Best of breed

It has been an interesting year for covered bonds. While few asset classes outside commodities have flourished in the current market conditions, covered bonds on aggregate have enjoyed relatively good performance. This has ranged from being among the least bad performers in the credit universe in some of the newer covered bonds markets – such as Spain and the UK – to delivering very good returns in absolute terms in some of the more established markets – like Germany and France. This has attracted considerable new attention to the sector from...

The European Covered Bond Council (ECBC) was formed by the European Mortgage Federation (EMF) in November 2004. It has over 90 members from 16 different European countries, covering many different market segments. The group claims to represent around 85% of all covered bond issuers. According to the ECBC, the onset of the credit crunch has exacerbated a number of fault lines that had started to appear in the patchwork of the international covered bond industry. As the problems tightened their drip on the global economy, the ECBC’s response...

Global financial problems have ensured issuers have reined in their impulses to deliver increasingly innovative covered bonds in recent months. There is a prevailing mood of conservatism in the market. The credit crunch has frightened investors, driving them to become more risk averse and encouraging them to invest exclusively in securities they understand. That investor sentiment must be seen in light of many experiencing what they had not previously envisaged, even as a worst case scenario: the collapse in value of Triple A structured...

The implementation of a law to govern UK covered bonds can only be a good thing for the market. Investors have been battered by worries regarding a range of financial instruments, most of which are less transparent and more complex than covered bonds. This law provides them with some level of comfort in a stressed environment. For issuers, it offers another fundraising tool and, possibly, a wider investor base. Specifically, the new law brings UK covered bonds in line with the directive for the undertakings for collective investments in...

For Caisse de Refinancement de l’Habitat (CRH) president director general Henry Raymond, the principal success of the €2.5bn (US$3.9bn) dual tranche covered bond transaction, launched in February, was in bringing many international accounts onto CRH’s books. Although CRH is the largest mortgage loan covered bond issuer in France, Raymond said the institution was not well-known enough to international investors, as CRH had not developed a marketing strategy until late 2006. CRH bonds provide safe haven assets for investors in the face of...

According to Juan Pablo Soriano, managing director at Moody’s Investors Service in Madrid, 2008 issuance volumes of cedulas will decrease by about 30%. In addition to the general malaise that dogs mortgage assets globally, the Spanish banking system has had to contend with a more pronounced weakening of the real estate market than initially anticipated, he explained. The real estate boom of the past years, driven by a high demand for residential property against the background of a vibrant economy, had fueled the boom in the cedulas market on...

Covered bond and RMBS both reference the same underlying mortgage assets. Yet with the former, investors have recourse to the underlying assets and the issuing bank. Investors in RMBS only have recourse to the assets. While covered bonds are usually structured in fixed rate bullet format and are generally held on balance sheet, RMBS carry a floating rating, amortise as the mortgage assets pay down and are held by an SPV. Moreover, while covered bond spreads are usually quoted against mid swaps, RMBS are quoted against the three month Libor or...

Following a meeting held in mid-May a number of market participants put forward proposals to offer a screen-based trading platform for covered bonds. "Many traders say that the old market making obligations can no longer be supported in current market conditions and that it will be to everyone's advantage to improve market transparency," said Richard Kemmish, chairman of the market related issues working group at the ECBC, which arranged the meeting. "However others say that the old rules have served the market well and can continue with only...

Mortgage funding has been an especially topical subject since the onset of the global credit crisis. Global credit woes rocked both the RBMS and the covered bond markets. Yet the Swiss Pfandbrief sector has continued to hold its position as one of the most important bonds in the Swiss domestic market. One distinguishing feature of the Swiss framework, established by the Pfandbriefgesetz (Pfandbrief law) of 1930, is the existence of only two domestic institutions entitled to issue Pfandbriefe: Pfandbriefzentrale der Schweizerischen...

The slow emergence of the Italian covered bonds industry can be at least partly explained by negative developments in the broader covered bond market, where spread volatility had hampered issuance volumes across most jurisdictions. Even so, arguably even more significant has been what one market professional described as the “sluggish response by Italian banks to get their act together”. Yet after a number of false starts a handful of potential issuers seem finally almost ready to take the plunge. Intesa Sanpaolo was initially expected to be...

While the Italian covered market has been conspicuous by its absence, it is likely to establish itself some time before its Greek neighbour – the only other “large” Eurozone jurisdiction that is still to get of the ground. Greece released its primary legislation for covered bonds towards the end of last summer. While already approved by Parliament and containing many necessary facets that indicate a solid legislative framework, many details are still fairly general and will be left to secondary legislation which will then have to be signed...

There were 30 jumbo covered bond issuers in 2000, according to Heiko Langer, a research analyst at BNP Paribas. In 2008 that figure had risen to 86. Despite the challenging market conditions, the number of first-time issuers in covered bonds is still set to grow. The appeal of the product for issuers is clear: in addition to being able to tap the market in large 'benchmark' size, the traditionally attractive cost of funding versus senior, unsecured debt has become all the more apparent since the onset of the volatilities. A little over a year...