The main theme in the covered bond market of 2006 has been the addition of new jurisdictions as fresh legislation is passed. Most notably, this included the much-anticipated and successful opening of the US covered bond market courtesy of Washington Mutual in a move widely expected to open the floodgates for more US mortgage lenders looking to latch onto the coattails of this success.
The implications of this development could eventually be far reaching for traditional European issuers of covered bonds that have found the US investor base a difficult nut to crack in the past.
Bringing together key participants from sell-side, buy-side and research, IFR's covered bond roundtable investigated this and other important sector developments. Of particular interest was how European issuers could benefit from the introduction of these US institutions to the market.
While the notion that market expansion can only be generally beneficial was widely accepted, the deeper impact of what this growing market will mean to the spreads of more established jumbo sectors such as Germany, France and Spain was also considered. Will these newcomers offer investors more spread differentiation, will this create a tougher environment for the existing markets, and what steps are being taken to reach out to a wider investor base through new products and structures?
Could private placements play a more prominent role in future funding plans, and will there be a window of opportunity to gain exposure to a broader range of investors by offering more tailor-made products across a more diversified range of currencies, mirroring the tranching strategy that is common place in the securitisation market? All of these scenarios were investigated.
Also reviewed was the sticky subject of liquidity that continues to trigger much debate as new issuance volumes notch up record levels year-on-year. The ongoing questions of whether the current jumbo criteria confer genuine liquidity and should a higher commitment to market-making standards be adopted mirroring events in the Pfandbriefe market were also addressed.
The merits of the electronic trading platforms were discussed, given that around 40% of covered bond trading is now executed in this way, as was the question of whether the traditional €1bn jumbo criterion is still acceptable, given eligibility for these platforms often demands a minimum issue size of €1.5bn.
The traditional method of tapping outstanding issues and whether this is still the most effective way of injecting liquidity into the market was looked at, as was what additional borrowers are taking to address the liquidity issue.
The group considering these questions comprised four established issuers of jumbo covered bonds
representing three jurisdictions: Carlos Stilianopoulos, managing director and head of capital markets at Caja Madrid, Ivan Comerma, head of fixed-income treasury at Caixa Catalunya, Dr Tammo Diemer, director and head of capital markets at Aareal Bank and Vincent Digby, head of funding at the Bank of Ireland. They were joined by two covered bond research analysts: Dr Claudia Vortmueller, who works in structured finance research at Commerzbank and Jose Sarafana, who is a senior covered bond analyst at Societe Generale.