Integration of Financial Markets and Capital Markets

News on Covered Bonds: The EBA’s Blow to Denmark’s Covered Bonds

December 6, 2013

Denmark’s $530 billion mortgage-backed covered bond industry is facing uncertainty because the European Banking Association is planning to urge the European Commission not to give the covered bonds the stamp of Level 1 assets, but that only sovereign debt is given the highest liquidity status. According to the Denmark’s Economy Ministry, the European Banking Authority is planning to recommend covered bonds not be treated as highly liquid assets, dealing a blow to the nation’s $530 billion mortgage bond market. In doing so, the EBA was ignoring the findings of its own report, which suggested covered bonds have all the key characteristics of the most liquid assets, the ministry said. Denmark’s central bank also rejected the EBA’s recommendation that covered bonds should not be given the highest liquidity status. It would lead to a paradox if highly rated, very liquid covered bonds get a lower status than lower-rated, illiquid sovereign bonds. It contends that the EBA’s recommendation not to treat covered bonds as highly liquid assets ignores its own findings, which show the securities are at least as safe as government debt.

If approved by the European Commission, the EBA’s recommendation would limit banks’ ability to use covered bonds to fulfil their liquidity requirements. That might trigger a sell-off of the securities and send mortgage rates higher. While banks may have alternatives to building their liquidity buffers, the biggest fallout would be felt by the Danish mortgage market. This would also cause a situation where the banking sector would place more reliance on sovereign debt and might hamper the objective of delinking the sovereign from the banking sector. 

Germany and Norway have also questioned the logic of the EBA’s recommendation. The EBA isn’t due to publish its final recommendations until later this month, with draft technical standards set to be finalized by March. Fitch Ratings announced that it is going to closely monitor the outcome of the EBA’s proposal. 

Shambo Dey

News on Covered Bonds: Malaysia’s first covered sukuk

December 2, 2013

Malaysia Building Society Bhd. is planning to issue the nation’s first covered Islamic bonds, offering RM495 million[1] (S$192 million) of the debt next month paving the way for the world’s first covered Shariah-compliant securities to be backed by receivables. The borrowing cost of such covered sukuk being less than normal debts, this is naturally a lucrative option for the sellers. The sale will be the first portion of a RM 3 billion programme announced last month and will be issued by Jana Kapital Sdn, a special-purpose company. The securities have been assigned an AA1 ranking by RAM Rating Services Bhd in Kuala Lumpur.

MBSB is tapping the Islamic debt market for the first time after the average global sukuk yield dropped 51 basis points, or 0.51 percentage point, to 3.78 per cent from a two-year high of 4.29 per cent reached on September 6, according to the HSBC/Nasdaq Dubai US Dollar Sukuk Index.[2]

In December 2012, Gatehouse Bank Plc in London became the first entity to sell covered sukuk backed by property.


[1] http://www.islamicfinance.de/?q=node/5829

 

[2] http://www.btimes.com.my/articles/20131121155339/Article/

Reported by: Shambo Dey