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Banking

Portugal debate: Banking on reform

A government committed to reforming Portugal’s public sector has also shown that it cares about capital markets. A recent 30-year bond issue signalled a new focus on developing the yield curve and a new covered bond law promises benefits for both issuers and investors.

Portugal roundtable participants


SB, Euromoney Let’s start with the macro-economic situation. What are Portugal’s present challenges?

PS, Fitch Our current sovereign rating for Portugal is AA but with a negative outlook. This outlook was assigned last year, and mainly reflects our concern that the public sector deficit remains very high, and while the government is proposing to reduce it, we feel there has not been sufficient progress made. Some of what has been achieved seems to have been more a result of increasing taxes and with the economy in its present condition, we do not feel that that is what is required. What is required is reducing the cost of the public sector.

SB, Euromoney And what about the level of domestic indebtedness?

PS, Fitch Broadly speaking we’re less concerned, since to a very large extent, indebtedness is mortgage-related. We’d be more concerned if it were consumer-finance related. There has been huge expansion of home ownership in recent years, and that has fed through into mortgage borrowing, but we don’t see that individuals will be unable to service that debt.

SB, Euromoney Fernando, are those the concerns of the investment community?

FR, F&C Yes they are. Also, investors look at the ratings first and foremost. If the three main agencies all have a negative outlook for Portugal then they will demand larger spreads on Portuguese government debt. Portugal has suffered from lack of political stability and economic competitiveness and has a small internal market. So it is crucial to improve the competitiveness of the economy if it is to be successful and its companies are to succeed in this ever more globalized world.

SB, Euromoney Secretary of State, perhaps you could give us the view from the other side.

Room for optimism

CCP, Secretary of State I am more optimistic. Obviously, we have a problem with low growth and with competitiveness. These two points are at least partly to be addressed by the private sector. The public sector’s main mission is to consolidate the budget deficit. And the government has committed itself to reducing the deficit from 6% to 4.6% in 2006, and then to 3.7% in 2007 and 2.6% in 2008. These figures are included in the growth and stability programme, and were deeply scrutinized before being accepted by the European Commission. Obviously we need measures on both the expense and the tax revenue side, and obviously it’s quicker to adjust tax revenues first. The budgets for 2005 and 2006 include measures for the reduction of expenses as a percentage of GDP. This is not an easy task, so we have developed PRACE – Programa de Reestruturação da Administração Central do Estado. We will see the effects of this programme over the next few years in terms of a reduction in the number of public servants and fewer redundant services. We think we are on the right path.

SB, Euromoney What’s the European Investment Bank’s view?

PEA, EIB Well, the Portuguese state is one of our shareholders, so we cannot have views about them as an institution. Personally of course I have my own opinions. Recent reports from the Bank of Portugal, the OECD and the IMF have portrayed the economic situation as gloomy. That’s nothing new. It’s just that these analyses coincided and stressed the imbalances of the Portuguese economy. The main problem is that behind them lie structural problems. It is my understanding that the government is working very hard at solving these problems and we expect the economy to reposition itself on a growth path. So, unlike Fernando, I’m optimistic.

FR, F&C I’m not really pessimistic. I was just making an assessment of the current situation. The government is stable, with no general election foreseen for almost the next four years, no municipal elections for the next three years and no presidential election for the next five. There is a majority in parliament, so there is no excuse but to turn things around. And as Pedro was saying, the ingredients are all in place and I see the will. It’s now a question of execution and a track record to show to investors.

CCP, Secretary of State It is important to note that government policy has been a success so far, because for the first time in a long while we have had a reduction in expenses in the budget. Yes, part of the improvement is in tax revenues, but one-third comes from a reduction in costs. We are also interested in redefining the nature of those costs. One important measure is the technological plan, which will provide higher levels of funding for research and development. And the government is fully committed to central administration reform. For example, we think that by reducing the presence of the state in the economy through privatization, we are making more resources available to the private sector and the government is also stimulating exports and the presence of Portuguese companies in other economies.

