Covered bonds debate: Covered bond issuers take on the global market


Philip Moore
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The jumbo covered bond market had another banner year in 2006. A record €170 billion of issuance was accompanied by significant globalization of the market. But the growing range of structures, from an ever-expanding group of countries, is a double-edged sword, adding complexity as well as diversification.

Covered bonds debate: Executive summary

• After record 2006 issuance, the consensus is that 2007 will be another record-breaking year, with the geographical scope of the jumbo covered bond market becoming increasingly diversified

• With such borrowers as BNP Paribas having chosen to issue in structured format, the primary market debate will continue to focus on structured versus legislation-backed issuance.

• With investors across the globe playing a more active role in the international jumbo covered bond market, the market is no longer dominated by German investors

• Washington Mutual and Bank of America have established benchmarks for US issuers in the international covered bond market. Will others follow?

• Following the success of recent dollar deals for such issuers as HBOS and Depfa, will more European borrowers target the US investor base, or is the entry premium too high?

• Will Asian demand for European covered bonds continue to grow?

Covered bonds debate: Participants

PM, Euromoney
Given that 2006 was a record year for the jumbo covered bond market, can we expect issuance volumes to be sustained in 2007?

HH, Fitch
People expect volumes to grow further, with new issuers from new countries continuing to join the jumbo market. I think the consensus is that the market will expand to around €200 billion or €210 billion this year.

Clearly 2006 was a big year, with notable new issuers coming from a number of the Nordic countries as well as Portugal and the US. This year we’ve already seen a second issuer from the US in euros, and we will see the first issuance from Norway and hopefully some more activity in Italy. But strangely enough, while there had been issuance of about €62 billion by the end of March 2006, in the same period this year there was something like €55 billion, so although people are expecting total issuance of €200 billion this year, in the first quarter we were running a little below expectations.PM, Euromoney Why is that? Was the market spooked by what has been happening in the US sub-prime market?

I don’t think so. I think one factor was that we had a slowdown in issuance in Spain, which was the main driver of new issuance in 2006. The fact that Spain has been a bit slower than last year has been beneficial for Spanish spreads. Overall it has brought down total volumes, but there is plenty of time for the market to catch up later in the year.PA, CIF Euromortgage France is not the largest issuer but I think we will see an increase of issuance in the French market, with new banks entering the market. In addition to the specialist lenders, such as CIF, Crédit Foncier and Dexia, we have seen BNP Paribas enter the market and I expect a number of the other large French banks will look to the market because of a shift in the structure of their balance sheets. Pressure on customer deposits is leading to increased demand for liquidity and so French banks are examining the covered bond option very carefully. We might not see them entering the market this year but by 2008 I think we will see issuance from some of the large French universal banks.

Structured versus legislation-backed issuance

SD, JPM Do you expect those banks to issue obligations foncières or to use a similar structure to BNP Paribas?

Speaking as a French banker, rather than as a representative of the Société Générale funding team, I think other banks are attracted by the flexibility of the BNP Paribas product. But from our perspective we still think the obligations foncières framework is sufficiently flexible and is probably the option that we would favour.PM, Euromoney Were people surprised that BNP Paribas chose to issue in the structured format when there has been a perfectly good obligation foncière law in existence in France for so many decades?

