The covered bond market has shuddered to a halt. Increasingly negative repercussions for pricing in the European jumbo market have caused the inter-bank market-making of jumbo covered bonds to be suspended on the recommendation of the European Covered Bond Council’s “eight to eight” committee of market makers and issuers. Conditions are even worse than in September, and the possibility of the entire covered bond market shutting down until the new year is increasingly plausible.
Even on the assumption that it will reopen in January, many banks have been left wondering what they have to do to secure a mandate. On the basis of distribution, if one has a proper sales force and a reasonably good dialogue with issuers, there is very little to choose between potential leads for what little issuance is planned. Increasingly, the difference between getting a mandate and not is coming down to one of three Rs: regionalism, relationship and reciprocity.
Regionalism is not often weighted very strongly, given the nature of covered bond investors. But in a conservative, defensive market, it becomes more important. Relationship is also something that is largely ignored during the boom times but has significant resonance during this period of correction. Many US banks, such as Merrill Lynch, rely on it, as they are unable to benefit from regionalism – their home market has all but disappeared – and, not being an issuer themselves, they cannot tap the third and most weighty R, which is reciprocity.
More and more issuers are granting mandates to those that offer them in return. A lot of issuers and underwriters are now dependent on reciprocity. Without it, banks such as Natixis would be nowhere near their presently vaunted position in the league tables. Since Sparbank reopened the market following the hugely volatile summer, there have been some 24 deals. Natixis has been involved in nine of them, which places them second behind Barclays, which has led 10. In many cases, if a potential lead cannot offer reciprocity, it cannot get in. A perfect example is Deutsche Bank, which was one of the biggest covered bond players before the crunch but is now nowhere to be found. Deutsche has not been involved in a single deal of the 24. That it cannot offer reciprocity is undoubtedly a reason in this decline. Conversely, Dresdner has thrived in the covered bond market since the summer, with a presence on seven deals. Dresdner cannot offer reciprocity either but has found success by concentrating on regionalism and relationship.
An example of a beneficiary of reciprocity is BNP Paribas. Since the summer, the French bank has participated in six deals. BNP Paribas not only offers extensive abilities to issuers but also the chance to take part in its own issues.
As the wider covered bond market continues to labour under such harsh conditions, each issue that does come to market will spark a free-for-all among banks that will cause issuers to look for such non-traditional factors as the three Rs in order to determine its leads. Many banks may realize that without their own programmes it is becoming more and more difficult to participate in the covered bond market. Some are already planning an increase in their issuance capabilities. Commerzbank is buying out Hypothekenbank Essen, and Société Générale is structuring its own mortgage arm that would allow for covered bond issuance.
