Participants
JO, Euromoney The covered bond market is one of the largest and fastest-growing sectors of the fixed-income markets. Let's review the current developments behind that success, then look at some of the remaining concerns and finish up by looking at what may happen in the future. Helene?
New issuers, new countries
HH, Fitch Ratings Perhaps a good place to start is with country developments. Ziad, what do you think have been the most interesting from the investor perspective?
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Awad, Goldman Sachs: issuers who
establish a poor pattern of secondary
market performance will find it
harder and harder to correct. |
ZA, Goldman Sachs The key development has been expansion outside Germany and in particular the rapid growth of the Spanish market. Spain is likely to be larger than Germany for the first time ever in terms of benchmark issuance. Also the UK covered bond market has come on line, starting with HBOS, over the last couple of years, and, very importantly, Ireland has seen rapid growth in issuance, thanks to a new and very sophisticated covered bond law. Finally the home market, Germany, has reacted positively and has launched a new Pfandbrief law, which is rejuvenating that market in something of a virtuous circle.
JO, Euromoney Yes, I was just in Spain and we have Ahorro Corporacion looking at issuing up to €70 billion a year and other Spanish issuers have focused on issuing in very large size.
HH, Fitch Ratings This morning [May 4 2005] the Italian Senate has approved the legislation for the Italian covered bond. So that is another market that will provide growth in the asset class.
WHN, Depfa So how many Italian issuers are lining up?
JO, Euromoney At least half a dozen I know of.
New products
HH, Fitch Ratings Another driver has been the increase in what were initially thought to be competing products. Other types of structured bonds, far from taking investors from Pfandbriefe, have actually increased interest in the asset class as a whole.
WHN, Depfa Definitely.
LA, SG CIB Over the past six to nine months I've seen increased interest out of Asia for these covered bond products. Part of that has been due to the new issuers. We're also seeing renewed interest out of Canada.
JO, Euromoney Are investors confused by the change from a legal branded market into a credit market in which investors have to analyze each credit and each structure?
WHN, Depfa I don't think they are confused. Certainly it means investors have to have the ability to analyze the pure credit, as well as the structure, of the product. And it is also a question of price.
DB, HBOS Remember that even in Pfandbrief, investors have always had to look at the underlying credit story. When we came into the market, there had been a number of downgradings within the Pfandbrief market. People learnt that they had to look at the originator, at downgrade risk and so on. Also, in establishing our programme, we modelled it on the best practice in Pfandbrief and tried to create something that investors would be familiar with, rather than a structured credit product.
TB, Allianz Absolutely – people have always had to analyze credits and structures because one triple-A is different to another. Six months ago, many market participants told us that there is a high de-linkage of covered bonds from their issuers. After the negative credit news in the recent past, we saw that even triple-A products widened one or two basis points and different issues behaved differently. So we do need to analyze the issuer and the structure even if it is a Pfandbrief-law backed issue.
ZA, Goldman Sachs If you're talking about the public-sector-backed covered bonds, you are buying into European sovereign risk, and if you're buying a mortgage-backed covered bond, you're buying into the European mortgage market and a structure that makes it a triple-A. The differentiation at the moment is not huge between those different credits, because the structuring has become very sophisticated and the two products have been sold at the same time in a very similar way, but I think we have to be very careful when selling to investors and to be clear about what we're selling to them and educating them appropriately.
LA, SG CIB I think issuers have made an effort. I also think the rating agencies need to look more carefully at what collateral is in the pool. I remember back in 2002/2003, when we saw some of the public sector issues at triple-A S&P and double-A3 Moody's. From a prop trading point of view we said, 'Triple-A S&P at 25 over swaps? Maybe we should buy some'. Then we went to management and they asked, 'Well what actually is in there?' and the issuer sent us a six-month old Excel pie chart of the collateral with lots of pretty colours but no real detail. That has all changed.
TB, Allianz If we are talking about covered pools, one interesting thing is, as you know, in July in Germany the Anstaltslast & Gewährträgerhaftung [Landesbank state guarantees] will be removed. So loans affected by these regulations are no longer cover pool eligible. But in Luxembourg it will still be possible to put them in the cover pool. So investors must be very careful and must understand what's in the pool and the underlying law.
HH, Fitch Ratings Is it harder for issuers to explain structured covered bonds than Pfandbriefe? David, do you have to explain the differences between you and your securitization master trust?
DB, HBOS No. If you do that, you start to confuse the investor. All you want to say is, 'This is our story. You have a double-A bank and triple-A security'. We want investors to accept the credit story and focus on liquidity because in triple-A it's liquidity that should drive the price.
WHN, Depfa So, when you roadshow a structured covered bond, do investors try to compare it with the legally-backed covered bonds? Do they raise questions with respect to that?
