Pfandbriefe/Covered Bonds: The start of something new

Turn the clock back just a few years and the image that sprang to mind at the words "covered bond" was of a German market proud of its traditions and robust structure. But while the Pfandbrief continues to play a central role in the market, its supremacy has been challenged by a number of newcomers, most notably out of the Spanish Cedulas stable. And the covered bond family looks set to grow further over the coming months. While regulators in Spain are currently refining legislation regarding the asset class, that is just one of a number of...

After a record-breaking 2006 that saw volumes increase some 30%, the market was expecting big things from covered bonds this year. According to data from Thomson SDC, €184bn equivalent of jumbo issuance priced in 2006, and right up to the very end, the market continued to be dazzled by new entrants and jurisdictions. In contrast, 2007 has so far brought less in the way of glittering new markets and, if current supply is anything to go by, covered bond volumes may only exceed 2006 by the most conservative of predictions. With forecasts ranging...

The situation in the Spanish covered bond market is in stark contrast to a year ago. Then, criticism was leveled at many Spanish issuers as a result of what some viewed as a lack of clear and dependable guidance with respect to the timing and volumes of issuance. Indeed, it was around this time last year when the outlook for Spanish Cedula was cloudy at best. A huge influx of supply had put pressure on spreads and at times had pushed investor demand to its limits. This was especially evident at the long and ultra-long end of the curve, where...

Any asset that offers diversification is good from an investor’s point of view, and covered bonds are no exception. New names, new markets, improved legislation and Basel II are fast making the asset class an irresistible diversifier, and with no shortage of financing demand coming out of the market, liquidity looks here to stay. While investors’ views on covered bonds as a flow or a credit product differ, all agree that investing in the Triple A rated asset class offers good diversification for a government bond portfolio. “We do not see...

After years of intense lobbying by the Italian banks, Italy's covered bond law finally appears to be nearing fruition. Tommaso Padoa-Schioppa, the Italian finance minister, has reportedly signed the final decree of the secondary law relating to the supervisory capacity of the Bank of Italy. The statutory order for Italian covered bonds, or Obbligazioni Bancarie Garantite, was authorised back in December 2006 following the amendment of Securitisation Law 130 in May 2005. However, it is the all-important secondary law that has been halting the...

The impact of Basel II depends to a large extent on the approach adopted by investors rather than that of issuers. It is essentially a question of the extent to which paper is placed with Basel II-sensitive bank investors, versus non-bank investors. If paper is placed mainly with banks, the question is which approach they intend to take. The risk weighting for underlying residential mortgage loans is expected to fall from 50% under Basel 1 to 35% under Basel II’s Standardised Approach (SA) and 13% under the Internal Ratings-Based Approach (IRBA...

Many reasons have been put forward to explain the relatively slow rate of growth of the US dollar-denominated covered bond market. “Some of the delays in this happening have been attributed to the need to set up a programme for issuance and the costly legal work associated with this,” says Torsten Elling, head of covered bond syndicate and trading at Barclays Capital in Frankfurt. “Does it all make sense in the context of extending the investor base? The fact that there was US$7.5bn of jumbo covered bond issuance in 2006, compared to US$7bn...

Think back just five years and you are taken to a time when covered bond funding was a playground reserved only for financial institutions from countries with a covered bond law in place. But with structured issuance now accounting for 32% of the supply, it is hard to believe, looking back, that access to this market was just a pipe-dream for the many. Nonetheless, times change, and after the door to structured covered bonds was opened by HBOS in 2003, prejudices soon began to wane. The market has not looked back since. However, despite...

One of the never-ending talking points in covered bonds is the emergence of new markets. In the grand scheme of things, Turkey's contribution to covered bonds is expected to be minimal, the US has yet to live up to its hype and Italy's volumes, though noteworthy, will fall well short of those of Spain. But what cannot be overlooked is the potential from Scandinavia. With Sweden already successfully issuing covered bonds, the long awaited Norwegian law now ironed out and Denmark’s updated covered bond law waiting in the wings, Scandinavia is...

Several European countries are currently busy drafting new covered bonds laws or revising their existing legal regimes. The following table provided by DZ Bank gives a summary overview of the current state of play in the legislative processes that are under way and the date when the new/revised laws are expected to come into force.

While the convergence of the covered bond and RMBS worlds had been a topic of market conversations for some time, it was not until the latter part of 2006 that any substance was added to the conjecture. Although often – wrongly – described as a hybrid programme, HSBC’s move allows it to use a single mortgage portfolio against which to issue covered bonds and RMBS. The resultant flexibility has certainly provided food for thought for a number of others involved in the market, most of whom have been complimentary, even to the point of envy. “If...

Aareal Bank’s ongoing strategy of expanding its investor base was nowhere better exemplified than in its recent €1bn February 2010 mortgage-backed transaction. Spearheaded by Barclays Capital, Dresdner Kleinwort and DZ Bank, it commanded €2.2bn of interest, thus paving the way for pricing through the initial spread guidance at mid-swaps less 5.5bp. Notable was the large portion that was placed with accounts outside the borrower’s domestic market at over 40%. Many of these buyers were gaining exposure to the borrower for the first time and...