IFR’s latest covered bond roundtable in Frankfurt at the end of January was an extremely insightful update not just on market activity and themes but also on the issues currently on the regulatory agenda. It was an opportune moment, too, to review the challenges and achievements of 2012 and look ahead to likely developments in the coming year. Our discussion included participation from an issuer, an investor, an analyst, a lobbyist as well as bank originators so was a well rounded one that looked at the issues across their various dimensions.
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The roundtable preceded by a few weeks Commerzbank’s inaugural €500m SME-backed structured covered bond, but this became one of the key talking points. Indeed the debut issue under the programme had been widely talked around the covered bond market as well as the wider capital markets. Its imminence had caused quite some controversy among the ranks of Germany’s more conservative Pfandbrief elements who didn’t want it to be confused with legally-based covered bonds.
One of the key talking points was whether the debut issue would price nearer the covered bond or the senior curve; pricing at 47bp over mid-swaps pushed it marginally closer to covered bonds, while the excess demand showed it to be a viable funding option for the issuer.
Another dominant theme was the return of peripheral names to the primary covered bond and senior debt arena, and the shift to longer-dated issuance. The former certainly speaks volumes about the end-of-crisis tone that drove sentiment in the latter part of 2012 and into early 2013. At the same time, issuers from core markets were able to print transactions at extremely competitive levels, in some cases well through Euribor. The ECB covered bond purchase programme certainly helped issuers with this process as it reduced new-issue volumes and facilitated the extremely favourable technical conditions that evolved over the year.
Roundtable participants felt a supply-demand imbalance for Pfandbriefe in particular would persist into 2013, offering issuers fabulous execution and great long-term funding. One participant expects no more than €20bn–€25bn in benchmark issuance and €50bn including private placements.
In a market heavily skewed towards issuers, it was also noteworthy that non-eurozone issuers took the covered bond market by storm and tapped the market for more supply than their EZ counterparts; with Australian issuers at the forefront. It was also a year of impressive currency diversification - euro issuance fell to 65% of the market.
The question of whether it was appropriate for covered bonds in peripheral countries to print through their respective sovereign curves also came up. From an investor perspective, this was seen as less of an issue than it is perhaps in the DCM community in that secondary spreads were already through governments so it was only
Depending on the spin you want to put on this, it’s either a comment on the risks still inherent in the eurozone periphery as reflected in deteriorating sovereign ratings, or alternatively it’s a signal that the special regulatory treatment afforded covered bonds and indeed the robustness of the instrument as enshrined in legislation has significant value that’s recognised by all. Or perhaps it’s both.
Covered Bonds Roundtable 2013: Part 1
