Pfandbriefe/Covered Bonds 2007
Turn the clock back just a few years and the image that sprang to mind at the words "covered bond" was of a German market proud of its traditions and robust structure.
But while the Pfandbrief continues to play a central role in the market, its supremacy has been challenged by a number of newcomers, most notably out of the Spanish Cedulas stable. And the covered bond family looks set to grow further over the coming months.
While regulators in Spain are currently refining legislation regarding the asset class, that is just one of a number of jurisdictions that are in the process of implementing or honing their rules. Efficient funding costs and access to a fresh investor base are a powerful draw for borrowers in an ever-more competitive marketplace, and this year should see the advent of a covered bond fraternity that encompasses western European issuers from the Nordic countries through to Italy, and also begins to spread eastwards through the previous emerging market nations of eastern Europe and on to Turkey.
But perhaps the most talked-about situation centres on the US. When Washington Mutual became the first US covered bond issuer, with a €4bn dual-tranche five and 10-year issue in September 2006, the talk was that it would be the first of a number of institutions looking to break into the sector.
A host of potential issuer names were thrown up, but so far the only bank to follow the trail blazed by WaMu (apart from a return visit by that borrower) has been Bank of America, which mirrored that dual-tranche approach in all aspects from size to maturity. As a result, few would claim that this market segment has succeeded in living up to its billing, and the real acid test of whether the sector has come of age – a US institution issuing in US dollars into a US investor base – appears as far off as ever.
An increasing number of European investors are certainly enthusiastic in committing themselves to a burgeoning asset class where they can combine top-grade credit ratings with a spread over similarly rated paper – hence the escalation in the number of potential borrowers clamouring to be included in the covered club. But their US counterparts are proving a tougher nut to crack.
The debate centres on whether the US buyside views covered bonds as a rates or a credit product, and the returns investors therefore expect to receive. While the correct answer probably lies somewhere between the two, there is currently push-back from fund managers still averse to viewing covered bonds as a surrogate for the waning Agency sector.
Indications are that the message is gradually being accepted, the case in point being the reception afforded to HBOS’s two trips to the USA. While the bank's first foray in November 2006 saw a credible 76% of its US$2bn five-year placed with US accounts, they numbered just 19. Last February’s return with a US$3bn 10-year saw the percentage remain similar (78%) but the number of buyers increase dramatically, to close on 50.
But even if the US venture proves less successful than hoped, appetite in Europe looks set to remain keen. One way or another, the covered bond market is destined to grow, though perhaps not exactly in the way that some expected or hoped.