|
Covered bonds debate: Executive summary
• After record 2006 issuance, the consensus is that 2007 will be another record-breaking year, with the geographical scope of the jumbo covered bond market becoming increasingly diversified
• With such borrowers as BNP Paribas having chosen to issue in structured format, the primary market debate will continue to focus on structured versus legislation-backed issuance.
• With investors across the globe playing a more active role in the international jumbo covered bond market, the market is no longer dominated by German investors
• Washington Mutual and Bank of America have established benchmarks for US issuers in the international covered bond market. Will others follow?
• Following the success of recent dollar deals for such issuers as HBOS and Depfa, will more European borrowers target the US investor base, or is the entry premium too high?
• Will Asian demand for European covered bonds continue to grow? |
Covered bonds debate: Participants
PM, Euromoney Given that 2006 was a record year for the jumbo covered bond market, can we expect issuance volumes to be sustained in 2007?
HH, Fitch People expect volumes to grow further, with new issuers from new countries continuing to join the jumbo market. I think the consensus is that the market will expand to around €200 billion or €210 billion this year.
LA, SGCIB Clearly 2006 was a big year, with notable new issuers coming from a number of the Nordic countries as well as Portugal and the US. This year we’ve already seen a second issuer from the US in euros, and we will see the first issuance from Norway and hopefully some more activity in Italy. But strangely enough, while there had been issuance of about €62 billion by the end of March 2006, in the same period this year there was something like €55 billion, so although people are expecting total issuance of €200 billion this year, in the first quarter we were running a little below expectations.
PM, Euromoney Why is that? Was the market spooked by what has been happening in the US sub-prime market?
LA, SGCIB I don’t think so. I think one factor was that we had a slowdown in issuance in Spain, which was the main driver of new issuance in 2006. The fact that Spain has been a bit slower than last year has been beneficial for Spanish spreads. Overall it has brought down total volumes, but there is plenty of time for the market to catch up later in the year.
PA, CIF Euromortgage France is not the largest issuer but I think we will see an increase of issuance in the French market, with new banks entering the market. In addition to the specialist lenders, such as CIF, Crédit Foncier and Dexia, we have seen BNP Paribas enter the market and I expect a number of the other large French banks will look to the market because of a shift in the structure of their balance sheets. Pressure on customer deposits is leading to increased demand for liquidity and so French banks are examining the covered bond option very carefully. We might not see them entering the market this year but by 2008 I think we will see issuance from some of the large French universal banks.
Structured versus legislation-backed issuance
SD, JPM Do you expect those banks to issue obligations foncières or to use a similar structure to BNP Paribas?
LA, SGCIB Speaking as a French banker, rather than as a representative of the Société Générale funding team, I think other banks are attracted by the flexibility of the BNP Paribas product. But from our perspective we still think the obligations foncières framework is sufficiently flexible and is probably the option that we would favour.
PM, Euromoney Were people surprised that BNP Paribas chose to issue in the structured format when there has been a perfectly good obligation foncière law in existence in France for so many decades?
HH, Fitch From an analytical perspective, we recognize that there is more than one way to issue covered bonds and arrive at the same triple-A rating that we assign in the obligation foncière market. BNP Paribas made it quite clear that it chose this route because there is currently a 20% limit on property loans within the cover pool that are not secured by mortgages. Hopefully that will be increased to 35% when the new European capital directive is transposed into French legislation. This will give issuers more flexibility to refinance existing portfolios that also include loans guaranteed by mutual insurance companies. The 20% limit does not correspond to the structure of French banks’ lending books.
LA, SGCIB I had the impression speaking to people at BNP Paribas that they don’t think the 20% limit will be changed in the very near future. Our feeling is that we would prefer to wait for the limit to be increased to 35%, as Hélène said. Given that most French banks have about 50% of their portfolios in loans insured by mutual insurance companies, 35% would be a much closer representation of their balance sheets.
HH, Fitch In terms of risk, the debate about guaranteed loans is an interesting one. The system of having loans guaranteed by a mutual insurance company rather than being secured on mortgages is peculiar to the French market. As long as the mutual insurance company is performing, a default of a borrower will not lead to any losses, whereas a mortgage right will only avoid losses to the extent the value of the property is greater than the outstanding loan amount. Of course if the mutual insurance company is in default, then recoveries on a defaulted loan will be equal or lower than if the loan was secured on a mortgage right. The agency can analyse any cover pool of housing loans irrespective of the share of mutual guarantees versus mortgages, but one can understand that the French regulator has excluded, in the obligation foncière regime, loans guaranteed by an insurance company belonging to the same group as the issuing bank.
