Starting a revolution
With the US government in shutdown and Italy in yet another political crisis, October 2013 was a tumultuous time for markets. Many issuers chose to sit out the volatility, with dozens shelving plans to come to market. But not NIBC.
The Dutch bank – along with its other lead managers Credit Suisse, LBBW and RBS – saw the volatility as a prime opportunity to unleash the first covered bond to feature a pass-through structure. Not only did the deal pass off successfully, but it has arguably changed the covered bond world forever.
“From a structural perspective this deal represents the most important step forward for the covered bond market since the introduction of soft bullets,” said Christoph Anhamm, head of covered bond origination at RBS.
The structure delinks the rating of the covered bond from the issuer by maturity-matching the cover pool assets with the ultimate legal final maturity of the bonds – December 2046 in the case of NIBC. This means that even if NIBC defaults, the assets should be sufficient to pay the bond at maturity.
An added advantage is that such a structure allows banks like NIBC to save precious collateral while still achieving a Triple A rating. NIBC’s vanilla covered bonds, by contrast, only have a single A+ rating from Fitch.
“The structure allows issuers to reduce the level of over-collateral, offers higher ratings and higher rating stability, which brings down the total cost of funding substantially,” said Anhamm.
The level of demand for the deal was unexpected as orders reached €1.3bn, allowing the €500m five-year issue to price at mid-swaps plus 50bp – a tighter level than where NIBC would issue a vanilla covered bond. All of which were seen as incredible achievements by the market.
The successful outcome reassured market participants, who had been unsure whether die-hard covered bond investors would be willing to buy into such an innovative structure. The deal was so successful that NIBC and as many as eight other banks are looking to follow up this deal in the coming year.
“There is only evolution if there is revolution,” said Chris Tuffey, head of European debt syndicate at Credit Suisse. “This is the first trade and stands out on its own but it also has created another asset class at an ideal time as investors continue to hunt for spread.”
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