News on Covered Bonds: DBS all set to issue first covered bonds of Singapore

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January 7, 2013

Monetary Authority of Singapore (MAS) came out with a consultation paper on guidelines for issue of covered bonds by the banks of Singapore. The paper titled "Covered Bonds Issuance by Banks Incorporated in Singapore" was issued in March last year. Since then the paper was put up for public and industry comments for almost a year.

DBS bank is already preparing and pressing for structural reforms to issue covered bonds once the regulations are approved and are in line. DBS working closely with Deutsche Bank and Barclays are all set to be the first to issue the first covered bonds of Singapore. DBS is likely to face tough competition from the Australian banks which are pricing their covered bonds at a cheaper rate. Thus, penetrating the market with a tight pricing policy seems to the primary objective of DBS. The currency denomination is yet to be determined for the issue. Europe is speculated to be the favorable buyers of the covered bonds with their vast experience in this area and familiarity of the structure.

Singapore banks are eagerly waiting for the final guidelines to be approved. Due to their little experience in securitisation, structural standardization of the loans to be used as collaterals need to paid heed with a constant supervision.

Reported by: Piyush Sinha

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

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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?http://www.standardandpoors.com/spf/upload/Ratings_EMEA/CoveredBondsOutlook2012IsTheShineComingOff.pdf

 

Reported by: Piyush Sinha

News on Covered Bonds: Covered bonds backed by SME receivables: a nice thought, or a sellable product?

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Covered bonds backed by SME receivables: a nice thought, or a sellable product?

February 19, 2013

The covered bonds market is testing new geographical territories, and new asset classes. From what has been its mainstay over decades, it is moving out of Europe, and out of the mortgage market.

In terms of asset classes, one of the asset classes recently to hit headlines was a structure proposed by Commerzbank to sell covered bonds backed by SME receivables. It is not for the first time that such a structure has been tried – a transaction from Turkey was also backed by SME receivables, but the Turkish deal may not have been a global highlight. However, something from a German bank, which is where most covered bonds issuances have come from, is surely a different thing.

In early Dec 2012, rating agencies published ratings on SME-covered bonds to be issued by Commerzbank. Moody's had assigned a rating of Aa2 to the issuance[1].

The structure was unusual for several reasons. First, while most German transactions are issued under the Pfandbrief Act. This one is not a pfandbrief structure under the Act, but a so-called “contractual structure”. Contractual structures refer to the transaction relying on common law principles, usually by a true sale to an SPV. Similar transactions have so far been structured from out of countries which do not have dedicated covered bonds laws, such as UK, USA, etc. The second speciality is obvious – that the bonds are based on SME loans, while most covered bonds so far have been mortgage receivables-backed. SME loans are not an eligible collateral under the German pfandbrief law – hence, the transaction anyways could not have been covered by the law.

The deal was based on a substantial over-collateralisation – 30%. The final prospectus of the transaction was placed on Commerzbank's website[2].

Return of the CLOs?

Standard and Poor's  brought a generalised report on SME covered bonds[3]. The report generally discusses the structure of SME-covered bonds, and likens them to SME securitisation structure. This is the familiar CLO structure, with the difference that here, investors have a recourse against the issue too.

The S&P report says that SME covered bonds may become as systematically important as mortgage covered bonds. The underlying strength is the fact that most of the European economies, with Germany in particular, have substantial reliance on SMEs. SME funding is high on the agenda of European governments – hence, governmental action will only promote new avenues of SME funding.

Ground realities:

However, as Commerzbank went out to sell the product in the market, investors have been demanding triple digit spreads[4]. This may be due to the recently reported losses of the issuer[5].

However, as a general instrument available in the market, the debutante covered bond initiative is both a landmark in the covered bonds development, as also in funding of SMEs.

[1] http://www.moodys.com/research/Moodys-assigns-PAa2-to-Commerzbanks-SME-structured-covered-bonds–PR_225006

[2]https://www.commerzbank.com/media/aktionaere/emissionsprogramme/sme_programme/SME_Prospectus_approved_05122012.pdf

[3] http://www.standardandpoors.com/spf/upload/Ratings_EMEA/04Feb2013_CouldSMEBackedCoveredBondsGainPopularity.pdf

[4] http://www.reuters.com/article/2013/01/30/commerzbank-sme-covered-bonds-idUSL5N0AZAG320130130

[5] https://www.commerzbank.com/media/aktionaere/emissionsprogramme/sme_programme/Supplement_07022013.pdf

 

Reported by: Vinod Kothari

News on Covered Bonds: The Fall of Covered Bonds in the US

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The Fall of Covered Bonds in the US

October 17, 2013

The sale of covered bonds in the US has fallen to $17bn this year, down from $45 bn in 2012 and $40 bn in 2011. [1]

Covered bonds being widely perceived as the alternative on-balance sheet option for RMBS, several countries have sought legislation to regulate covered bond issuances.[2] In response to mortgage market turmoil in 2007 and 2008, the Treasury Department and the Federal Deposit Insurance Corporation (FDIC) considered rulemaking to encourage the use of covered bonds as an alternative to mortgage securitization.[3] However, the Federal Reserve Board (FRB) and Federal Deposit Insurance Corporation (FDIC) have yet to recognize covered bonds as a valid source of bank capital. Legislation on covered bonds does not exist as of now, although efforts have been underway for over three years.