HH, Fitch
From an analytical perspective, we recognize that there is more than one way to issue covered bonds and arrive at the same triple-A rating that we assign in the obligation foncière market. BNP Paribas made it quite clear that it chose this route because there is currently a 20% limit on property loans within the cover pool that are not secured by mortgages. Hopefully that will be increased to 35% when the new European capital directive is transposed into French legislation. This will give issuers more flexibility to refinance existing portfolios that also include loans guaranteed by mutual insurance companies. The 20% limit does not correspond to the structure of French banks’ lending books.LA, SGCIB I had the impression speaking to people at BNP Paribas that they don’t think the 20% limit will be changed in the very near future. Our feeling is that we would prefer to wait for the limit to be increased to 35%, as Hélène said. Given that most French banks have about 50% of their portfolios in loans insured by mutual insurance companies, 35% would be a much closer representation of their balance sheets.HH, Fitch In terms of risk, the debate about guaranteed loans is an interesting one. The system of having loans guaranteed by a mutual insurance company rather than being secured on mortgages is peculiar to the French market. As long as the mutual insurance company is performing, a default of a borrower will not lead to any losses, whereas a mortgage right will only avoid losses to the extent the value of the property is greater than the outstanding loan amount. Of course if the mutual insurance company is in default, then recoveries on a defaulted loan will be equal or lower than if the loan was secured on a mortgage right. The agency can analyse any cover pool of housing loans irrespective of the share of mutual guarantees versus mortgages, but one can understand that the French regulator has excluded, in the obligation foncière regime, loans guaranteed by an insurance company belonging to the same group as the issuing bank.LD, ECB I go along with Hélène’s view. If up to 50% of a bond is covered by bank loans or guarantees then I think mortgage covered bond is an inappropriate term for what is in fact a kind of structured product backed by bank exposure. As an investor I understand the logic of why BNP Paribas chose to issue in the way it did. But personally I feel comfortable with the obligation foncière legislation and I think most investors would prefer to see bonds issued in the context of an established legal framework – at least in Europe. In the US and the UK investors maybe feel more comfortable with structuring techniques.SD, JPM I agree with Lars and I think a lot of investors are thinking the same way. Nevertheless, the success of the BNP Paribas transaction suggests that as long as a bond is rated triple-A and is recognized as a covered bond – structured or backed by covered bond legislation – investors will buy it because it offers diversification. You only have to look at the massively oversubscribed books for issues like the Washington Mutual bond, where the order book was €17 billion, to see how strong investor demand is. That was a record in terms of bookbuilding. The last information I had was that there was €7.5 billion of demand for the Bank of America deal, so there is obviously tremendous appetite for new names and new countries. But there is also demand for new structures from countries with established legislation, as we’ve seen from such issuers as Landesbank Berlin in Germany. I know it sounds a simple comment but at the end of the day if the structure, the rating and the spread are all OK, investors will buy these issues and see them as covered bonds.LD, ECB But the purpose of a covered bond is to have a secondary back-up. If you don’t need this cover, because we are currently enjoying good market conditions, you may just as well sell a senior unsecured bond. Covered bonds are designed to withstand bad market conditions, and in a few years we will be in a better position to judge which have been the better structures.LA, SGCIB Yes – in three or four years’ time it will be interesting to compare the performance of the BNP Paribas and CIF Euromortgage covered bonds.

I think much will depend on issuers’ ability to differentiate themselves from one another, because what we have seen over the past few years is a creeping dilution of the covered bond principle. The term covered bond has been used, over-used and one could even say abused, to the point where it holds out a promise that it might not always be able to fulfil. For issuers concerned about the dangers of contamination from clones, or derivatives, or replicas of the original covered bond, the challenge will be to differentiate themselves positively, possibly by creating a new brand for their product. That would allow them to erect a firewall between themselves and some of the racier segments of the market, which would shield them from the collateral damage they might otherwise suffer if there is a problem. The covered bond term has lost much of its meaning, and if a panel like this is discussing the market in two years’ time it will be interesting to see what other newcomers have arrived and whether they have undermined the quality of the original product.

I would also like to mention the ratings agencies here. In the late 1990s the agencies were reluctant to assign triple-A ratings to covered bonds that didn’t have explicit, legally enshrined assurances of bankruptcy remoteness. But today, anything that appears to make the promise of contractual asset backing and bankruptcy remoteness is being assigned that rating. Somehow the very stringent approach that was noticeable in the late 1990s seems to have given way to a much more open-minded and flexible methodology.

PM, Euromoney Are you saying that the agencies change their methodology too often?

Absolutely. I find it amazing that there is such generosity now.

