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1. The Covered
THE COVERED BOND REPORT
Bond Report
www.coveredbondreport.com May 2011
MAY 2011
WWW.COVEREDBONDREPORT.COM
NUMBER 2
Measuring up?
Labels and limits in quest for covered bond ideal
CBIC Small banks Asia
Takes transparency lead Weighing pros and cons Playing it, Safe?

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3. The Covered
Bond Report CONTENTS
32
Cover Story
LABELS & LIMITS
32 The measure of an asset class
As covered bonds become an increasingly
important pillar of the new global financial
architecture, the need to define and delineate the
asset class increases. A labelling initiative has been
embarked upon to this end. But can the needs of
regulators and investors be squared with those of
issuers? By Neil Day
5 FROM THE EDITOR
3 First things first
MONITOR
4 Legislation & regulation
14 Market
17 Ratings
Q&A: DEXIA
20 Dexia rebuilds for a brighter future
Gone are the days when Dexia sat atop the covered
bond market. Its recent history has ensured that it now
trades at the wide end of the French sector. However,
the funding team is confident it can convince investors
that the credit deserves better and a Eu1bn five year
20 Dexia Municipal Agency benchmark on 11 May
produced encouraging results. Neil Day spoke to the
team about the challenges they face.
May 2011 The Covered Bond Report 1

4. The Covered
CONTENTS Bond Report
24
SUB-JUMBOS:
24 Jumbos: lowering the bar
Growing acceptance of benchmarks being less than
Eu1bn carries advantages for issuers old and new, and
the leading index provider is being lobbied to follow
the trend. But could this lowering of the bar result in
the loss of privileged status for jumbos at the European
Central Bank? By Maiya Keidan
ANALYSE THIS: COVERED VERSUS SENIOR
29 Bail-in fears unheeded
Bail-in fears are said to have driven investors from
senior unsecured into covered bonds, but, according to
Deutsche Bank head of covered bond research Bernd
Volk, spreads for some jurisdictions fail to reflect this.
40 ASIAN DEMAND: IN TRANSIT
40 Specially packed for Safe & Co.
Covered bond issuers have long sought to sell their
wares to increasingly wealthy Asian investors. But
although the identities and behaviour of the biggest
Asian players are, in the words of one banker, the bond
market’s “worst kept secret”, the extent to which they
want to buy covered bonds is unclear. Recent successes
have nevertheless suggested attitudes could
be changing. By Neil Day
SMALL BANKS: REASONS TO BE FEARFUL?
44 Small banks size up pros and cons
Some small financial institutions in countries exploring
covered bonds for the first time have expressed
concerns about being put at a disadvantage. But while
bigger banks may have natural advantages in the asset
class, mature jurisdictions suggest that these can be
overcome or need not be a concern. By Neil Day
44
FULL DISCLOSURE
48 Stockholm & Paris
2 The Covered Bond Report May 2011

5. FROM THE EDITOR
First things first
W
alk before trying to run. The
wisdom quoted by Washington
consultant Bert Ely, with regard
to the development of a US cov-
ered bond market, is advice that
appears to have been taken on
board by the covered bond market and those who regu-
late and support it lately — albeit after they had already
set off at quite a trot.
While covered bonds have been put centre stage in the
laws and regulations of a rebuilt global financial system,
rules governing just what they need to do to qualify for
this leading role differ from country to country.
The labelling initiative being undertaken by the Eu-
ropean Covered Bond Council with the support of the
European Central Bank is not new, but has taken on
renewed importance given the prominent role covered
The Covered bonds are being given under Basel III, Solvency II and a
variety of other regulatory overhauls. A push for greater
Bond Report transparency from the Covered Bond Investor Council
has only given the initiative further momentum.
www.coveredbondreport.com Coming up with a template for what a covered bond
is — or at least, one that deserves preferential treatment
— would be hard enough even without having to take
Editorial
Managing Editor Neil Day into account the varied structures that have already been
+44 20 7415 7185 developed. The Basel Committee on Banking Supervi-
nday@coveredbondreport.com sion faced a similar challenge in coming up with a glo-
Reporter Maiya Keidan bal compromise that somehow balanced local differences
mkeidan@coveredbondreport.com across a range of areas — and even after its December
framework was announced the debate over implementa-
Design & Production tion still rages.
Creative Director: Garrett Fallon
Senior Designer: Sheldon Pink
But however difficult it might be — and whether the
differences are down to natural national idiosyncrasies or
Printing vested interests — a way of delineating the varied struc-
Wyndeham Grange Ltd tures and legislations in the covered bond market will
have to be found, even if it risks alienating some quarters
Advertising Sales of the market.
ads@coveredbondreport.com Neil Day, Managing Editor
Subscriber Services
subs@coveredbondreport.com The Covered
Bond Report
www.coveredbondreport.com May 2011
Editorial
editorial@coveredbondreport.com
The Covered Bond Report is a
Newtype Media publication
Measuring up?
25, Finsbury Business Centre Labels and limits in quest for covered bond ideal
40 Bowling Green Lane
London EC1R 0NE
+44 20 7415 7185
CBIC Small banks Asia
Takes transparency lead Weighing pros and cons Playing it, Safe?
May 2011 The Covered Bond Report 3

