Looking for cover

IFR Asia - South East Asia 2015
6 min read
Frances Yoon

Singapore is moving closer to a long-awaited debut issue of covered bonds as regulators mull key improvements that are expected to help clear the way for the first offering to hit the market this year.

The Monetary Authority of Singapore, which first set rules for covered bonds in 2013 to help its banks access cheaper funding, is now assessing the feedback on its latest consultation paper due at the end of February.

Covered bonds are senior notes secured against a pool of assets most likely in the form of loans, allowing issuers to sell them at lower interest rates. The assets are kept on the issuer’s balance sheet.

The proposed changes stand to unleash a market expected to issue around S$25bn–S$30bn (US$18bn–US$22bn), based on the MAS ruling that allows banks to use up to 4% of their total assets as collateral for covered bonds.

“These three points iron out a few structural issues to allow the first few deals to happen in 2015.”

Amendments include allowing an issuer to set up a trust over the residential mortgage loans used as collateral for covered bonds, preventing a bank from losing its trustee status when transferring the assets to a special-purpose vehicle.

The tweaks also propose to give more flexibility in the loan-to-value limit, as well as the amount of cash and cash equivalents, a bank can hold as a portion of its covered pool assets to make it easier to meet covered bond requirements.

“These three points iron out a few structural issues to allow the first few deals to happen in 2015,” said Andy Lai, head of securitisation in Asia for BNP Paribas. “Although the caveat is how long the MAS will need to finalise all this, we hope that this won’t be a long process.”

Singapore joins South Korea in building such a market to help banks diversify their funding sources and raise funds at cheaper costs, especially during times of crisis, when borrowing costs typically rise amid tight liquidity.

Yet, structural issues have prevented Singapore’s covered bond market from taking its first step, while Korea has yet to see its first issue under the new Covered Bonds Act enacted last April.

DBS Bank had mandated Barclays Capital and Deutsche Bank in early 2013 on hopes of becoming the first issuer of a covered bond in the city state, only to be delayed amid uncertainty over whether covered bondholders had full entitlement to mortgages or could be subordinated by other entities like the Central Provident Fund.

Singapore allows its citizens to use proceeds from the CPF, a savings fund for employees, to pay for mortgage payments. In a liquidation event, the CPF could potentially earn a claim on homes first, instead of going to covered bondholders.

Moody’s also warned that Singapore, like Korea, did not have minimum liquidity requirements to pay for interest and principal on covered bonds, a rule that would ensure timely payments if the issuer faced financial stress.

“Such requirements will be particularly relevant in Korea and Singapore, both of which lack a liquid secondary mortgage loan market,” said the March 3 report.

Future pipeline

Still, bankers are optimistic that the Singapore covered bond market will kick off once the changes from the recent consultation are accepted.

Singaporean lenders, such as DBS, United Overseas Bank and Oversea-Chinese Banking Corp, are largely expected to kick start the covered bond market through multi-issuance programmes. This will allow different covered bonds to be sold and backed against the same pool of assets.

Colin Chen, managing director and head of structured debt solutions at DBS, says the first covered bond can hit the market in the second half of this year. He estimates issuance can easily grow up to US$3bn over the next two to three years.

Demand for Singapore covered bonds should be strong, given its stable mortgage market and its coveted Triple A sovereign credit ratings.

The possibility that Singapore banks may be required to bulk up on liquid assets to conform to Basel III reforms can also help whet appetite for covered bonds.

“This is not a typical fixed-income product, where it’s about yield, it’s about quality and the fact that it qualifies for certain regulatory treatment,” said Chen. “Primary investors have been bank treasuries, sovereign wealth funds and central banks.

Given the favourable market dynamics, Singaporean covered bonds should be attractive to conventional European covered bonds investors as the European Central Bank’s quantitative easing boosts investor demands, said Lai, and also due to its ability to provide diversification for investors in the global covered bond market where currently demand outweighs supply.

The main focus for Asia ex-Japan’s covered bond market would continue to be Singapore and Korea, but Lai said there was a chance that Hong Kong, Malaysia or even in China or Taiwan could also become covered bond candidates.

While only locally incorporated banks will issue Singapore covered bonds, Korea allows offerings from financial institutions that meet requirements of the Financial Services Commission, according to Moody’s.

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Looking for cover