An emerging asset class

It has been a long, cold winter in the financial markets. The land of the covered bond has been as bleak as anywhere, with issuance in 2008 and early 2009 reducing to the merest of trickles. In 2008 there were questions about whether the covered bond market could ever regain its relevance after the emergence of the government guaranteed market robbed it of its natural investor base. But now some are latching on to evidence that spring might at last be here – at least in this corner of the financial markets. May saw a rebound in the fortunes...

The financial crisis that began in the summer of 2007 did not prevent the Triple A bond market from functioning, though it did transform its terms of reference. The covered bond market, on the other hand, suffered more dramatic consequences, seeing supply reduced to a trickle for most of this year. The intervention by the ECB, with its announcement of up to €60bn of covered bond purchases in the 12 month period starting in July this year at its May policy meeting, provided new support for the market. At a stroke, the supply tap was turned...

At €16.5bn, May's covered bond issuance already surpassed the total amount of jumbo's issued during the first four months of the year. One could be forgiven for thinking covered bonds have turned a corner in this financial crisis. Last year was the most challenging year for the covered bond market since its inception in 1995. Secondary liquidity and new jumbo issuance ground to virtual standstill on several occasions. But the remarkable comeback of the primary market since May tells its own story: required new issue premiums are no longer...

In May, in an unprecedented move to help bolster lending markets, the European Central Bank announced it would buy €60bn worth of covered bonds. In late May the ECB was yet to release details of how exactly it would undertake its purchases, but the announcement itself immediately boosted confidence in the covered bond market, being quickly followed by a number of large issues of new instruments (for more on the ECB see previous story). “The announcement by the ECB gives a strong perception that this is a safe product,” said Bernd Volk,...

Standard & Poor's new methodology proposal for covered bonds will have issuers everywhere on red alert. If implemented, they could see the credit ratings of more than half of Europe's covered bonds come under pressure. The news is obviously negative for the product, but the changes will essentially link the rating of the issuer with the covered bonds themselves. This will bring S&P’s methodology into alignment with those of Moody's and Fitch. S&P estimates that approximately 60% of the programmes by number would not meet the proposed minimum...

For now, there is a happy co-existence of the old and the new. The ECB’s announcement in May that it would purchase up to €60bn of covered bonds sent the moribund market into a catch-up frenzy. The primary market consequently witnessed the busiest session for new jumbo supply since May 2008. Banks made a beeline to welcome the return of this important funding tool and promptly placed €6.5bn through five new benchmark bonds by the end of the week beginning May 11. It was an impressive revival, given that the first four months of this year only...

The delay in introducing covered bonds to Asia has been blamed on the lack of a legal framework and regulations backing covered bond issuance in the region. But that theory has to a certain extent been undermined by Kookmin Bank’s ability to bring its deal, despite a lack of a covered bond law in South Korea, by utilising its ABS legislation. Given the success of Kookmin’s deal and the obvious attractiveness of the asset class, it seems likely that covered bond issuance in Asia will take off. European investors have long extolled the virtues of...

With a total outstanding volume of some €800bn – roughly one fifth of the entire German bond market – the importance of Pfandbriefe, Germany’s highly prized covered bond market, must not be underestimated. But few asset classes have come out unscathed from the crisis, and despite being widely regarded as the strongest of all covered bonds, Pfandbriefe have been no exception. In the first quarter of this year, only €3.25bn of jumbo Pfandbriefe (excluding taps) were publicly issued in the market – a staggering 62% less than the same period of...

German investors are traditionally the biggest buyers of covered bonds in across Europe. They, like most others, had taken a huge step back from the asset class during the financial crisis. But their interest in a €1bn, five-year transaction, issued by Swedish bank SEB in late March, has opened the door again for Nordic covered bond issuers. “Germans took around 70% of the SEB issue,” said Monika Rast, head of origination/international financial institutions at UniCredit Group in Munich. “They make up a large part of the original buyer base for...

Before the global economic crisis hit its peak, the Treasury and the FDIC were advocating a vibrant US covered bond market. At that time there had only been two deals, but expanding the market was seen as an important fillip to the US residential housing market. By allowing mortgage-lending banks to issue bonds collateralised by a covered pool of mortgage assets – a structure similar to RMBS – they hoped to lower the cost of mortgage financing. The plan was overtaken by economic events and the idea of fostering a relatively untested asset class...

With a history dating back over 200 years and a total worth of over €800bn - practically one fifth of the entire German bond market - one may well ask why it took Germany's leading bank so long to catch on to the Pfandbriefe craze. Before borrowing costs commenced their upward spiral Deutsche Bank, a strong Double A rated issuer, could typically rely on a relatively low cost of funding. It did not make economic sense to enter the covered bond market due to the "not inconsiderable cost of setting up the programme without any significant...

For BNP Paribas, diversity is king. According to officials at the bank, it is constantly looking at ways to expand the breadth of its debt issuance, in its covered bonds offering and beyond, to diversify its funding sources, its investor base, the products available to existing investors and the currencies in which it issues debt. This diversity is not reflected in the collateral pools of BNPP’s covered bonds issuance, which are grouped to give pure exposure to one part of the business. This provides a means for professional investors to take...