6. MONITOR: LEGISLATION & REGULATION
Legislation & Regulation
LEGISLATION
Canada launches consultation after re-election
A consultation paper released by Canada’s
Department of Finance on 11 May was
greeted with enthusiasm by Canadian
market participants, who said that it was
a positive outcome after several months of
talks with the government about the de-
velopment of a covered bond framework.
The consultation comes after the govern-
ment committed to introducing legislation
in its March 2010 budget. Canada’s Con- Finance Minister Jim Flaherty:
servative government was re-elected earlier Plans announced in March 2010 budget
in a general election earlier this month.
“It’s very positive and a welcome devel-
opment for any Canadian covered bond “Canada’s adoption of a legislative
issuer,” said a funding official at a Canadi- framework should cover? Does the pro- framework for covered bonds will be a
an bank. “This is something we have been posed framework strike the appropriate welcome development for issuers and in-
working through with the Department of balance between the interests of cov- vestors alike,” he said. “Strengthening and
Finance for several months. ered bondholders and other creditors of clarifying investor rights in covered assets
“The next step is legislation, which we banks, both secured and unsecured? upon an issuer’s insolvency should bring
believe should give Canadians a more lev- Canada’s position into line with other
el playing field in Europe.” countries that have adopted legislative
The Department of Finance said that a ered bonds should be standardized by frameworks.”
legislative framework will benefit Canadians. the framework to create a robust, deep Palmer said he found interesting the
“The legislation will create a more and liquid market? proposed scope of eligibility criteria for
robust product that will retain investor
confidence in periods of market instabil- “The more modest scope of permitted assets
ity by providing legal certainty and setting
minimum standards for covered bonds,”
will simplify the process”
it said. “It will also help financial institu- covered assets and issuers.
tions diversify their sources of funding by of the covered bonds registrar and what “Cover pools for legislative covered
increasing investor interest in Canadian entity should perform this role? bonds would be limited to residential
covered bonds.” The funding official said he was mortgages, unlike the recent US proposal
The volume of Canadian covered pleased to see all the points that had been that would open up the US covered bond
bonds outstanding doubled last year, ac- discussed over the past several months ad- market to other asset classes, like autos,
cording to the Department of Finance. dressed in the consultation document, in- credit cards, and student loans,” he said.
Almost all of the growth in the Canadian cluding the matter of existing structures. “Finance suggests that the more modest
market has come from the country’s banks “There was a vested interest in codi- scope of permitted assets will simplify the
selling US dollar denominated covered fying existing structures in the proposed process and permit a more rapid imple-
bonds, mainly to US investors. This year legislation,” he said. “Investors who hold mentation of a legislative regime.”
National Bank of Canada and Caisse Cen- existing paper, the last thing they want is Other market participants agreed that
trale Desjardins de Quebec launched their to be uncertain about what’s happening the covered bond legislation should not
first covered bonds. with their outstanding structures.” face problems moving forward.
The consultation paper deals with a “It should not be a terribly controver-
range of issues including asset segrega- Canada, Canadian issuers have restricted sial piece of legislation, aside from the
tion, eligible assets, and overcollaterali- their cover pool to mortgages insured by standard discussion of trying to balance
sation, for example. The Department of the interests of retail depositors,” said the
Finance said that it is specifically seeking Aaron Palmer, a partner at Blake, Cassels funding official.
feedback on three general questions: & Graydon, also welcomed the consultation. The consultation ends on 10 June.
4 The Covered Bond Report May 2011

7. MONITOR: LEGISLATION & REGULATION
CIBC
ECBC acts after CBIC transparency push
The European Covered Bond Council transparency standards even ahead of
has been surveying its members for their the release of the data lists and had made
views on transparency standards pro- progress on the topic. At a plenary session
posed by the Covered Bond Investor of the ECBC in Stockholm at the end of
Council, which could form part of a la- March Grossmann unveiled an updated
belling initiative being supported by the version of a part of the association’s web-
European Central Bank. site where market participants can find
The ECBC sent out the survey a week comprehensive information on covered
after a meeting in Frankfurt on 29 April bond legislations and links to issuer data.
focussing on labelling and featuring many “We have already done some work on
of the association’s members as well as our own part, with the comparative data-
European Central Bank officials and in- base website and looking into what dif-
vestors, including Covered Bond Investor ferent issuers provide in terms of infor-
Council representatives. mation,” said Grossmann. “We welcome
At a plenary meeting of the ECBC at that investors have now put their ideas on
the end of March Michel Stubbe, head the table, which will enrich our on-going
of the market operations analysis divi- dialogue.
sion at the ECB — speaking as an expert “If you speak to different investors you
without prejudging any decision of the get different answers as to what they re-
ECB governing council — had suggested quire, but now the CBIC’s transparency
that any covered bond label could involve standards provide us with something of
“value-added services”, such as transpar- a consensus on what is the ultimate wish-
ency about products. He added that a label list to work with. Now we will be meeting
could be “a big resource saver” for inves- in the technical issues working group to
tors and regulators. Andreas Denger: see how we can address this.”
The ICMA Covered Bond Investor “Most of this can be provided The CBIC proposals are the fruit of a
Council unveiled its plans for the trans- relatively easily” working group that has sought to identify
parency standards at the ECBC plenary the key information covered bond inves-
and then released its data lists in April, The publication of the proposed trans- tors require, said the Council, which op-
detailing information it believes issuers parency standards begins a consultation erates under the auspices of the Interna-
should provide to investors. period that will close on 30 June, and the tional Capital Market Association.
The voluntary transparency standards CBIC is aiming to have the standards fi- “It is expected that the information
set out three categories of information the nalised in September. required would be available on a regular
CBIC expects from issuers: general issuer basis (e.g. a half yearly update) to meet
data; cover pool data; and explanations as “Providing consistent investors’ transparency and information
to how key concepts are defined.
“It’s not just new covered bond in-
data should favour needs,” it said. “Beside the quantitative
information provided via a spreadsheet,
vestors who are raising questions about issuers” some qualitative information is requested
transparency,” said Andreas Denger, sen- to explain the figures and make the data
ior portfolio manager at MEAG Munich “The CBIC believes that transparency more comparable.
Ergo Asset Management. “Traditional standards are a milestone in the roadmap “The CBIC believes that issuers should
buyers also have also increasing needs for towards a better transparency regime in consider these qualitative elements and
comparable and standardised information Europe,” it said. ensure a certain degree of consistency,
on the issuer, collateral pool characteris- Ralf Grossmann, head of covered most urgently at national level.”
tics and key definitions. bond origination at Société Générale and General issuer information required
“We believe that most of this informa- chairman of the working group, told The under the proposals includes sections
tion can be provided relatively easily by all Covered Bond Report that the ECBC had on: balance sheet data; wholesale funding
issuers.” been co-operating with the CBIC on the breakdown; customer loans; margin cal-
May 2011 The Covered Bond Report 5

