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Capital Markets

Covered bonds: WaMu ponders pioneering role

(May 2006) It is early days but US issuers are seriously considering covered bond issuance. There are economic and regulatory reasons why this makes sense.

Washington Mutual is conducting a feasibility study on a covered bond. If it goes ahead, it will be the first US issuer to use this funding tool and is likely to prompt a series of other financial institutions to follow suit. Other US issuers are also said to be waiting in the wings.

Senior bankers say that ABN Amro and Barclays Capital are working on the study. Both banks have refused to discuss it with Euromoney.

Alternative

What is the rationale for a US institution to issue a covered bond? A lot of bankers assume that agency funding in the US – which is a very aggressive source of finance – remains the more attractive option. But for WaMu, a large provider of home loans in the US, covered bonds could provide a welcome alternative source of liquidity.

The prospect is of a new and deep investor base for WaMu different from the one it has in the domestic market. US banks are more domestically focused than financial institutions in Europe when it comes to their funding sources. Well-rated US banks, generally, have never looked to Europe for senior unsecured or secured financing.

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