Plans for privatization

SB, Euromoney The privatization plans seem to have been just that – plans – for some time. What is the concrete programme for the next 12 months?

CCP, Secretary of State We have many companies in which we want to reduce or to remove public participation. We no longer have any reason for the state to be present in the paper sector, for instance, and so we want to sell our stakes in Portucel and paper distributor Inapa. We think we can conclude the privatization of around 25% of our stake in Portucel this year, and this year or next year, the stake in Inapa. We are also preparing the privatization of Galp Energia in which we will sell a minimum of 20% of the share capital of the company, and this will take place in this year. We also want to continue the privatization of EDP in the electricity sector, and of REN, the electricity grid operator of which we currently own 70%. For the next year we plan also to sell part of our stake in TAP, our national airline. In addition, we are also working to define a privatization model for ANA-Aeroportos de Portugal, the airport handling company. We are strongly committed to this programme and expect privatization proceeds of around G1.6 billion this year, and around G800 million next year. This will make an important contribution to public debt reduction.

SB, Euromoney And Miguel, that’s going to have an effect on Euronext. Presumably you think a positive effect?

MAM, Euronext Well, certainly if privatization is through public placement. The impact would be threefold. First, by increasing market capitalization, it would make the stock exchange more representative of our economy. Second, it would increase liquidity. At present, liquidity is concentrated on a handful of equities. Five stocks are responsible for around 80% of our liquidity. Privatization would change this. And the third consequence would be diversification. New sectors would enter our market and perhaps create an impetus for other companies to list.

RP, PwC Miguel, as a representative of the equity markets, what is your view of the wider economy?

MAM, Euronext Well, the stock exchange is a barometer of what’s going on in the corporate sector and I think some of the PSI-20 (stock index) statistics are interesting. Dividends distributed in 2003 grew by 9.8% versus 2002. In 2004 they grew by 35%. And the 2005 dividends that have recently been announced show an increase of around 60% compared to 2004. These figures reflect the strength and growth of those PSI-20 companies. In the economy at large, if you take the 1,000 largest companies in Portugal, you’ll see an aggregate increase in sales of 73% and aggregate net profit growth of 42.2%, when the economy grew just 1.1%. This demonstrates that Portugal is not technically in a recession. Its private sector companies are trying to find ways to stay competitive and they are showing an increasing level of profits.

RP, PwC Filomena, as a representative of a state-owned banking group, what is your view?

FO, CGD I’m on the optimistic side, but we can see the deceleration of the economy in the growth rates of our corporate credit activity. On the other hand, the retail side is still very dynamic. As far as investor sentiment is concerned, most of our big corporates fund in the international market and at very good levels, proving that investors are still confident about the performance of both the economy and of these big corporates. We are more concerned about small and medium-sized enterprises (SMEs) and we believe there needs to be a new mentality at these small companies to motivate them to invest and take some risks.

A new stock exchange?

MAM, Euronext I agree but I think one problem faced by SMEs is that the capital markets in Portugal and in particular the stock exchange are not performing the role they could, because companies have been slow to use them as a way of sustaining growth and funding internationalization. We have many companies not listing on the stock market, relying only on debt for expansion, and that is a structural problem. As companies grow, they rapidly reach the prudential levels of the institution that grant this debt, but they ignore the other key source of capital – equities. Portugal’s ratio of market capitalization to GDP is just under 50% and this reflects our corporate culture, which is dominated by family businesses.

Much of our corporate strength lies with SMEs and we need a platform for these companies to access share capital in order to grow. But we lack a middle market that can provide a service to these companies. We have the stock exchange, but this is demanding in terms of regulation and presentation of IFRS accounts and audits. We are talking to the market with a view to launching an alternative self-regulated market, which would be less demanding in terms of compliance. But it’s also necessary to develop a whole financial services infrastructure for the middle market.

RP, PwC Perhaps the government could help develop the middle market to increase the performance of the country as a whole?

CCP, Secretary of State We are looking at this situation. We are analysing tax measures and venture capital initiatives and looking at how smaller companies and start-up initiatives could benefit from more effective tax incentives.