HH, Fitch
Having followed the structured finance market since long before rating covered bonds, I would challenge the view that there has been any slippage of standards as far as the analysis of what constitutes bankruptcy remoteness is concerned. But I do agree that it can be difficult to reconcile having an established legal framework that clearly states that an instrument will survive the insolvency of its issuer with looking for the same certainty by reading contracts and legal opinions. By their nature the two are very different, and if it is challenging comparing them within the same country, it is even more difficult comparing them on a cross-border basis.JB, HBOS I agree with that. Bear in mind that it’s not just the ratings agencies but also the investors that are scrutinizing these bonds. We have now done 10 benchmark issues and the demand for those has shown that they have successfully passed the test of investors’ scrutiny. Investors have looked at the product very carefully and concluded that it does merit inclusion in a covered bond portfolio.PM, Euromoney If people are concerned about dilution of the covered bond principle, how do they respond to news that a corporate like Veolia is considering issuing a covered bond?

The Veolia project is one that we’ve been working on and although it is too early to start discussing it in detail, the cover pool will be contracts between Veolia and public sector borrowers. So if there should be crises in areas like the US sub-prime market or the Spanish residential mortgage market, Veolia will be like an Öffentliche covered bond that will offer a very safe alternative issued within the obligation foncière framework. PM, Euromoney How does the VDP feel about the debate on structured covered bonds versus those that are backed by an established legal framework?

The Pfandbrief issuers we represent are concerned about this, especially when issuances of so called structured covered bonds emerge from German issuers. They fear that the very deep and homogenous Pfandbrief market might be cannibalized by structured covered bonds, especially if they are backed by assets that would also be eligible as collateral for Pfandbriefe. We recognize that some investors will welcome more heterogeneity in the market, but we also believe they appreciate a clear and reliable legal basis for their investment.

We also believe that as the market for structured covered bonds is supervised by the general banking supervisors, there is more concern for the protection of bank depositors than there is for bondholders. The question, therefore, is how sure the priority claim of the covered bond holder really is. While I’m not saying that structured covered bonds are generally a bad thing, we think that creating a homogenous market on a sound legal basis is preferable to creating a market with a wide diversity of highly complex instruments in which investors will ask for a yield pick-up for the analytical work they have to do.

JB, HBOS Picking up on the point about supervision, through the British Bankers’ Association we have been talking to the UK Treasury for a while about creating just the sort of investor-based supervisory framework you have mentioned As the UK is a creditor-friendly jurisdiction, legislation has not been needed to give the protection demanded by investors and the Treasury has stated that the legislation will fully accommodate existing UK covered bond structures.LH, VDP I think the UK development underpins my point. In the UK, you didn’t have a specific covered bond law, so the industry had to create a structure of its own, which was easier than in most other continental jurisdictions given the well-established and tested trust law in the UK. It will be interesting to see what sort of legal framework is established around that by the Financial Services Authority and the Treasury. I think the UK’s regulator is looking to create a framework that protects bondholders, which will be a plus point for the UK covered bond market. At the last ECBC [European Covered Bond Council] meeting, Charlette Holt-Taylor of the UK Treasury gave a presentation in which one of the key bullet points was bondholder protection.PM, Euromoney Does this explain why so little of the BNP Paribas issue was placed in Germany? Do German investors still demand the security inherent in the Pfandbrief law, and are they still cautious about structured products?

Not really. The largest source of demand for the WaMu deal was Germany. My guess is that German investors tend to be bank asset swap players who would prefer buying 10-year cédulas at Euribor plus eight or nine basis points than three- or five-year BNP Paribas at Euribor minus.

The growing importance of the Nordic investor base

PM, Euromoney Nevertheless, it was interesting to see a large jumbo deal being distributed so successfully with limited German placement. We have also seen Nordic investors playing an increasingly prominent role in the distribution of jumbo covered bonds, haven’t we?PT, SBAB Yes. There have traditionally been quite a few Libor-based investors in the Nordic area. But the real money institutional accounts that have historically bought domestic issues are now growing more accustomed to buying euro-denominated jumbo covered bonds – both structured and legislation-backed. The early adopters were Finnish investors but we are now also seeing Danish and Swedish support from the investor side.

At the same time we are seeing integration on the issuing side. We now have three Swedish issuers, and soon there will be a fourth, that have completed the conversion of their unsecured domestic bonds into covered bond format and are starting to access international markets. The Swedish market is worth €80 billion, and already about €9 billion has been sold to overseas investors. I think this year the Nordic region will be a net supplier of international covered bonds. We will see more issuance from Sweden, the first deals from Norway and perhaps a little more from Finland. The Danes are now changing their mortgage bond legislation, so towards the end of this year we might also see the first international Danish jumbo covered bonds.