8. MONITOR: LEGISLATION & REGULATION
culations; and the legal status of covered the suggested data twice a year, it would
bonds — whether they are repo eligible, make the market significantly more trans-
and UCITS and CRD compliant. parent and comparable, with the extra in-
The cover pool data standards require formation on issuers’ strengths and weak-
issuers to detail cover pool composition nesses feeding through to prices more
and eligibility criteria, with a breakdown consistently.
of the types of assets in the cover pool and “At the end of the day, this would help
allowed as collateral. Some examples are: investors and other market participants
to form an opinion on individual issuers
ble assets? and their covered bond programmes in-
dependently of rating agencies,” he said.
house prices to the current OC. “However, we would warn readers of the
danger of basing their judgements of cov-
soft or hard bullet structure? ered bonds on excessively ratio-driven
Issuers are then required to explain analysis.
key concepts underlying the data in the “The key question is ultimately all
previous two sections. They are required, about the long term intrinsic value of the
for example, to describe how NPLs are de- cover assets, which in turn is ultimately
fined, how LTVs are calculated, and how subject to the economic developments.
residential and commercial loans are de- And last but not least, we believe that the
lineated. value of covered bonds also depends on
The CBIC said that it hopes national the sustainability of the issuer’s business
associations will take the data lists into model and lending standards.”
consideration when developing their own Grossmann said that the ECBC survey
national templates. Associations in Ger- Ralf Grossmann: and working group would be looking at
many and Sweden have already developed “Some items probably sensitive what data is already included in standard fi-
for the stock market”
standardised ways of calculating some of nancial reporting by issuers and what is not.
the key concepts in the CBIC’s proposals. “There are also some items that will
“The CBIC is well aware that not all Bank of England that for UK issuers take probably be sensitive to the stock mar-
jurisdictions or issuers will be in a posi- in covered bonds as well as asset backed ket, perhaps,” he added. “For example, if
tion to provide all of the requested data,” it securities, which were seen as the original we would all disclose our margins in the
added. “Nonetheless, the CBIC invites all main target of the central bank’s new re- mortgage business, that would probably
issuers to be as accurate and comprehen- quirements. By chance, on the same day as bring the equity analysts in. And also
sive as possible in filling in the data list. the labelling meeting, the ECB introduced some of the information probably needs
“Providing consistent data and trans- to be approved by auditors or by internal
parency for their covered bond products “We would warn compliance.
should favour issuers and their respec-
tive jurisdictions in increasing investors’
against excessively “These are all things we need to take
account of. The national delegations and
confidence in their product. To accom- ratio-driven analysis” associations will play a pivotal role in de-
modate the differences between markets termining what can be produced in what
JÖRG HOMEY
and jurisdictions and deviations from time-frame and by the different countries.
the data list which potentially could oc- loan-by-loan information requirements We are now doing our homework.”
cur, additional remarks in the data list at for commercial mortgage backed securi- Feedback to the ECBC’s survey was re-
the ‘Additional comments’ section could ties and SME securitisations, but it has not quested in time for a meeting of its techni-
be given.” yet imposed any such requirements in the cal issues working group scheduled for 27
Some market participants have noted field of covered bonds. May.
that the CBIC requirements are not as Jörg Homey, covered bond analyst at See cover story for more on the labelling
stringent as those being introduced by the DZ Bank, said that if all issuers provided initiative
6 The Covered Bond Report May 2011

