sheets, spurring green covered bond supply.

Interest could well be boosted by a number of supranational agency members on the EEM Initiative’s advisory council who might support growth with a scheme to purchase green covered bonds secured on eligible energy efficient mortgages. When the next plenary ECBC meeting is held in Riga, on April 24 2019, Bertalot hopes to show “an important number of banks” are issuing energy efficient mortgages.

In a wider context, covered bond markets globally have recently made new strides and should develop further in 2019. Santander Brazil tested the market with two private placements in November, with a view to issuing a benchmark soon after and around five Brazilian issuers are expected to follow.

Meanwhile, in Japan, covered bonds have started to gain a lot of attention from a broad range of issuers after SMBC issued the country’s first deal.