Tuesday, 13 November 2018

Pfandbriefe/Covered Bonds 2005 - No. 11 scores

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With its €1bn 10-year in February 2005, Banco Pastor became the 11th issuer of cedulas hipotecarias. Despite early fears that Moody’s’defunct notching approach might undervalue its collateral strength, recent methodological reforms mean that Spain's lowest rated cedulas issuer could soon join the Triple A club. Joti Mangat reports.

Spanish mortgage lenders are among the most sophisticated capital market borrowers, seeking an optimal balance between funding and capital relief. Gloria Hernandez, Pastor's director of finance, explained that the borrower's long-term strategy gave equal weight to both securitisation and cedulas hipotecarias (CH).

"The two main aims are liquidity and capital relief; covered bonds achieve the first aim while with securitisation we look to structure transactions which release the greatest capital resources."

To this end, Pastor's issuance strategy is based around two new benchmarks a year – one RMBS and one CH.

"Considering our balance sheet size and in order to maintain a high level of over-collateralisation, our target is to launch one covered bond in benchmark size per year. We have also been a frequent issuer of RMBS – again with one trade per year – where we can offer junior and subordinated tranches to investors to optimise capital relief."

The mortgage pool backing Pastor'sCH issuance was, as of May 2004, heavily over-collateralised at 462%. Some 66% of the pool is comprised of residential mortgages, with the remaining 34% made up of commercial mortgage loans.

The NPL ratio stands at 0.24%, comfortably below the sector average of 0.43%. Given that the large majority of mortgage loans with LTV of 80% and above are placed into Pastor RMBS transactions, the weighted average LTV of the CH pool is 50.24%.

With an A2/A– senior unsecured rating, Moody's' notching methodology was only able to deliver a Aa3 CH rating. However, a recent proposal from Moody's to update its covered bond analysis with quantitative methods from the structured finance rating methodology could give Pastor CH the all important ratings uplift.

The new approach will have a stronger focus on collateral quality and cashflow matching, of which Hernandez argues Pastor is well positioned to take advantage.

"With the previous methodology to rate covered bonds, Moody's' notching system did not give full credit to the quality of the underlying portfolio, over-collateralisation and other credit criteria like in-house credit risk assessment . We felt that all these aspects should be taken into account in the new methodology, and have presented our case to Moody's.

"There is no good reason why Pastor CH should not be Triple A," she argued. "In any case, covered bonds offer investors a greater degree of security than RMBS because they are ultimately taking on Pastor risk, rather than the risk of underlying mortgage borrowers."

Either way, Pastor will return to the covered bond market in 2006, most likely in the first half and subject to market conditions. Given the rally in credit spreads, she is hopeful of an improved print.

The €1bn 10-year deal in February was marketed at a generous range of mid-swaps plus 9bp–10bp, and printed these Aa3 rated notes at plus 9bp against a 21/2 times subscribed book.

Seventy accounts were allocated paper, of which just over a quarter were German, while Spain, the Netherlands and the UK took the bulk of the balance. Smaller portions were sold to France and Switzerland.

Two-thirds was placed with banks, while funds and pension funds took most of the rest with a little left over for central banks.

Analysts at Barclays Capital argue that Banco Pastor benefits from a significant increase of efficiency, with a cost/income ratio of 56% in 2004, down from 67% in 2002. Also, Pastor has a strong record in managing credit exposure through tightened underwriting standards and monitoring systems.

On the other hand, potential weaknesses include relatively high exposure – 20.3% of the total loan book – to the region of Galicia, pressure on its Tier 1 capital ratio which stood at 7.3% in 2004 and the increasingly competitive environment.

Pastor ranks among Spain's middle market credit institutions, specialising in retail and SME lending, and has total assets of €12.7bn, and a BIS ratio of 12.08%. Its market capitalisation stands at €1.33bn.

The bank has an 18% market share of its home region, Galicia. Its largest shareholder is the Pedro Barre de la Maza Foundation which owns 41%.

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