9. MONITOR: LEGISLATION & REGULATION
“The market will still prefer Eu1bn deals
because they are more liquid” page 26
GARRETT-MALONEY
US Bill passes subcommittee intact
Attempts to address concerns surround- sued relative to the size of a bank’s bal-
ing the US Covered Bond Act of 2011 are ance sheet.
set to take place ahead of a full hearing of Garrett pointed out that the bill gives
the House Financial Services Committee, regulators the ability to set such limits,
after its Capital Markets & Government but Campbell said that he would prefer
Sponsored Enterprises subcommittee any limits to be statutory.
passed the bill with only two “non-con- Garrett and Maloney had already said
troversial” amendments on 3 May. that they are open to exploring avenues
The amendments were put forward by to address ways in which such concerns
the sponsors of the bill, Republican Scott among members of the committee, the
Garrett, who chairs the subcommittee, Federal Deposit Insurance Corporation
and Democrat Carolyn Maloney, follow- and others might be addressed through
ing a first hearing of the bill on 11 March. changes to the bill before it is discussed
However, John Campbell, a Republi- by the full House Financial Services
can Representative from California, said Committee.
that he was “not thrilled with this bill or “We have reached out to – and they
this concept”. have reached out to us – to the regula-
“I have concerns about this because of tors and specifically to the regulator that
the way that covered bonds work, because you referenced as well, to try to hear what
of the substitution of collateral issue,” he their concerns are and understand that
explained. “So you’ve got this pool of they have the concerns, some of which
mortgages upon which Wall Street loans you listed there,” said Garrett. “And what
money to the bank and then if one of we’d like to do is to continue the dialogue
those mortgages goes bad the bank has between now… and the full commit-
to take a good mortgage out of the bank tee markup, and keep involved all those
and put it in the pool and then the bad folks.”
John Campbell: “not thrilled with
mortgage goes over into the bank. This appeared to satisfy Maxine Wa-
this bill or this concept”
“So if you have a situation like we had ters, the ranking Democrat member of
in 2008 where a lot of things are going the subcommittee, who had also cited
bad, then the Wall Street loans on this, concerns about the bill. amendment” and Garrett’s as “really to-
they have to be covered by the bad loans Proponents of covered bonds had tally non-controversial”. However, Gar-
going into the bank and good loans com- feared that the FDIC might seek to have rett said that his amendment, among
ing from the bank going into this pool. an amendment tabled, potentially intro- other things, “conforms [sic] the FDIC’s
Therefore, potentially — which is why ducing an overcollateralisation limit so authority to recover losses through exist-
the FDIC has concerns with this — be- low as to render covered bonds unwork- ing law” and “clarifies how the cover pool
cause it potentially creates a problem for able. is treated during the FDIC’s exclusivity
the security of that bank and for eventu- “They will go on saying that they period”.
ally the FDIC and potentially even tax- like covered bonds,” he said, “but only The bill was passed by voice vote and
payers if you have a bad situation.” on their own terms. They are trying to Garrett said it would be “favourably re-
He said that while the two amend- get away with the argument that it must ported to the full committee”. He also
ments improved the original version of be possible for these things to happen said that there could be progress on cov-
the bill, he was not prepared to support and for them to be happy, but the real- ered bonds in the Senate.
the legislation yesterday. He suggested ity is that it’s going to be very difficult to “I’m optimistic about this actually get-
two limitations be placed on issuance, square their requirements with what the ting over to the Senate as well,” he said.
one limiting the extent to which good market currently needs.” In mid-March Democrat Senator
loans can be substituted for bad, and The two amendments were not dis- Charles Schumer said that he was con-
another placing an absolute cap on the cussed in any detail, with Maloney de- sidering introducing a covered bond bill
volume of covered bonds that can be is- scribing hers as “basically a clarifying in the Senate.
May 2011 The Covered Bond Report 7

10. The Covered
Bond Report
The Covered Bond Report is not only a magazine, but also a
website providing news, analysis and data on the market.
Did you know that The Covered Bond Report has its own database
of benchmarks?
Did you know that we link directly from bond data to relevant coverage?
Did you know that we include price guidance, book sizes and
distribution statistics?
Did you know that you can run league tables by country and currency?
To register for trial access to The Covered Bond Report, visit
news.coveredbondreport.com or contact Neil Day, Managing Editor, at
nday@coveredbondreport.com. And don’t forget: if you are an investor in
covered bonds you can qualify for free access to the website.

11. MONITOR: LEGISLATION & REGULATION
AUCTIONS
Danish offer daily move in Basel bid
The Association of Danish Mortgage “And if we do a refinancing on a daily
Banks (Realkreditrådet) is proposing a basis, we would do refinancing on about
move to daily auctions to refinance ad- 220-240 days,” said Hjortshøj-Nielsen, “and
justable rate mortgages as one of various in that case we could only lose half a percent
options it is exploring in a bid to win bet- of our funding on one day. That’s much less
ter treatment for its system under Basel III than a retail bank has the risk of losing.
when the new framework is implemented “So we would very much like to use the
in the European Union through CRD IV. argument that if you actually refinance on
The possibility of having “day-to-day” a daily basis it would be as safe as if you
auctions was raised by Peter Engberg Peter Engberg Jensen: “We have a
have retail deposits. We are going to use
Jensen, chairman of the Association of system with low liquidity risk” that argument in the NFSR debate.”
Danish Mortgage Banks and Nykredit Arnth Jensen said that a European
group chief executive, at its annual meet- The Danish mortgage banks also believe Commission proposal for CRD IV is ex-
ing at the end of last month. that such a move would help their case with pected just before or after the summer
“We are discussing such a proposal with regard to the NSFR as well as Liquidity holidays, with discussions in the Euro-
the Danish Mortgage Banks’ Federation and Coverage Ratios under Basel III. Accord- pean Parliament to follow.
public authorities,” he said, “with a view to ing to Henrik Hjortshøj-Nielsen, head of “If we can prove that they are liquid
implementing it in due time for us to dem- group treasury at Nykredit, a possible move then we think that will help us argue our
onstrate to the European authorities that we to daily auctions is just one of three options case,” she said. “It’s a long way before we
have a system with low liquidity risk which being explored and prepared for. actually know what’s happening but it’s
should fall within the Next Stable Funding Nykredit Realkredit, which has very important that we are fighting.”
Ratio under the Stable Funding rules.” three auction dates, is reweighting its A move to daily auctions could, how-
Currently, Danish issuers hold up to sales so that within the next two years ever, carry disadvantages for the Danish.
three covered bond auctions a year — in the March, September and December “There is an advantage in trying to get
March, September and December, with the auctions will be of equal size, and it is investors’ interest at certain times of year
largest concentration being in December. considering introducing a fourth auc- by having big liquid auctions, and having
The December sale issued 96% of Danish tion. The mortgage bank has also pre- big liquid bonds is actually advantageous
covered bonds until 2009, but the associa- pared to bring its auction dates forward for investors,” said Hjortshøj-Nielsen. “So
tion agreed to further distribute refinanc- a month, because in order to satisfy the you could argue that on average we would
ing auctions and to refinance new loans at LCR institutions have to be financed 30 have higher funding costs by spreading it
other times of year after the Danish central days forward. out. That is the risk.”
bank, Danmarks Nationalbank, raised con-
cerns over the reliance on a single auction.
“That moved quite a few bonds,” said
Ane Arnth Jensen, managing director of
the association, of the move away from
having only the December auction. “That
was a good first step.”
However, the central bank is under-
stood to be keen on spreading the auc-
tions even further.
“The Danish central bank has been
against these very large auctions,” said
Gustav Smidth, senior analyst at Dan- Denmark’s Nationalbank “has been
ske Bank. “It tends to put the country’s against these very large auctions”
finances at risk if an auction happens to
come at a bad time for the market. So this
is all a result of the crisis.
May 2011 The Covered Bond Report 9