SD, JPM You said Scandinavian investors are looking to invest in international covered bonds. Does that mean that their appetite for Swedish krona issues or Danish callables is diminishing? Or does it mean that there might be opportunities for international issuers to step into the local currency markets? Will we see a Depfa or an HBOS Swedish krona-denominated benchmark?PT, SBAB The opportunity is definitely there. The only problem is that Swedish investors have been so used to buying high-quality domestic names on an unsecured basis that now that we have had this conversion to covered bonds many are asking why they should be paying up for a triple-A rated covered instrument? They’re arguing that the bond is the same as they had before – but it isn’t. It will take some time for investors to learn about differentiation in credit quality. But we believe that as an issuer our bonds are backed by supportive legislation and have some added structural support features, so in our view we are proving triple-A-plus risk. And I think that given its collateralization, HBOS thinks the same.JB, HBOS That is true, and we have had similar discussions with investors in our securitization programme.

PM, Euromoney
Looking at developments in some of the other European markets, would anybody like to comment on the recent changes in the Spanish cédula law? Will they materially strengthen the Spanish covered bond market?

HH, Fitch
Certainly. One important change is that the plan is to introduce an allowance for liquid assets in the cover pool. To date, cover pools backing cédulas hipotecarias have been made up exclusively of mortgage loans, so this will improve the liquidity position in the event of an issuer’s insolvency. Another change is that the maximum issuance limit for cédulas hipotecarias will be reduced from 90% to 80% of the eligible pool, thereby increasing the minimum overcollateralization from 11% to 25% based on the eligible pool, which is the highest in the mortgage covered bonds market.

Germany’s residential mortgage market

PM, Euromoney What about the German market, and specifically what about the German residential mortgage market? Is there a danger that because Germany’s residential mortgage market is so underdeveloped, the relative importance of the Pfandbrief market will be diminished as mortgage-backed covered bond markets expand elsewhere? Will we see initiatives such as the pooling of mortgage assets among the Sparkassen?LH, VDP The residential mortgage market in Germany is picking up. We have seen some initiatives among the Landesbanken and the Savings Banks Association aimed at activating these pooling models based on the so-called funding register which was introduced a year or so ago. I know of similar projects in the private banking industry. There are some legal and technical matters that need to be resolved but that process is moving ahead. So I expect that we will soon be able to observe assets in the cover pools of Pfandbrief banks that derive from the funding registers held by non-Pfandbrief banks.

But the most important question among the savings banks, which have a share of the mortgage market of between 30% and 35%, is whether they really need covered bonds to fund their mortgage loans when they are so well funded through their deposits. Until July 2005 it was very easy for the savings banks to raise low-cost funding by issuing senior unsecured bonds, which were bought either by Landesbanken or by mortgage banks and used as eligible cover for Öffentliche Pfandbriefe. That is no longer possible, but before July 2005 many of the savings banks pre-funded themselves very efficiently, so they still have plenty of liquidity. Sooner or later that liquidity will be reduced and then you will probably see more savings banks using covered bonds directly or indirectly as a funding tool.

It is true that new issuance of Pfandbriefe has been declining for the past few years. There are two main reasons for that. The first is that we are now seeing the consequences of the mid to late 1990s, where we have seen huge, perhaps sometimes excessive, new issuance in the Öffentliche Pfandbrief market, which is leading to a lot of redemptions now. Second, loans to public-sector banks, which accounted for about a third of Öffentliche Pfandbrief issuance, are no longer eligible as collateral. To compensate for that, banks are now doing a lot more public-sector lending outside Germany. All in all, I don’t see this as a negative development rather than a healthy one. Just have a look at the very positive price development of Pfandbriefe.

The potential of the US

PM, Euromoney I imagine most people would agree that last year’s Washington Mutual deal was one of the landmark events in the recent history of the covered bond market. Will we now see a regular supply of jumbo covered bond issuance from US borrowers?

