Open a crack
RMBS-backed deals show investor willingness to get comfortable with slightly more complex structures – but only for internally-sourced assets. They are unlikely to open any floodgates to significant further issuance, and the number of issuers active in the market is set to remain small. Denise Bedell reports.
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Intesa Sanpaolo and Axa Bank Europe opened the market for European RMBS-backed covered bonds late last autumn. Since then, a few follow-on deals have been launched, and more are expected. The transactions highlight not only increasing investor comfort with the covered bond structure, but also the limited asset pools that investors are willing to look at under these programs.
They show that investors are indeed willing to look at slightly more complex structures with a variety of underlying assets. However, investor interest rests on the fact that these are self-originated assets, not RMBS originated and repackaged solely for inclusion in such a transaction.
While the market is indeed open to further deals of this nature, and indeed investor interest was strong for a similar deal launched recently by SG, it is fundamentally still a niche tool. It will be used by a few select issuers to move assets about and access liquidity from a pool of existing internal assets.
Intesa Sanpaulo came to market in October last year with its first issue under a new €20bn covered bond programme for bonds backed by self-originated MBS. It tested the market with a €1bn five-year issue, and reportedly has plans to build out the maturity curve with further issues under the programme. The deal provided a good mechanism for the bank to take some liquidity out of these assets and restructure its RMBS portfolio. Intesa is one of a number of Italian issuers that are embracing covered bonds as a new refinancing tool.
Axa Bank Europe followed suit in late October with €750m of ten-year covered bonds into the French market – backed by a portfolio of Belgian RMBS securities. In March this year Axa once again tapped the market, this time with a with a €500m five-year French deal, which came in at mid-swaps plus 65-68bp through bookrunners Bank of America Merrill Lynch, BNP Paribas, Credit Agricole, HSBC and Natixis.
“The deals were received very well by the market,” said Ralf Grossmann, head of covered bond origination at Societe Generale.“Overall we had almost no negative investor feedback on the specific fact that they had RMBS on board. The key thing is that it is self-originated RMBS.”
These transactions represent a willingness on the part of investors to get their head around structures that include RMBS, according to Julia Hoggett, head of coverd bonds and FIG flow financing EMEA at Bank of America Merrill Lynch. “However it is not a material shift into the idea that the covered bond market has become a financing vehicle for RMBS that is not self-originated,” she said. “One can easily put explanation or reason behind almost every one of those transactions as to why they are structured that way. It is an effective solution to a very specific internal structuring requirement.”
Since both issuers only use internal RMBS, it is effectively a technical approach to transfer assets available within the bank. In the case of AXA, it was a cross border transfer of assets between Belgium – where there was no covered bond framework at the time – to France, which has a well-established framework.
With both of these transactions, the critical thing was for investors to know that there is recourse to the ultimate parent. With Intesa that is clear in that it is the issuer of the RMBS, which sit in an SPV. With AXA, it is a bit more complex thanks to the cross-border nature of the deal, but the institution provides a guarantee on its portfolio.
In addition, investors like the liquidity enhancement of RMBS. “The advantage is that these assets are repo-able with the ECB, which strengthened the potential liquidity in that structure. The liquidity and the recourse are better than would be the case with direct mortgage loans,” said Grossmann.
SG itself launched a deal in May this year under the new Societes de Financement de l’Habitat legal framework. SG SFH’s €1.5bn transaction – backed by a cover pool made up of French home loans originated by SG and guaranteed by Credit Logement – came to market on May 23 with price guidance of mid swaps plus 45bp. Within an hour and a half books sat at more than double issuance amount and the deal priced at mid swaps plus 43bp on the back of strong demand.
Although not technically an RMBS-backed covered bond, it does provide double recourse and is backed by a pool of mortgages originated by SG. The holder of SG’s paper has recourse to the cover pool and to SG. According to Grossmann, it is something of a hybrid structure that looks and acts like a covered bond, thanks to explicit double recourse – but where the cover pool is made up of real residential real-estate loans.
The five-year deal was launched through bookrunners BBVA, CACIB, Danske, ING, SGCIB, and UniCredit. It was the first transaction for SG under the new SFH framework and the second transaction in France to launch under the legal structure: BPCE SFH launched a €2bn, five-year deal on May 3.
Although double-recourse transactions for self-originated residential mortgage assets have been around for quite some time, as with most mortgage-related ABS structures, most investors backed away from any structure with an MBS taint during the crisis. These new deals do show that investors are willing to take the time and effort to understand these transactions. Strong demand shows that they like the credit enhancement and liquidity.
However, it is a limited solution and is unlikely to develop beyond that for the foreseeable future, with little new development occurring in most mortgage markets. Institutions are still looking to refinance existing portfolios – but until growth begins to pick up the idea of third-party MBS-backed covered bonds is effectively a non-issue.
Even when the markets do finally pick up, investors are unlikely to embrace the use of such collateral in a covered bond. “One has to distinguish between the ways that RMBS are used as collateral,” said Heiko Langer, senior covered bond analyst at BNP Paribas. “In using RMBS as a means of asset transfer into a covered pool, where the transfer of the actual pool would be more costly or complicated, then covered bonds are a useful tool for that and most investors are fine with that.”
On the other hand, if third party RMBS in the market is being used as collateral for covered bonds, that leaves a bit of an odd taste with investors. “This is essentially using covered bonds as a wrap to achieve tighter pricing,” said Langer. “If this is the case, the investor base feels arbitraged, and rightfully so.”
Plus, investors want a structure they can understand. “We will not see, at least in the next five years, a multinational MBS transaction with loans to entities in five countries, as we may have seen in the past,” said Andreas Bartsch, partner at law firm Freshfields Bruckhaus Deringer. “Investors won’t buy this, they want simple products.”
The dramatic rise in swap costs has undermined the fiscal case for such deals. “Since the swap between the euro and pound is so expensive no one will do cross currency deals,” Bartsch said. And as both the European Central Bank and HM Treasury in the UK have expressed concerns over the use of RMBS in such transactions, any issuer hoping to advance this product beyond its current uses faces an uphill struggle.
Regardless, covered bonds do provide a solid solution for managing specific portfolios of MBS, said Andrew Vickery, partner for capital markets in London at law firm Linklaters. “Using covered bonds as a repackaging vehicle the offers best of both worlds to investors. It provides not just the dual strength of the corporate and the asset-backed credit, but also a credit-enhanced asset-backed credit.” You also have underlying liquid, rated securities which are easier to value and should be easier to sell in the open market versus mortgage lines that can be hard to sell.
But it does have clear limitations, concluded Grossmann: “It is a structure that is used by a few select issuers for technical reasons as an alternative to direct asset transfer. In case the structure needs liquidity out of the pool, RMBS can be repoed quicker, then it could make sense. But you really can’t draw general conclusions about these transactions except that it will remain a transfer method that is used by a limited number of issuers.”