12. MONITOR: LEGISLATION & REGULATION
CRD IV
Stick to LCR limits, says Basel member
A member of the Basel Committee on considered as liquid under the new regula-
Banking Supervision has said that the tion more popular, and assets that are not
European Commission should stick to considered as liquid assets less so.
the limits placed on covered bonds in the “This can shift demand to sovereign
Basel III framework when implement- bonds, covered bonds and high quality
ing it through CRD IV — although he corporate bonds and away from less liq-
said that they could play a greater role in uid assets, such as other bank bonds, se-
countries lacking Level 1 and 2 assets. curitised assets and lower quality corpo-
Speaking at a European Covered Bond rate bonds. All this can have implications
Council plenary meeting in Stockholm at for credit spreads and investors’ returns
the end of March, Lars Frisell, chief econ- Frisell: Basel III “a global compromise” on particular market segments.”
omist at the Swedish Financial Supervi- Wellink said that the prospects for
sory Authority and member of the Basel shortage of Level 1 and 2 assets. He said that term funding could improve if the liquid-
Committee, said that the Basel III frame- Denmark and Sweden were “pretty close” ity of long term paper improves relative
work represented a “global compromise”, to qualifying for special treatment on this to short term paper.
and that “it was an achievement to get an basis, adding that it would be “absurd” to “This could be stimulated by transpar-
explicit role for covered bonds at all”. punish countries that had kept government ent, collateralised and straightforward
Under the Basel Committee’s frame- debt low. asset structures,” he said. “For these rea-
work, covered bonds can be included in sons covered bonds have become popular
Liquidity Coverage Ratios as Level 2 as- “It’s hard for them to recently, although we are not sure on the
sets, meaning that they can constitute
up to 40% of LCRs and face haircuts of
see differences precise impact on unsecured investors.
In the first quarter Eu100bn of covered
at least 15%. The ECBC and others have between RMBS and bonds was issued in Europe and observ-
been campaigning for improved treatment
of covered bonds in LCRs, with a Danish-
covered bonds” ers expect this asset class to grow further.
“The recognition as liquid assets in
German initiative calling for certain cov- “My main advice is not to worry too the LCR supports the issuance of covered
ered bonds to be treated as Level 1 assets, much,” was his advice to Danish con- bonds.”
on a par with sovereign bonds, which do cerns about the impact of Basel III. He then raised the prospect of MBS in
not face the same limits and haircuts. Frisell pointed to the way in which the future being included in the LCR.
“It is important that the Commission Australia is planning to cope with such “As you probably know, MBS securi-
stands by this agreement,” he said, add- a situation as a model. The Reserve Bank ties are not recognised in the LCR buff-
ing of the 40% limit that the EU would of Australia will have a new committed er,” said Wellink. “Increased transpar-
“have to live with that” and “same thing secured liquidity facility that banks can ency and market liquidity, for instance
with the haircut”. use to meet the LCR, and this could be through market quotation, would in-
Frisell said that there had been “candid” secured on covered bonds. crease the likelihood that MBS securities
discussions within the Basel Committee would be recognised as liquid assets.”
about covered bonds, where it had been MBS in LCRs? The shortfalls in liquid assets that
noted that covered bonds, too, had suffered Nout Wellink, chairman of the Basel some countries are facing were also ad-
during the crisis, and that it was at times Committee, highlighted how Basel III dressed, with Wellink highlighting how
difficult for non-European members to see will boost demand for covered bonds in “tailor-made” solutions were allowed by
why covered bonds might deserve special a speech in mid-April, and also discussed the new liquidity regulation.
treatment given that “it’s hard for them to how the chances of mortgage backed se- “For instance, the Reserve Bank of
see differences between RMBS and covered curities being recognised as liquid assets Australia has established a liquidity facil-
bonds in their own country”. could be improved. ity to help local banks meet the LCR re-
However, Frisell said that there remained “The LCR will change the relative prefer- quirement,” he said, “while Denmark in-
plenty of time for carving out a role for cov- ences for banks to hold certain asset classes,” tends to give special treatment to covered
ered bonds before the final implementa- said Wellink, who is president of De Neder- bonds; the possibilities to do so will be fle-
tion of Basel III for those countries facing a landsche Bank. “It will make assets that are shed out over the observation period.”
10 The Covered Bond Report May 2011

