FRANKFURT ON A cold rainy day in late January may not sound like the most compelling proposition but IFR’s Covered Bond conference, held annually in that fine city, was a particularly hot ticket this year.
IFR’s Covered Bond event has been going for nine years now and so has covered pre-crisis and post-crisis periods; new-issue feast and famine; secondary squeezes; and pretty much everything in-between. A host of new jurisdictions has emerged – Singapore up next with Poland, Romania and Turkey all looking promising – while others have retreated. New issuers have come – €8bn in prints under 10 new covered bond programmes in euros in 2014 – while others have gone (some rather more ignominiously than others).
And innovations have been either welcomed as ‘inspired’ or condemned as pesky sideshows or as dangerously inconsistent with the fine traditions of this age-old market. In the home of the Pfandbrief, they take their covered bonds pretty seriously.
Long story short, there’s always lots to chat about – even more so as ours is the first big public covered bond event of the year – so it doubles up as a networking session for folks from all over Germany who make the trip to see their peers, friends, foes and competitors, get the feel of the market and take the pulse of sentiment.
We’ve sure covered some ground over the years and captured some great themes and content but I don’t recall a year like this year, when the attention of the entire market has been so consumed by a single all-encompassing theme that has absolutely everybody on the same side facing a single enemy.
You’d have thought German Pfandbrief issuers would be ecstatic at being able to fund at stupid levels
COVERED BOND PURCHASE Programmes 1 and 2 may have come and gone but CBPP3 has had everyone baying for the ECB’s blood. The vitriol and anger directed towards the ECB at our event last week was extraordinary and pretty heartfelt. Issuers, underwriters, investors and others queued up to express their deep frustration with monetary authorities for completely screwing their market. I’m told the same themes were repeated at LBBW’s covered bond day, which took place after the IFR event in this past week.
You’d have thought German Pfandbrief issuers would be ecstatic at being able to fund at stupid levels through mid-swaps. Ditto peripheral eurozone issuers rather absurdly being able fund way through their sovereign curves even with new-issue premiums added in. But no. A market can only ever be a market if all sides, broadly speaking, get something out of it and I was taken with the efforts German issuers at the IFR conference said they needed and wanted to go to to make sure the interests of investors were served during this extraordinary period, which at the end of the day is only temporary.
When I say investors, I mean investors as dedicated real-money investors not the central bank bid that is so egregiously destroying any vestige of price discovery and ramping the market up to unsustainable levels. Bank treasury buyers have a slightly different take given their LCR requirements, which adds a different dynamic to their need to buy paper.
I understand the predicament issuers find themselves in. Following a few weeks during which the ECB was drowning the primary and secondary market with orders and lifting dealer inventory, this has been reflected more latterly in careful and in some cases rather bold syndication strategies where the ECB order has been scaled back so traditional clients can get allocated.
Such was the level of ECB over-bidding that long-time covered bond investors have said publicly they would be looking elsewhere, particularly in a world of negative or barely net-neutral supply. On this latter point, €120bn in euro supply will undershoot euro redemptions in the order of €145bn in 2015!
WE’RE ALSO IN a world that hasn’t led to a borrowing binge to lock in current funding levels, largely because the assets side of the equation remains rather moribund and in any case the asset-liability spread moves in lock-step so the benefits are limited; while other sources (Tier 2, Additional Tier 1, TLTRO) obviate the need for more covered funding.
The problem is: if the real-money non-bank bid disappears and the only buyers in town away from the ECB – talking about Germany here – are German banks, it does add an unusual skew and increases concentration risk in the system.
With the market trading so tight, looking after your investors is always going to be a little one-sided in that borrowers can’t really go out with big price concessions; that’s not really the way of things. Sovereign bond purchasing will change the pricing landscape and may offer some respite, but then again showing investors paper with a negative yield and telling them it offers value on a relative basis is a weirdly nuanced discussion.
On the plus side, IFR’s Covered Bond event reaches its 10th Anniversary next year. And you know what big birthdays mean? Party party party! Book now to avoid disappointment. We’ve already alerted Jimmy’s Bar.
● On a separate note, I’ve had sight of the responses sent to the FSB by the Swedish Debt Office and regulator Finansinspektionen and by S&P on the TLAC proposal. Watch this space. Question: is there a difference between breach of TLAC minimum and breach of minimum capital requirements and does the proposal accelerate the point of resolution?
(This is an updated version of a column which was posted online earlier this week)
