If a product swamps a market, prices go down. Yet this basic economic tenet seems to have eluded many of the issuers in the Spanish covered bonds market. How else to explain the consistent lack of coordination in issuance endemic in the world of the cédulas?
Talk to market participants and they will point to the period in late March and early April when three 15-year cédulas were launched in quick succession, which pushed spreads progressively wider. The bonds underperformed and inventory was left on the leads’ books.
Crowded house
More recently, Caja Madrid, BBVA and AyT were all set to crowd into the market with covered bonds maturing in 12 years. Although Caja Madrid went ahead with the launch, and the AyT launch is planned for June 1, BBVA was evidently not keen to see its spreads widen unnecessarily. It scrapped its 12-year tranche, due a week after the Caja Madrid cédula, and concentrated on a six-year tranche instead. Although some have applauded Caja Madrid for its pricing – 11 basis points over mid-swaps – as sensible, and the BBVA move is generally regarded as prudent, one still has to ask why the three bonds were scheduled to come to market at such short intervals? The question becomes more poignant if one considers a four-week lull in primary covered bond market that followed the launch of the 15-year cédulas.
Critical commentators are hesitant to go on the record, but the most prominent complaint among arrangers is that cédulas issuers are unwilling to talk to one another. Instead, they are keen to trump each other by scampering to place their issue in the market first. One indication of this spirit of one-upmanship is that Caja Madrid was the last of the three to mandate its cédula, but ended up being the first to launch.
The desire to come to the market first and the aversion to cooperation with competitors leads to what one observer has described as a “run of issuance”. As a consequence of overpriced cédulas flooding the primary market, spreads in the secondary markets widen, and investors will sell off existing issuance to replace them with more attractive new issues. Although all this is good news for investors, it is hardly the most efficient way to refinance mortgages, and makes life difficult for the arranging banks.
Bit of a mess
One explanation for this competitiveness among Spanish issuers is that a lot of cédulas are jumbos that have aggregated the collateral from Spanish savings banks. The gestoras, aggregators such as AyT, TDA and IM Cédulas, essentially have to compete for the collateral of the savings banks.
Such analysis is no cause for optimism. “My concern is that competition is intrinsic to the Spanish covered bond market structure”, says one source. “It is all a bit of a mess.”