Presently, covered bonds are issued under the Securities and Exchange Commission (SEC) 144(a) Private Placement Rules or under Rule 3(a) 2 provisions. This has limited the number of prospective buyers and made covered bonds less attractive for issuers who are seeking large number of bidders to lower their financing costs. This slump is mainly the result of lack of interest by large US banks in the absence of regulation. Since Federal Housing Administration insurance is easily available and there is heavy participation of GSEs in the housing market, there seems to be little incentive for banks to float a market for covered bonds. It is also possible that some banks may not have sufficient collaterals.

The slump in the market was experienced outside the US as well. In Europe also, the recent efforts at reduction of bank’s balance sheets and cheap liquidity available from central banks have caused the demand for funding to slump.[4] Globally, issuances stand at $130 bn, which has decreased by 40 % year on year. Issuances of unsecured bonds have also decreased by 2%. [5]

Notes:

  1. See,http://www.ft.com/intl/cms/s/0/f7af1f88-32a3-11e3-b3a7-00144feab7de.html#axzz2hnSeLUcp, http://www.icmagroup.org/resources/market-data/Market-Data-Dealogic/#3
  2. Canada recently amended its National Housing Act to bring about a legal framework for covered bonds. Last year, Singapore, South Korea, Australia and New Zealand also developed legislation to regulate covered bonds.
  3.  http://www.sifma.org/uploadedFiles/Research/Statistics/SIFMA_USMortgageRelatedIssuance.pdf
  4. .http://www.coveredbondnews.com/Article/3227091/Covered-supply-at-lowest-level-since-2009.html
  5. .http://www.ft.com/intl/cms/s/7a1420f0-042c-11e3-8aab-00144feab7de,Authorised=false.html?_i_location=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2F7a1420f0-042c-11e3-8aab-00144feab7de.html%3Fsiteedition%3Dintl&siteedition=intl&_i_referer=

Reported by: Shambo Dey

News on Covered Bonds: Negative Outlook On Covered Bonds To Continue

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Negative Outlook On Covered Bonds To Continue

October 22, 2013

Negative outlooks on covered bond ratings have not seen any change over the past quarter but there has been an increase in the number of covered bond issuers with negative outlooks. Mortgage covered bonds of Greek banks received negative outlook from Fitch.[1] Portugese covered bonds programmes also received negative outlook from Fitch.[2] S& P lowered its outlook on Danish banks causing outlook of its covered bonds to fall.[3] Although a downgrade or any change in the outlook by a rating agency on an issuer of covered bonds does not automatically cause a downgrade in the rating of the covered bond issue, there is still a high correlation between the issuer’s ratings and the covered bonds ratings. Thus, unless the negative ratings on the banks show a reversal of trend, covered bonds may continue to get affected. In addition, there are interest rate risks and country risks which are preventing the outlook on covered bonds from improving in the short run. Covered bonds are also exposed to market value risk. If there are unmatched cash flows, it might cause an asset sale. Although there are enough cushions by way of overcollateralization, which has slightly increased by 2% in the last quarter, some issuers have reportedly shown high degree of fluctuations in overcollateralization. In Sweden, overcollateralization provided by covered bond issuers increased by 10.4% whereas in Portugal it decreased by 6.3%. [4] Issuers must continue to manage these fluctuations to maintain a stable rating.

Notes :

Reported by: Shambo Dey

News on Covered Bonds: European Bank Association’s Stamp of Approval for Covered Bonds

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European Bank Association’s Stamp of Approval for Covered Bonds

October 30, 2013

Data  presented  at  the  European  Banking  Authority's  public  hearing  this  week  has boosted  the  outlook  for  covered  bonds  in  the  continent.  The  regulator  released  its findings at a public hearing on liquidity in London, where it also summarised responses to a discussion pap er on defining liquid assets released in February and its views on the feedback. The EBA is charged with advising the European Commission, by 31 December 2013, on the determination of “extremely high” and “high” quality liquid assets (HQLA) for  LCRs under  the Capital Requirements Regulation (CRR),  corresponding to  Level 1 and Level 2 assets under Basel III, respectively. [ 1]

The  EBA's  findings  may  pave  the  way  for  covered  bonds  to  be  counted  among  the highest rank of assets  –  Level 1  –  in a bank's liquidity  coverage ratio, meaning they do not face haircut in the  calculation of a bank's  LCR. [ 2] EBA’s data is gathered  from 9 million trades, 13,000 bonds, 1 million observations and 844  distinct equities. The EBA rated government bonds, covered bonds, non -financial corporate bonds, ABS (including RMBS)  and  equities  on  8  distinct  criteria,  including  pricing  impact,  trading  volume, turnover  ratio,  and  30 -day  price.  The  scale  was  from  1  to  5 ,  with  1  being  the  highest score and 5 the lowest. Both covered bonds and government bonds scored an average of two, whereas ABS finished in fifth place with 4.38. [ 3]

The EBA held that the results were preliminary and subject to change before it publishes a report on liquidity ratios and HQLAs at the end of the year. 

However in the US, the Fed has  opposite views. According to the Fed, covered bonds do not deserve a place within Level 1 assets. It published a paper on the implementation of LCR  requirements.  It  will  keep  covered  bonds  at  a  ranking  below  sovereign  paper, 
holding the view that they are insufficiently liquid and hence not marketable. [ 4]

Notes:

  •  1.http://www.coveredbondnews.com/Article/3272130/Statistics -say-what- youwant.html
  •  2.http://www.ifre.com/eba-boosts-covered-bond-hopes/21115692.article
  •  3.http://nordic-fi.com/early-eba-liquidity-ranking-boosts-covered-bonds-lcr -case/
  •  4.http://www.federalreserve.gov/FR_notice_lcr_20131024.pdf  

Reported by: Shambo Dey