FR, F&C I am not a government representative, but I don’t think I remember any other government that has made their intentions to cut bureaucracy and allow companies to be set up and start business more rapidly as this government has done. But most small and medium-cap companies and entrepreneurs believe that they should own the majority of their company, and that doesn’t encourage investors to have much confidence in them. The problem of facilitating access to capital is that the country lacks private equity, and that is the mechanism by which you develop small and medium-sized businesses, until they can be either sold or off-loaded. Just using tax benefits risks companies taking advantage of them while they last and then going back to their old ways. I would much rather see tax benefits that, for instance, decrease income tax for all companies, rather than addressing a specific group.

PEA, EIB Financing and supporting financing to SMEs is one of the strategic goals of the EIB, and we would like to do more in Portugal. Under a new initiative – the Structured Finance Facility (SFF) – we can assume risk directly in our SME loans and can team up with the European Investment Fund, part of EIB Group, which can provide credit enhancement specifically to support SMEs, in mezzanine financing, subordinated debt and even in equity. But in Portugal we need more vehicles through which to do this. Because of the economic slowdown, we feel that some of our intermediaries are having difficulty allocating our lines as the traditional global loan approach is at times not working properly. The challenge is therefore to set up creative instruments and vehicles to make more funding and services available to SMEs. I think the idea of SMEs listing on some kind of stock exchange is interesting but a bit idealistic.

MAM, Euronext It’s not an either/or situation. But if we look at what is happening in other alternative markets, such as AIM, the Alternative Investment Market in London, and in the recently created Alternext in Paris, which is less than a year old, the number of listings in these markets speak for themselves. They are really important pieces of infrastructure that allow companies to grow if they wish, and they also provide an important exit for the venture capital/private equity industry.

Successful long bond launch

SB, Euromoney Let’s move on to sovereign borrowing, and the offices of the IGCP. Alberto, what’s the issuing programme for the next 12 months? And do you have a plan for what you’re going to issue at what points in the curve and roughly when?

AS, IGCP Sure. First though I’d like to talk about investor confidence in the context of the issuance of our 30-year bond in March. The way the issue was received and the price levels achieved show that the marketplace has a high degree of confidence in the policies being pursued by the government. To answer your question specifically, at the beginning of the year, the components of the annual borrowing programme are publicly announced, with particular emphasis on the issuance of medium- and long-term tradable debt securities. The market is given an estimate of the annual gross borrowing requirements and the amount to be funded through the issuance of Portuguese government bonds (OT) and Treasury bills (BT). The amounts to be placed, the maturity and final size of the new lines, the mechanisms for placing the OT – syndication and auction – and the financial intermediaries to be involved are also announced. On a quarterly basis, a more precise calendar is published. Our plans are not fixed as we can’t anticipate market conditions, but the borrowing policy is transparent, predictable and accountable, and we consider that this has been recognized by the market.

Obviously in the context of the eurozone we are a small sovereign issuer. IGCP cannot diversify too much, since to guarantee liquidity we have to concentrate the Republic’s borrowings on a small number of instruments. So we tend to finance mainly through OTs and this year will be no different in that regard.

We will continue to focus on the development of a yield curve with liquid series in standard maturities and on further broadening and diversifying our investor base. To meet this objective, and subject to market conditions, new instruments will be considered – such as the recent issuance of long-term debt. A regular issuing programme in Treasury bills will also be maintained.

SB, Euromoney And are you happy with the spread performance of Portuguese bonds against similar issuers?

AS, IGCP Well, we follow that every day, and in our view the market is pricing Portugal at fair and adequate levels. Portuguese government bonds are priced in between the core issuers of the Eurozone and the peripherals like Italy and Greece.

SB, Euromoney Diogo, can things be done to make the Portuguese government debt market more attractive?

DL, Millenium bcp Investimento The key to that is to listen to the buy side. We will always be a small market, so we should make things as easy to understand as possible so that investors can come to either our public debt market or covered bond market as easily as possible.