13. MONITOR: LEGISLATION & EGULATION
“It’s easier for the big banks given that rating
agencies have linked approaches” page 46
SOUTH AFRICA
RBSA prohibits covered
The Reserve Bank of South Africa has possible use in South Africa.
prohibited the issuance of covered bonds However, the Reserve Bank said that:
by banks in the country, saying that they “Since a covered bond structure in terms
are potentially “materially inconsistent” of which covered bonds are issued by a
with the mission of its bank supervision bank will in essence subordinate the in- Coovadia: “covered bonds provide a
department (BSD). terests of depositors to the interests of the useful tool”
The Banking Association South Africa covered bond holders, a covered bond
had been lobbying for covered bonds, but structure is regarded by the BSD as pos- engaging the banking regulator on this
the RBSA revealed the decision in a guid- sibly being materially inconsistent with aspect,” Cas Coovadia, BASA managing
ance note in late May, informing banks the objectives, duties and responsibilities director, had told The Covered Bond Re-
that it has a “policy not to allow the use imposed on the BSD in terms of the pro- port in early May.
of covered bonds and similar structures visions of the Banks Act, 1990 (Act No. “Covered bonds provide a useful tool
by banks in South Africa”. 94 of 1990 — the ‘Banks Act’).” to lengthen the term of bank funding
The central bank said that the mission The central bank added that it would whilst at the same time add to the stock
of the BSD is to “promote the soundness of “continue to monitor and appropriately of liquid assets in a country that has lim-
the domestic banking system and to mini- consider all relevant international devel- ited options to meet the new internation-
mise risk through the effective and efficient opments related to covered bonds”. al banking legislation.”
application of international regulatory and The move comes in spite of lobbying Some market participants had, how-
supervisory standards and best practice”. from The Banking Association South ever, already raised objections to the
The guidance note acknowledges the Africa, which had been in talks with the push for covered bonds. Andrew Canter,
position covered bonds are given under Reserve Bank. chief investment officer of Futuregrowth
Basel III and their use in other jurisdic- “Covered bonds are not yet offered Asset Management, for example, had said
tions, suggesting that these prompted re- in South Africa and we, The Banking that covered bonds would prejudice ex-
cent enquiries it has received about their Association South Africa, are currently isting creditors.
MOODY’S
Better LCR treatment credit positive
Moody’s would view any inclusion of minimum 15% haircuts that Level 2 assets troubled issuer meaning that access to,
covered bonds in Level 1 assets for li- – which covered bonds fall under accord- and costs of, refinancing for existing pro-
quidity coverage ratios as credit posi- ing to the Basel Committee on Banking Su- grammes is reduced.
tive, the rating agency said after a Ger- pervision’s proposals – for covered bonds
man finance ministry representative was meeting certain criteria.
reported as saying that covered bonds Moody’s said that, if implemented,
meeting certain criteria should be treat- the initiative would be credit positive as it
ed as high quality liquid assets for the would reduce investor losses arising as a
purposes of LCRs. result of refinancing risks.
The rating agency said that an article “If some covered bonds have the ben-
in Recht der Finanzinstrumente in March efit of an exemption from the 40% cap, this
quoting state secretary Jörg Asmussen exemption will materially increase and sta-
supports an initiative by the Association bilise the potential investor base for these
of German Pfandbrief Banks (vdp) and covered bonds and reduce yields,” said
Association of Danish Mortgage Banks the rating agency. “Prospective covered
(Realkreditrådet) aimed at gaining better bond issuers with access to a strong inves-
treatment of covered bonds under Basel tor base, able to fund at low yields, will be Asmussen:
Supports Danish-German stance
III. This would remove the 40% cap and more willing to refinance the assets of a
May 2011 The Covered Bond Report 11