There are a handful of names that are seriously talking about coming to the market. I’m not sure that I agree with those people who say that this market will be worth $500 billion. A more likely issuance volume would be something like $40 billion a year, with $20 billion equivalent issued in euro-denominated bonds and the other $20 billion in dollars. In terms of US banks coming to the European market I think the WaMu deal was the real breakthrough and I believe this market will play an important role for many US names to meet their natural funding requirement. LA, SGCIB We saw quite a gap between the first two issues from Washington Mutual and Bank of America. Last September, everybody was expecting the Washington Mutual deal to be followed quickly by deals from Wachovia and Countrywide but it was six months before we saw the next issue. I think there are still some issues with the Federal Deposit Insurance Corporation and one or two other technicalities that are slowing down the development of the market. But we will see the market grow, perhaps to a size bigger than some of the smaller European covered bond markets.PM, Euromoney Will we also start to see issuance from Canadian banks in this market?

Canadian issuers have been watching developments in the US very carefully and there has also been a great deal of interest among Canadian investors in the covered bond product. We have seen a number of deals issued by European borrowers into the Canadian bond market in the form of maple deals, which have by and large been embraced by Canadian investors, who have been keen to diversify their bondholdings away from their traditional domestic-biased exposure before the lifting of restrictions. If US issuance takes off, the Canadian investor base might therefore become another option for US issuers to consider when venturing abroad.

The backdrop for anything mortgage-backed coming from the US is not entirely favourable at the moment but I don’t believe that the current headline noise from the sub-prime segment of the US residential market is necessarily a negative influence on the launch of the US structured covered bond product. One could almost argue that it is even positive, because the collateral pool for future US-originated covered bonds will definitely not be sub-prime mortgages but would represent the best assets from the prime end of the market and might thus benefit from a flight to quality. Nonetheless, at the moment the words "mortgage", "US" and "housing loans" carry a bit of a stigma, so it remains to be seen whether issuers’ pricing targets will be realistic under the current circumstances. Volatility has certainly increased in the US RMBS market and it will be an interesting exercise to watch if and how US residential mortgage backed structured covered bonds product are able to differentiate themselves from the ordinary RMBS products. If they manage to do so, it would represent a major triumph of intelligence over sentiment.

PM, Euromoney Isn’t it the case that for years the VDH – as it then was – and banks like Depfa worked tirelessly to promote the Pfandbrief to US investors without much success? Now at last we have seen borrowers like HBOS successfully crack the US market. Why was it so difficult in the past and what has changed in the past few months?LH, VDP It’s true that we were never able to persuade US investors to buy large volumes of Pfandbriefe. The main reason for that is that when we started to promote the product in the US investors there weren’t very interested in buying non-US-dollar-denominated bonds. There was some dollar-denominated issuance but it was never in big sizes. The second issue for US investors was the product itself, which they didn’t really understand. Their view was, therefore, that if they wanted to buy a highly priced European triple-A bond, why not buy a government bond, which they understand? The third problem was that the names of the issuers weren’t very familiar to US investors, and the fourth was that they couldn’t see a difference between Pfandbriefe and mortgage-backed securities. So they asked themselves why they should pay up for a European covered bond when they could get a higher yield for a US MBS.

The real difference today is psychological. With the WaMu and now BoA transactions, suddenly there are names out there in the covered bond arena that US investors know very well. And that opened the minds of US investors to other European issuers.

PM, Euromoney The HBOS transaction seems to have opened the floodgates for European issuers. Were you surprised, Jeremy, by the overwhelming response of US investors to your dollar deal?

We were always confident that the deal would work but it went better than we expected. The WaMu deal created a buzz about covered bonds, which was helpful. But we weren’t coming from nowhere in the US market. We have been in the market for a while with our securitizations and capital issues, so over time our name recognition in the US has improved considerably.LA, SGCIB From the outside, Depfa seems to have paid up to issue its 30-year dollar ACS. It widened its launch spread by a basis point from plus 1bp to plus 2 bp, which equates to about plus 7bp in euros. Had Depfa priced a 30-year deal in euros it would probably have issued at something like plus 4bp. A pick-up of roughly 3bp between 30-year euros and 30-year dollars is a lot to pay but diversification of funding is key for large issuers and I would expect this premium to drop as the dollar market for covered bonds develops.