CCP, Secretary of State Just one comment regarding the debt market. By the end of last year, the government had taken the somewhat risky but strategic decision to authorize the first 30-year maturity issue of treasury bonds. This decision was strategic because we wanted to consolidate the Republic’s yield curve and the policy has been very well received.

SB, Euromoney Fernando, I see you’re looking at some Bloomberg print-outs there. With its commitment to structural reform, will the government see spreads come down, or with the negative outlook on ratings, is spread pressure the other way?

FR, F&C Portuguese government debt spreads are well priced by the market but the market has a structural problem. According to the IGCP, before the recent 30-year issue, the duration of the outstanding debt was 3.2 years, compared with the main benchmark that euro-based investors use, which is around 6.2 years. That means that the curve is not well balanced – it’s concentrated in short-term maturities. So the country needs to extend duration and also focus on a smaller number of larger-sized issues, so that the weighting on the main benchmark goes up. Even countries like Austria, Ireland and Finland, which have lower outstanding global debt than Portugal, and even Greece, which has an above-average debt to GDP ratio, have issues that have higher weightings in the most common benchmarks than Portuguese government debt. And the weightings on the benchmark define the liquidity.

Liquidity satisfactory

AS, IGCP That is correct, but as I mentioned before, we are constrained by our relatively small funding needs. Unless unexpected financing needs arise, this year we will have only two syndications. And I would not say liquidity is a particular concern. Each syndication is a minimum of €3 billion. This allows for immediate transactions in MTS Portugal, EuroMTS, Tradeweb and BondVision. In addition, IGCP offers repo services to primary dealers and has a platform for buying back securities. Daily average turnover through MTS Portugal is above €500 million and in record months can reach €700 million. Even our recent issue, the 30-year, has experienced high turnover and at good spread levels. So, while I agree that it would be desirable, from the liquidity point of view, to have larger benchmark bonds, I don’t think there is a liquidity issue with the Portuguese OT market.

Covered bonds coming soon

SB, Euromoney We talked earlier about the substantial increase in mortgage assets in the banking sector. That leads us on to the topic of securitization and covered bonds. Manuel, what’s the state of play with the true covered bond legislation at the moment and when are the first issues expected?

MP, Santander Totta If I’m correct, we have the legal framework already in place, and I think the new legislation that has recently been published addresses most of the issues that were on the table. We are now waiting for the Bank of Portugal to put out the specific regulations on how covered bonds will be treated in Portugal from a supervisory standpoint. We’re now essentially in a ‘wait-and-see’ situation. One of the important things about covered bonds for us as an issuer will be how the rating agencies will look at all the legal environments that exist in Portugal to adequately rate the issues. We need to see what kind of advantages we might have in terms of pricing, because we know that covered bonds will serve at least two purposes. One is the diversification of our investor base in terms of funding. The second is to make life a bit easier in terms of extending the maturity of our funding and trying to use our mortgage books to do so. Securitization has been the traditional way in which Portuguese banks have converted their mortgage book into something more liquid. This is not easy from an administrative standpoint in terms of setting up the operations and then running with them for the long term. Covered bonds would give us some advantages there, but of course all that is dependent upon pricing.

AC, Banco de Portugal Yes. As for the legislation, there has been always a concern that the legal environment does not reinvent the wheel. We have tried to form an opinion of best practices in markets where these types of bonds are already mature. Naturally, we are using the regulations of several other EU countries as a basis on which to draft ours. The regulations have been drafted now, and we were a little bit surprised about the speed with which the decree was issued, because the drafting of it has been a long process across several Cabinets. It appeared on 20 March, and we weren’t expecting it until the end of April. From the technical point of view, the draft regulations were completed at the end of May, although my masters are looking at them now. We will consult credit institutions and also the rating agencies, but we are not sure yet if we are going to an open consultation. From my point of view if we open the consultation to the banking community, the rating agencies will be able to indirectly assess those regulations.

SB, Euromoney Are there any sticking points?

