News on Covered Bonds: Covered Bonds volume declines in 2012 as European banks rely on alternative liquidity sources

Covered Bonds volume declines in 2012 as European banks rely on alternative liquidity sources

February 2, 2013

The world witnessed a steep fall in the issuance of covered bonds during the last year. The main reason behind this is assumed to be the consumer behavior- which in due course had resorted to cheaper liquidity available from the central banks. However, international rating agency Standard & Poor's (S&P) opines that lower issuance costs and a host of maturing bonds in 2013 will keep the volume of covered bonds at par. Based on their analysis, Standard & Poor's came out with a report on covered bond's performance captioned "Covered Bonds face another tough year" on January 24, 2013.

The report consists an overview and a critical analysis about the performance of covered bonds last year along with the predictions of 2013. S&P evaluated and analyzed the following pointers:

  1. European covered bonds issuance benchmark: S&P placed its analysis on data available from J P Morgan which showed a fall in the issuance volume in the European countries.
  2. Bonds maturing in 2013: Bonds amounting to approximately 160 billion Euros are scheduled to mature this year which may drive many players back into the market.
  3. Participation from new jurisdictions such as Australia and Belgium.
  4. Sudden increase in the credit risk related to a certain mortgage covered bonds programs in the European market.
  5. Effect of the Asset Default Risk and its subsequent Overcollateralization Levels
  6. Effect of degradation of sovereign creditworthiness on the covered bonds market.

Changing Figures

Covered bond issuance started well in the beginning of 2012, with transaction volumes already exceeding Euro40 billion[1]. But increasing funding pressures forced the banking regulatory bodies to press for better legislations for covered bonds as a secure source. In this mounting pressure many have continued working on (e.g., the U.S. and Belgium) or finally implemented (e.g., Australia) new covered bond laws in 2011. However, from the short-term viewpoint, due to the euro-zone fallout risks started creeping up and brought

covered bonds issuance to a standstill. There was a 20% drop in the total volume of covered bonds issued in 2012 as compared to 2011. Investor placed volumes had a dip of approximately 40% in most of the European countries as compared to 2011. The graph below depicts the fall in global issuance of covered bonds as compared to unsecured bank debt.

S&P published a special report titled "Global Demand for Covered Bonds is Growing" wherein it stated that 2011 symbolized enough dynamism for the covered bonds market. Global issuance touched about 300 billion Euros with a very diverse set of issuers. Unfortunately, this acceleration was somehow hindered and the global turnout stated declining in 2012. An immense stress in credit markets in the second half of 2012 stalled new issues. Better and diversified options available to the investors from banks have changed the course of this asset backed security to a large extent but the market players are hopeful that the situation will be soon restored.

S&P Report Covered Bonds Outlook 2012: Is the Shine Coming Off?


Reported by: Piyush Sinha