Clearly there is a price to pay to access the US market, so although it might be attractive for an HBOS or a Caja Madrid, with very high annual funding requirements, some of the issuers from Portugal or Sweden with smaller funding needs might not be so attracted by the market.

PM, Euromoney Per, would you be prepared to pay an entry premium to get into the US market?

We have adopted a wait-and-see approach to the US market. We have deliberately chosen to let the bigger issuers take the lead and we are keenly watching how the market develops. If the demand is there we will definitely look at the US market but from the perspective of a relatively small issuer there is always the extra burden of documentation to write into the cost-benefit analysis. As a cost-conscious issuer we have to monitor the costs of documentation very carefully.

But I think the challenge that potential US covered bond issuers face in Europe is the same challenge that HBOS faced a few years ago in the European market. You transformed your RMBS programme into something that looked and smelled like a covered bond, and now you are using your name recognition to do something similar in the US.

JB, HBOS But our objective in the US is to create something that looks and feels like an agency issue. We are positioned as a cheap agency rather than an expensive securitization. The structure is different to a securitization, with many more levels of support than in a securitization. This explains the lower yield.SD, JPM Isn’t a big portion of your US investors made up of typical securitization buyers?

There was definitely an overlap between the two investor bases at the institutional level, but very little when considering the funds investors were buying for. The yield on covered bonds was not attractive to securitization investors; they ask why they should accept a lower yield when they were already comfortable with the risks of a triple-A securitization. We spent some time explaining the difference between MBS and covered bonds to investors and priced accordingly. There were also a number of new names that have contributed to our success, especially on our second transaction.
LH, VDP If US issuers start to tap the US market through covered bonds the decisive question will be whether they are able to explain to their investors the difference between the MBS market and covered bonds.

That will be a challenge. One of the problems that US issuers will have is that their investors have limits, and if those investors have already bought senior notes from issuers like WaMu at Libor plus double digits, why should they fill those limits at a much lower spread? It will be a challenge to convince them, but when we see a reduction in issuance from Freddie Mac and Fannie Mae, US covered bonds will be a way of filling that gap. PM, Euromoney Is the US market something CIF Euromortgage would consider?

No. We are a relatively small issuer and the cost of entry at the moment would be too high for us. We know that Dexma and Crédit Foncier are looking at the US market so we will wait and see what they do. We are concentrating on being a regular and visible issuer in the European market.

Canadian and Australian dollar covered bonds?

PM, Euromoney Georg, you mentioned the potential of the Canadian maple market, and I know that others are looking at the Aussie dollar kangaroo market. Is that a by-product of the strength of the covered bond product itself, or does it simply reflect the favourable basis swap?GG, RBC We think it will be a long-term trend, although it is of course subject to short-term technical conditions in the market such as the basis swap. But we have good evidence to suggest that both the Canadian and the Australian investor bases are warming to this product, and are readying themselves to allow it to play a larger role in their investment strategies. So we expect volumes to trend up in the medium term regardless of the basis swap situation.

We are also very mindful that if domestic issuers were to join the fray, the development of the product would take a quantum leap forward. That was vividly illustrated by the WaMu deal. If a well-known domestic issuer were to adopt the product it would be a wake-up call for the domestic investor base, also helping foreign issuers to make progress in promoting the product to Canadian or Australian investors. So we certainly think the alternative dollar markets are ripe for penetration by covered bond issuers. But it is important to be cognizant of the fact that markets develop in stages. The first stage is to persuade research-driven buy-and-hold investors that the extra security embedded in covered bonds is worth paying up for. The next stage is to attract liquidity-driven investors, which would help to launch large benchmark-sized issues, and we are getting closer to that point in both the Canadian and the Australian dollar market.