AC, Banco de Portugal We have three key technical issues to consider. The most important concern the continuity of the issues in case of insolvency of the issuer. We’ll try to have a process whereby investors are reassured that their rights to interest and other matters are satisfied. Another important issue is risk management. During the first stage we won’t be very prescriptive, because regulation on risk management has to accommodate different levels of sophistication of issuers. And the rating agencies themselves will look also at these aspects. We will have mostly qualitative regulations, which are principles-based, and then we’ll monitor the situation. Another issue that may be important, where we’ll have to be a little more concrete, is everything that is related to valuation; the valuation of real estate, of credit and of bonds themselves.

SB, Euromoney Filomena, what are the key features and flexibilities you’re looking for?

FO, CGD Most of the things that we would like to see incorporated into legislation are already there. In fact, I think that the Portuguese legislation is very sound and compares very favourably with the other regimes. In some cases I would say that the Portuguese legislation ensures a much higher degree of protection for investors than some legislation in Europe. As Adelaide said, the two crucial topics are the bankruptcy procedures – the timing of payments and the question of delays – and the other thing is the ALM [asset-liability management].

I agree with Adelaide that we should not be as precise as some other legislators, because this will be very dependent on the issuer, on the quality of the collateral and so on. We have always stressed during our discussions with the authorities that there should be a clear definition of the asset-liability management procedures. But I also think that banks should have some flexibility to choose the specific methodology they want to follow as long as this is accepted by the rating agencies and the investors. Again, this is dependent on the issuer.

SB, Euromoney And how important will the sector be?

FO, CGD For us it will be a very important instrument. Caixa was one of the drivers behind the idea of the creation of this instrument in Portugal because of the importance of our mortgage business and the fact that this instrument can help us achieve a lower cost of funds and allow us to go longer on the yield curve. So far, Caixa hasn’t had any difficulties in getting long term funding, and at very good levels, but covered bonds will enable us to issue liquid benchmarks at the long end of the curve and that is key. Covered bonds will be even more important for other banks in Portugal, because some don’t have the same easy access to long-term debt that Caixa has.

SB, Euromoney Diogo, Millennium bcp has done residential mortgage-backed securities with its Magellan programme. So is this new legislation less important for you?

DL, Millenium bcp Investimento Yes, we have now done three issues and have total outstandings of €3.5 billion. We actually did the first one back in 2001. That said, we are very enthusiastic about the covered bond legislation because we see it as a way to fund our activity at an extremely attractive level and to extend maturity, since maturities on covered bonds are much longer than those on RMBS (residential mortgage-backed securities).

MP, Santander Totta If you look at the RMBS market, you essentially have an instrument that gives you access to medium-term funding. Right now, a typical RMBS gives you five to seven years maximum in terms of funding. Mortgages in Portugal, although they are typically paid down much earlier than the original maturity, are still longer dated assets than five or seven years, and so there is a significant funding mismatch. So, if we have an instrument that allows us to put at least some funding in place at maturities greater than those available with an RMBS or an MTN programme, then it will allow us to manage our asset/liability mix better and reduce this mismatch. We will be able to access a part of the yield curve that we cannot target at the moment with the currently available instruments.

SB, Euromoney What is the investor base for the RMBS here?

FO, CGD It’s not very big and it’s more international. I would say that 90% of RMBS investors are abroad.

SB, Euromoney You’re predicting therefore that the investor base is ready to suddenly digest an awful lot of 20, 25, 30 year paper?

MP, Santander Totta I’m not saying an awful lot, I’m saying at least some, because if you look at the average maturity of a mortgage in Portugal it’s true that you’re giving out mortgages under 30 or 40 years, but most of them are repaid or rolled over within the first 10 or 15 years. But there are always those who continue, an average is an average, and you need to be able to move on to the extreme cases and be able to fund that and reduce that mismatch.

Waiting for the rating

SB, Euromoney What are your expectations on rating?

FO, CGD We will be very disappointed if we don’t get a AAA rating from all three rating agencies.

