Covered Bonds Report 2012

The stature of covered bonds as a funding tool continues to grow by leaps and bounds. Developments that will see senior debt become bail-inable by 2018 are adding to their allure; as is their legal robustness and unassailable place in the capital structure in the event of issuer insolvency. In short, covered bonds have offered a funding lifeline, certainly to non-peripheral banks whose access to capital has been ravaged by the effects of the eurozone sovereign debt crisis.

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Stories in Special Report

Tiers after the hangover

Covered bond issuance from European banks is likely to remain low thanks to the eurozone crisis and harsher rules on overcollateralisation.

Little supply, big demand

As the eurozone crisis grinds on, German Pfandbriefe have become the haven trade pricing ever tighter. But issuance cannot keep up with demand.

Small beginnings

Only three covered bond issues have sold in Asia, ex-Japan, ex-Australia since 2009, all of them in Korea. With the success of Australia, other countries are looking at the structure too.

Hitting the ground running

The Australian covered bond market has come a long way in a short space of time. Although the possibility has been discussed for years, its first issuance did not come until late last year. Yet from a standing start, Australia has established itself as a covered bond market to be reckoned with.

Off to a sterling start

Before the beginning of last year the sterling covered bond market was the fixed income equivalent of obscure exotica, attracting little interest outside the activities of a few specialist collectors. In early 2011, all that changed, and the previously invisible market suddenly and unexpectedly became the height of fashion.

Safety concerns

French banks started out the year by swamping the long end of the curve but following the news that 3CIF had suspended its bonds, issuance has remained light. Heading into the second half of 2012 the country’s borrowers say a combination of deleveraging and unlimited LTRO cash is giving them breathing room to prepare for 2013.

Northern appeal

In times of stress investors flock to quality assets, and the greater the stress, the more migration takes place. In the midst of the greatest financial crisis in living memory, the covered bond market represents quality. And for an extra layer of comfort, the Nordic markets stand out as among the best in breed.

No guts, no glory

Lauded for the success of its original covered bond purchase programme in 2009–10, the European Central Bank is, however, receiving far less praise for its second effort.

Abnormal load

Spanish banks are locked out of the covered bond market as spreads remain prohibitive and the LTRO has made the prospect of paying up for public funding unappealing. The fact remains that public issuance sends a positive signal to a market that continues to be dogged by negative headlines.

Crumbling foundation?

Without the Canadian banks, there wouldn’t be much of a US covered bond market.

Shifting the goalposts

Canadian covered bonds will undergo the most dramatic upheaval in their five-year history before the end of this year, when a new legislative framework for the instruments will fundamentally change their credit characteristics.

Ready for lift-off

The ink is soon to be set on Belgium’s long-awaited covered bond legislation which has the country’s borrowers gearing up to access the market as early as January 2013.

Special Report

Special Report

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