PT, SBAB Another interesting area for a relatively small issuer like us is the Swiss franc market, which tends to be very appreciative of high-credit-quality names. We did the first Nordic covered bond in Swiss francs in December and we intend to follow up regularly in that market. The Swiss franc market is also very flat at the longer end of the curve, which is another nice feature. It suits us to explore some of the smaller European currency markets because €1 billion, which is the minimum benchmark size in euros, is quite a big size for us. PM, Euromoney To what extent has the growing prominence of the US market changed the competitive dynamics of the covered bond market? Over the past year or so we’ve seen the US banks beefing up their covered bond capabilities. Is competition intensifying and is that healthy for the market?SD, JPM We’re definitely seeing more competition, which of course is good for issuers and for investors.

It is an interesting question if competition is always good for investors. The new appearance of more banks in the primary market maybe forced some investment banks to "buy" league table deals. Some of the deals have been priced expensively, which can make it difficult to differentiate between which deals offer value and which don’t, especially if you’re a new investor in the market.JB, HBOS Competition among banks is healthy for us. One of the challenges we will be facing is deciding which banks to use in the US, and the important thing there will be to ensure that there is secondary market liquidity in our issues. So we can’t spread our panel of banks too thinly. We will need a core set of banks that are able to work hard for us. LA, SGCIB Although we have had a shot across the bows from the US sub-prime market, we have been in a very bullish market environment for a number of years. It will be interesting to see what happens when, rather than if, we go into a bear market.

On the subject of the US banks, in recent years the players in the market have been fairly stable, with the same group of names appearing in the league tables. Everybody’s talking about the US banks but it was interesting that the banks that led the WaMu and Bank of America deals were Europeans rather than Americans. I think there may be a bit of a conflict within the American banks about who’s going to run the show – whether it will be their guys in New York or London.

The Asian dimension

PM, Euromoney We’ve talked about the growth of the US investor base. What about demand in Asia?

We’re still waiting for the Asian investor base to embrace the concept of covered bonds. If you look at the sheer size of Asian central banks’ reserves, and of the assets under management at other Asian investors, the process of gaining an understanding of the covered bond market seems to be a slow one.LA, SGCIB I don’t have the figures to prove it but I think there may even have been a greater participation among Asian investors five or six years ago than there is today.

We have always encountered great interest for Pfandbriefe from Asian investors. The VDP has been visiting Tokyo for eight or nine years now, and attendances at our conferences in Japan have been rising each year. Last time we had about 140 attendees, and in contrast to some conferences the majority of those were investors. I agree that Asian demand is largely made up of central bank but last time we were in China a law had just been passed allowing insurance companies to invest up to 15% of their assets in foreign currencies, so China is certainly a market we will be watching very carefully in the future.

PA, CIF On our recent roadshows to Asia I noticed that there were still a lot of people asking: what is a covered bond, and what are the differences between the various covered bond markets in Europe? People were hesitating because they lack a clear understanding of what is happening in the European market. So one of the main challenges for the ECBC will be to explain the various aspects of the market to investors in Asia. JB, HBOS We have found that some Asian investors will only buy legislated covered bonds and some will only buy public sector collateral. One of the other problems we’ve had in Asia is that the typical transaction timetable isn’t very well aligned with investors’ credit process. The time between announcing and closing a deal is generally quite compressed in the covered bond market – more so than an Asian roadshow might allow for.We have done and will continue to do non-deal roadshows. I think it comes back to the point we have already heard about, which is spending more time to educate Asian investors about the product and why it is safe.LA, SGCIB I see the problem a little differently. Of course investors need to be educated, but the problem is that the market has become so diverse that even if you’ve been in the market for many years it is hard to track all the different laws and different structures, which is why I would like to see more harmonization in the market. These days, covered bond investors need to spend whole days reading research.PM, Euromoney Things will get worse before they get better in that respect, won’t they, with markets in such places as eastern Europe and Turkey joining the party?

When there is a downturn in the market, covered bonds might prove to be a safe haven. Alternatively, some of the covered bond issuers that are less well protected on the downside than they should be might tarnish the market’s name. Hopefully that won’t lead to a repricing of the market as a whole, but it might result in greater differentiation among the issuers. It is brave to call for harmonization in a market where there are so many diverse issuers.PM, Euromoney I think we’ve covered pretty much everything, so thank you all for your time.