DL, Millenium bcp Investimento We are very keen and also anxious to know how rating agencies will look at it. We don’t have the same rating as Caixa – well, no-one in Portugal does – so it will be more difficult for us to achieve a AAA rating, but maybe we will because the legislation will be very good in terms of protecting the investors’ interests.

FO, CGD This is a very important point. This legislation is so strong that I think that these bonds would benefit from de-linkage from the rating of the originator.

SB, Euromoney Philip – you’re the arbiter here....

PS, Fitch We welcome the fact that there is now a fairly tight timetable to complete all the supplementary legislation as well. From a rating point of view, we are happy with the legislation as currently drafted, but we do need to see the fine print of the supplementary regulations. One of the key things is what happens in the event of the issuer becoming insolvent and the extent to which the transaction can be viewed on a stand-alone basis after that insolvency. Because these issues have been treated in different ways by different countries, it’s fairly common to see a AAA in some countries, but in others, like Spain, it’s not common at all. The ratings very much depend on how the guidelines are finally drafted.

To achieve the AAA we would need to be able to look at the transaction on a stand-alone basis and look at the collateral pool. Clearly if there isn’t total separation, and you are therefore looking at the position of the issuer relative to the transaction, then that could impose a constraint on the rating of the transaction. Now, obviously for a higher rated issuer, that may not necessarily be a problem, although it may still not get to the AAA. But clearly there would be less benefit for lower rated issuers. Overall, as far as we can see at this stage, certainly after the first transaction, a covered bond should be easier to put into place and should be more cost effective than current residential mortgage-backed security transactions.

MAM, Euronext Would the choice of model have any consequences as far as whether or not the underlying assets are part of the bank’s balance sheet, and what are the implications for core capital?

PS, Fitch That rather depends on the attitude of the regulator.

AC, Banco de Portugal Covered bonds will be risk-weighted for solvency purposes at 10%, whereas if a bank were to invest in ordinary shares or bonds issued directly by another credit institution, it would be 20%.

FO, CGD From an issuer point of view there is no capital release, even if the originator decides to go for indirect issuance. In this case, the issuing institution will consolidate because it will be fully held by the originator who will consolidate its capital with the parent house. This is one of the big differences from RMBS. The other is that we believe that this instrument gives a higher level of protection to the investor than the RMBS does.

PS, Fitch There are other things that we would need to bear in mind. Clearly, I wouldn’t see this being a problem in the initial stages, but in the longer term the agency would be looking at the extent to which the banks actually take advantage of covered bonds. Unsecured creditors may be in a weaker position if more and more of the bank’s assets are allocated to covered bond transactions. There is a potential implication there for the rating of the issuer itself, but that really depends to what extent the banks actually take advantage of covered bonds.

DL, Millenium bcp Investimento There are already limits on securitizing loan portfolios.

AC, Banco de Portugal They are not official, but there are some agreed limits on securitization transactions, whereby when the limit is exceeded they are penalized in prudential terms. Also, this will coincide with the introduction of the Basle II rules. And if banks are cherry-picking in such a way as to lower the quality of the loan portfolio that remains unallocated to covered bond transactions, supervisors can take care of that by imposing measures through Pillar 2.

DL, Millenium bcp Investimento Philip, do you have any particular view on whether we should do direct issuance from our balance sheets or through the special bank that regulation allows us to?

PS, Fitch I think from our point of view it doesn’t make a great difference. We’re more concerned with whether or not the regulatory framework is such that the transaction is completely stand-alone. Whether it’s on the bank’s balance sheet or in a separate vehicle, it really doesn’t matter particularly. From the bank’s point of view it’s probably easier and simpler to use its own balance sheet and not create a separate vehicle, but it’s not a significant issue for us.

SB, Euromoney If you want a AAA rating, why not simply copy a system where AAA ratings are common?

AC, Banco de Portugal The regulations will not be rating-agency driven. We are trying to do something that satisfies us prudentially and that at the same time corresponds to the way that we think rating agencies look at these type of things. So there is no trade-off, there is a balance.

SB, Euromoney The UK has a successful ABS market without a covered bond law and Portugal been doing successful RMBS transactions, so is it worth going through all this painful discussion when you have a vehicle that arguably achieves quite a lot of what you want?