14. MONITOR: LEGISLATION & REGULATION
REGULATED COVERED BONDS
UK promises enhancements, clarity
The UK Financial Services Authority and creditor’s residual unsecured claims after re-
HM Treasury launched a review of the alisation of collateral or recoveries under a
UK covered bond framework in April, guarantee would be subject to bail-in. As in-
which they said aims to make UK cov- ternational negotiations about bail-in pow-
ered bonds more attractive to investors ers progress, the authorities should consider
and to allow UK issuers to compete on a carefully the mechanisms by which creditors
level playing field. could call upon any guarantee forming part
The review had been flagged in the of a covered bond arrangement in respect of
UK budget in March. the original unsecured claims.”
“Making sure banks and building so- The RCBC’s Fielding welcomed this.
cieties lend to families and businesses “There has been a misplaced worry
is vital for sustaining the recovery,” said Mark Hoban: “Review that in the case of a bail-in the assets in
Mark Hoban, Financial Secretary to the demonstrates the government’s the cover pool could in some way be re-
Treasury, on announcing the review. “To- commitment” claimed,” he said, “but the consultation
day’s review demonstrates the Govern- makes it crystal clear that the segregation
ment’s commitment to supporting the of assets in a bail-in, the secured creditor’s
UK’s growing covered bond market. The as funding instrument for UK banks.” rights to collateral, is not in question.”
review will bring out the strengths of the Claus Tofte Nielsen, chairman of the However, market participants said
UK’s covered bond regime and help lend- Covered Bond Investor Council and that it was unclear how the review might
ers raise the funds they need to lend.” senior portfolio manager Norges Bank affect the levels at which UK covered
Investors and issuers reacted posi- Investment Management, said that bonds trade.
tively to the review, saying that it should the transparency improvements being “The rules are really positive, but the
strengthen the UK product. sought are aligned with the CBIC’s trans- spread impact is hard to quantify,” said
“We welcome the recognition of the im- parency initiative (see separate article). Frank Will, senior analyst at RBS. “The
portance of covered bonds as a funding tool UK has already performed well, but there’s
and the statement of intent to build upon Bail-in angle covered probably a little bit of room to perform bet-
the strengths of the existing framework, as As well as the framework governing cov- ter and this is a step in the right direction.
well as ensuring their attractiveness to in- ered bonds, the consultation document “However, I don’t think it’s a game-
vestors.” Chris Fielding, Regulated Covered discusses how covered bonds should be changer. It will probably do more for wid-
Bond Council executive director, told The treated in a bail-in scenario, with the au- ening the investor base and engendering
Covered Bond Report. “We appreciate eve- thorities noting that bail-in powers are more confidence in UK products.”
rything said by the Financial Secretary with an important issue for many investors.
regards to the flexibility covered bonds of-
fer and how they can complement unse-
“If a bail-in power were introduced
into the UK’s Special Resolution Regime
UK review proposals:
cured funding and securitisation.” (SRR) for failing banks, the power would
Buy-side market participants were also be subject to the same creditor safeguards
encouraged by the government’s move. that apply more generally within the SRR,
“We welcome the joint initiative by including the safeguard that protects cov-
the FSA and HMT to review the UK cov- ered bond holders,” says the consultation.
ered bond regulation and are supporting “In addition, the UK believes that, in the
the authorities in their effort to make exercise of any bail-in powers, secured
the current framework even better,” said creditors’ rights to collateral should not
Georg Grodzki, head of credit research be over-ridden, and that the claims of cov-
at Legal & General Investment Man- ered bond holders in relation to the asset
agement. “LGIM believes that covered pool of a covered bond, including under a
bonds could become an important asset guarantee which forms part of the covered
class for long term institutional investors bond arrangement, should not be affected.
and play an increasingly significant role “This would mean that only a secured
12 The Covered Bond Report May 2011

15. MONITOR: LEGISLATION & REGULATION
“You have to decide between two
objectives”page 37
AUSTRALIA
Aussies press on despite limit let-down
The Australian Treasury has set an 8% Analysts noted that the draft legisla-
limit on the amount of assets that can be Australia’s Treasury could hold tion did not deal with minimum liquid-
encumbered by covered bond issuance in second consultation ity requirements or the maintenance of
draft legislation, disappointing covered a minimum overcollateralisation level.
bond proponents, who have blamed the Fitch said it believes that these issues will
Australian Prudential Regulation Au- be addressed through consecutive drafts
thority for the restrictive stance. and result in a future rating of Australian
Some market participants criticised covered bonds of up to triple-A.
the limit, saying that the government S&P said that unlike under covered
had been swayed by APRA, which had bond legislation in other jurisdictions,
previously said that covered bond issu- eas such as asset quality (<80% LTV for special purpose vehicles (SPVs) envis-
ance was prohibited as it was counter to residential loans), third party asset monitor aged in Australian structures do not pro-
the Banking Act 1959 that is now being and maintenance of the cover pool are all vide a guarantee of the ADI’s obligations
amended by the government. welcome as a means to ensure the Austral- to covered bond holders.
“An 8% limit will be inadequate for those ian covered bond is best of breed.” “The exposure draft refers to the ADI’s
ADIs that could and should be making use debt obligation as being ‘secured against’
of covered bonds,” said one. “It’s a bit silly re- “APRA is clearly an the pool of assets and the explanatory
ally, but it came at APRA’s insistence.” on-going opponent memorandum refers to the bondholders’
The restrictive proposals come af- right to enforce a charge,” said the rating
ter APRA in February excluded covered of covered bonds” agency, “but neither document stipulates
bonds from its initial eligibility criteria for “There is flexibility through Regulation how any ‘security’ will work or be enforced.
liquidity buffers under Basel III, when it to see how an 8% limit works in practice “If the intention is for the SPV to
said that no asset classes met the required and then seek amendment if required,” he grant a third party security, the mecha-
standards to qualify as Level 2 assets. added. “However, much of the detail has nisms for enforcing and applying pro-
“APRA is clearly an ongoing opponent been left to APRA Prudential Standards ceeds from the security interest held on
of covered bonds, despite having said that and we look forward to working construc- behalf of bondholders will need to be
it was only the Banking Act that caused tively with APRA and the Government in explicitly dealt with, for example, in the
their prior objections,” said a market par- the development of those standards.” programme-specific documentation.”
ticipant. “This is just the latest manifesta- S&P also said that the exposure draft
tion of their attitude to covered bonds.” A solid first step, but no more does not appropriately tackle funding
He was also disappointed by the discre- A consultation on the exposure draft fin- and refinancing alternatives following
tion afforded APRA in the exposure draft, ished on 22 April and although this was insolvency.
which allows the regulator to impose ad- originally expected to result in a version “We believe that it does not explicitly pre-
ditional requirements on ADIs. Critics that could be presented to parliament, the clude the SPV from addressing maturity mis-
said that this could create uncertainty for launch of a second consultation round matches following an ADI’s insolvency – for
not only issuers but also investors regard- before that is understood to be possible. example, by incurring new debt or creating
ing the levels of overcollateralisation that In the meantime observers said that security over the cover pool assets in favour
might be permitted, for example. while the country is progressing positive- of other lenders,” it said. “We anticipate that
However, Commonwealth Bank of ly towards a viable covered bond frame- the relevant programme documentation and
Australia chief executive Ralph Norris work, it needs to address several issues structure of a covered bond issuance would
was reported to have described the 8% where uncertainties remain. specify any mechanisms or frameworks by
level as “a good number”. Fitch considered the draft as being “a which the SPV may incur new debt or source
Australian Securitisation Forum chair- solid first step”, adding that this was par- funding to meet any liquidity needs.
man Stuart Fuller said: “The relatively light ticularly true with respect to segregation “In addition, the proposed framework
handed approach is to be welcomed as is of assets. However, a lack of clarity in does not discuss matters concerning the
the protection afforded to unsecured ADI several areas of the proposed framework eligibility of the cover pool for repurchase
creditors through an 8% cap. Provision to led UniCredit analysts to declare the arrangements with the Reserve Bank of
protect covered bond investors in key ar- draft “no more than a first step”. Australia.”
May 2011 The Covered Bond Report 13

