Washington Mutual is the first US issuer of covered bonds and it is essential that its inaugural deal succeeds. So it makes sense to select a lead manager group made up of European banks with strong covered bond franchises.
But US dealers are watching closely, with an eye to taking advantage of the change in circumstances. For many years US investment banks have half-heartedly looked at this market before deciding that the fees on offer are too thin to make it worth their while (albeit thereby missing out on relatively lucrative swaps business).
They might now have a compelling reason to jump right in. Take WaMu: it is the third-largest US home loan originator and it considers covered bonds an ideal replacement for its use of short-term financing from the Federal Home Loan Banks system – with which it has $55 billion outstanding. If US originators target only a fraction of their portfolios to Europe it will signal a dramatic change in the market’s dynamics.
What will be the market’s response to WaMu? There will no doubt be some traditionalists who are concerned about the undermining of the purity of the covered bond product. WaMu has used contract law to establish a triple-A rated security. This has happened before. Contract law, rather than a specific legislative framework, was deemed good enough for UK borrowers. It is only now, some three years after the first UK deal, that the UK authorities have set in place plans to establish a covered bond law – something the US is unlikely ever to replicate.
But these concerns will be surely be outweighed by the prospect that US investors might at last take the sector seriously. Ever since the first US global Pfandbrief from LandesbankRheinland Pfalz, a decade ago, the covered bond issuers have struggled in vain to sell much paper into the US. If WaMu and those that follow it can drum up some interest, it can only be good news for the asset class.