DL, Millenium bcp Investimento After the first covered bond, it should be much easier, much faster, and you won’t use as many resources to do a second and subsequent ones. Also, if you have the tool, the investor base is different, so you can manage diversification targets through one or the other. Bringing in more instruments will allow the Portuguese banks a competitive way of financing themselves alongside other banks in Europe.

AC, Banco de Portugal There is also something in securitization called the equity piece. That is retained by the originator, and within the Portuguese regulatory framework it is heavily penalized in terms of consumption of regulatory capital.

SB, Euromoney What do you think the issuance volumes could be? And could covered bonds crowd out other issuers?

FO, CGD It depends on price. I think it’s reasonable to expect a single-digit spread for a 10-year issue in the near future, so I believe that most Portuguese banks will fund their mortgage activities through covered bonds. It would allow them to get long-term funding at lower cost than with RMBS, which are medium term, with a higher cost and with a much more cumbersome process.

MP, Santander Totta In other European markets we see that in spite of the AAA rating, covered bonds always pay more than the sovereign of that country. This is normal, because sovereign debt is zero percent risk-weighted instead of 10%. This is an important factor, but I don’t think there will be competition between the two instruments, because they are very different. But they will attract the same kind of investors, from a completely different investor base to that of the RMBS.

PEA, EIB I think part of your question was the potential size of the of the covered bond issues. I was just looking through some statistics of the European Mortgage Federation, and in 2004 in Spain, for example, 25% of the overall mortgage debt outstanding was already represented by covered bonds.

FO, CGD Well, mortgage lending outstanding in Portugal is G80-something billion.

PEA, EIB And if we apply the European average ratio of covered bonds market to existing mortgage outstandings we would be looking at 20% of that in potential issuance.

FO, CGD I think at the beginning of the process we have to expect a bit less than that. It will be a tentative process.

CCP, Secretary of State Mortgage credit in Portugal has experienced an impressive growth rate of around 40% over the last five years, compared with a consumer credit growth of around 6%. Securitized credit,under the securitization law approved in 1999, has higher growth rates of about 182%, but obviously this is not yet a mature market in Portugal. On the other hand, the ratio of securitized credit to mortgage credit by the banks was around 21% by the end of 2005, which compares quite well with Spain. We think there’s still room for significant improvement, both on the covered bond market and on the securitization market. But it’s up for the banks to decide what kind of regime they want to use.

SB, Euromoney Why does this government think the creation of this market is so important?

CCP, Secretary of State It is important because it creates more ways for the financial institutions to securitize their portfolios. The market was not comfortable enough with the securitization law we have had in force since 1999. We had a covered bond law that was approved in 1990, but this regime had never functioned well, and it was important to replace it with a new one, to compare favourably with other European regimes. It’s important to be on a level playing field with other European countries.

SB, Euromoney Fernando, what does the buy-side make of these developments?

FR, F&C On the buy side we can just wait and see what happens. But having made a comparison of the different legislations, I think that the Portuguese one is quite advanced. If the Bank of Portugal does decide to follow the Irish model, it would be helpful. The key thing, though, is that the issues should be sizeable enough and the issuers should be prepared to do some market-making. Creating even a perception of liquidity can overcome investor scepticism.

DL, Millenium bcp Investimento On that issue – size and liquidity – it is common practice in the covered bond market to have liquidity agreements in which issuers and banks support issues and agree to issue in a reasonable minimum size. I believe that all the Portuguese banks that are planning to issue covered bonds are considering market-making agreements and are committed to creating the liquidity that we all expect.

SB, Euromoney And Philip, how long do you need after you see the final fine print before you give your opinion?

PS, Fitch Well, from our point of view it would be helpful if we can see a copy of the draft regulations at an early stage, then obviously we can be working on it already, but I see no reason why we shouldn’t turn it round fairly quickly.

SB, Euromoney Well, ladies and gentlemen, that’s all we have time for. Thank you very much indeed.

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