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