Morocco looks set to become the first African country to introduce a covered bond market – a testament to the regional maturity of the country’s financial system.
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A multi-year effort to build a framework for covered bonds in Morocco looks set to finally bear fruit this year, just when it is most necessary as mortgage lending growth has slowed. The African nation will follow in the footsteps of other emerging markets, such as Hungary, Slovakia, Chile and the Czech Republic, while hoping to avoid the failure in Romania. South Africa, the only other nation on the continent that could introduce covered bonds, ruled them out years ago when worrying about their seniority versus depositors.
Morocco has been working on draft legislation since April 2011 when a technical committee made up of all the main market players – including the Central Bank, the Moroccan capital markets authority, major banks, and a securitisation company – was set up to fine tune the rules. Drawing heavily from German Pfandbrief laws the result was put out to public consultation until March this year.
The Ministry of Economy and Finance expects the government and legislature to approve the final laws by the end of the year, allowing the first covered bonds to be issued in the second quarter next year. Credit Immobilier et Hotelier, the Moroccan bank with a 12% share of the country’s mortgage market, is chomping at the bit to be the first to issued a covered bond.
Feeding growth
The fast pace of growth in mortgage lending in Morocco means lenders need additional funding routes. Total mortgage loans doubled to 26.2% of GDP in 2012 from 12.6% in 2006, according to MEF. In 2012, housing loans represented two-thirds of mortgage lending and 18% of GDP.
Growth has slowed from the explosion in 2005–2008 where mortgages were up 35% each year on average to a more sustainable 6.1% in 2012, but funding pressure is building.
Mortgage loans average 18 years and are largely financed by deposits, which are locked in – if at all – for short periods of up to six months. Also the ratio of customer loans to deposits surpassed 100% recently.
The growing pool of domestic institutional investors – mostly insurance companies and pension funds – will also use the new class of long-term, high-quality private debt to reduce their term gaps. At the end of 2012, the country’s insurance companies had total assets of Dh154.9bn (US$18.16bn).
“Morocco’s mortgage market has grown to such a size that asset liability issues have started to arise. Covered bonds are one way of solving this issue”
“Morocco’s mortgage market has grown to such a size that asset liability issues have started to arise,” says Nouaman Al Aissami, chief of the credit division in MEF’s directorate of Treasury and external financing. “Covered bonds are one way of solving this issue.”
“Morocco is one of few countries in Africa with a big enough mortgage book and large enough domestic investor base to consider introducing the bonds. A solid banking system and robust financial supervision are essential for them to function well. Their introduction forms part of the government’s goal to create a regional financial hub around Casablanca and to create the most dynamic capital markets in Africa,” Al Aissami said.
In Morocco, the draft law has established two kinds of bonds: mortgage covered bonds and public covered bonds. Eligible assets for MCBs are primary mortgage loans with a loan to value ratio of less than 80% for residential loans and 60% for commercial loans.
By September last year, total mortgage loans reached Dh218.6bn (US$25.7 billion), of which Dh147.5bn were home loans. It is estimated that around 40% of the housing loans qualify as cover assets, amounting to Dh60bn. MEF expects this sum to increase by about 10% annually.
Eligible assets for PCBs are loans to local government that meet certain financial conditions and loans to public corporations guaranteed by the government. Currently, loans to local government add up to over Dh11bn.
A unique cover pool will exist for all issued MCBs and a separate one for PCBs. Under the draft law, the bank must maintain sufficient eligible assets in the cover pool to guarantee the issued covered bonds.
Getting regulation right
The World Bank – which provided Morocco with technical assistance in devising the covered bond laws – says that it is vital that an emerging market establishes a sophisticated legal and regulatory framework for the bonds. This could require considerable effort.
“MCBs are very attractive in large part due to the very good and comprehensive legal and regulatory treatment they receive,” said Loic Chiquier, director in capital markets at the World Bank. “Investor access to – and interest in – the covered bonds must be ensured. So a jurisdiction with relatively small origination volumes and underdeveloped capital markets may wish to consider cross-border or pooled transactions.”
In May 2011, the bank regulator in South Africa rejected covered bonds as it felt that this asset type would subordinate the interests of depositors. In Morocco, the risk to depositors was not seen as a major issue, but the authorities judged it prudent to limit issuance to 20% of the issuer’s total assets.
KfW, the German government-owned development bank that also provided technical assistance to Morocco, believes that one of the advantages of covered bonds is that they remain on the bank’s balance sheet, unlike asset-backed securities.
“Covered bonds represent a robust alternative to securitisation,” says Karl von Klitzing, a senior financial sector economist at KfW. “They have not suffered from securitisation’s bad press during the past few years. Not only should they provide long-term financing to banks but they should help to mobilise local savings and stimulate local housing development by driving down the cost of funding. The priority is to have a test case, an issuance that succeeds and creates market confidence in the asset class.”
CIH wants to be that test case in Morocco and says it would like to issue a domestic covered bond of around Dh1bn as soon as it has the chance. The bank already issues corporates bonds and ABSs.
“For our bank, the best solution is to have as many alternative sources of financing as possible,” said Sekkat Lotfi, chief executive officer of CIH. “Securitisation is one of those but covered bonds will definitely be another.”
The World Bank says it is essential for a country with mature capital markets to consider the right regulatory and market treatment of covered bonds – including issuance, listing, primary and secondary trading, investment allocations, and central bank repo allowances.
Ideally, the interest rate and currency swap market should be developed as well to ensure that covered bonds can be issued internationally and attract foreign investors, according to BNP Paribas.
“That market definitely needs developing,” said Boudewijn Dierick, head of structured covered bonds at BNP Paribas. “The potential for covered bonds in Morocco might also be capped by the country’s credit rating ceilings. It will also be interesting to see the spread differences between the covered bonds and senior unsecured bonds.”