16. MONITOR: MARKET
Market
EUROS
Resurgence in prospect after supply ebb
A record surge in covered bond issuance night, when only four benchmarks had
that ran from January into March eased hit screens. As The Covered Bond Report
to a trickle throughout April and the first was going to press the European Central
half of May, with Eu96.3bn being issued Bank appeared to be at loggerheads with
in the first three months and only a fur- the European Commission and Ecofin,
ther Eu18.4bn up to 19 May, according to apparently rejecting the latter bodies’
figures from Crédit Agricole. suggestion of a “soft restructuring”.
However, the primary market gained “Looks like people are having trouble
renewed momentum in mid-May, with with the whole Greece story again and
issues from CIF Euromortgage, Bayer- again and again,” said one banker.
ische Landesbank and Eurohypo hitting Dhiren Shah on Credit Suisse’s cov-
the market on the same day. Market par- ered bond and SSA syndicate said that the
ticipants suggested the trio’s deals could slowdown was attributable partially to a re-
herald a second wave of supply. newed focus on senior unsecured issuance.
“I would expect this could last until “There was so much covered bond is-
the summer break now,” said a German suance at the beginning of the year” says
fund manager. “But I’d expect, after how Shah, “and hardly any senior. Now we’re
well the market held up at the beginning seeing more senior than at the beginning
of the year in the face of heavy supply, of the year and fewer covered bonds.
that things should go OK.” “Banks are diversifying their funding.”
In spite of the market having been Stéphane Bataille, head of origina-
quiet for some time, the few deals that tion and syndicate, DCM at Landesbank
did hit the market in the wake of two Baden-Württemberg, was positive about
long weekends in April showed it to be the covered bond market as a whole, in
open. BPCE SFH, for example, launched spite of the brief slowdown.
the first deal after a two week hiatus and “Yes, April was subdued, but with all
met with a strong reception for what was the holidays it’s not surprising,” he said.
the first obligations à l’habitat bench- “On the positive side, we’re seeing the
mark in euros, a Eu2bn issue. covered bond investor base expanding,
Market participants cited several rea- with more and more senior investors
sons for the quiet period alongside the switching to covered, and even clients Vincent Hoarau: “Everyone is pretty
holidays. Vincent Hoarau, head of cov- who had been traditionally very active well advanced in their funding”
ered bond syndicate at Crédit Agricole, prior to the crisis now returning.”
said that most issuers were in a “wait-
and-see mode”. iBoxx spreads against swaps
“At the beginning of the year most of
350
the European covered bond issuers front- Spain
300 UK
loaded massively and logically the pace
of the supply decelerated significantly 250 Italy
Basis points
over the months of March and April,” he 200 Netherlands
said. “Everyone is pretty well advanced in 150 Canada
their funding programmes — well above 100 France
60% for most of the tier one European Scandinavia
50
frequent borrowers.” Germany
0
Dexia analysts on 18 May pointed
0
10
0
0
1
10
0
1
1
-1
-1
-1
-1
-1
-1
-1
to the latest concerns about the fate of
n-
p-
ar
ar
ay
ul
an
ov
ay
a
e
M
-J
-M
-M
-J
-M
-N
-J
-S
04
-
Greek debt as a possible explanation for
04
04
04
04
04
04
04
04
the lack of issuance in the preceding fort-
14 The Covered Bond Report May 2011

17. MONITOR: MARKET
DOLLARS
SpareBank 1 last but tightest in Nordic quarter
The focus of dollar covered bond issu- Bank 1 Boligkreditt, told The Covered
ance turned from Canada to Scandinavia Bond Report.
as the first quarter turned into the sec- Thor Tellefsen, senior vice president
ond, with three Nordic issuer hitting the and head of long term funding at DnB
market at the tail-end of March and Spare- Nor, said that the funding achieved on its
Bank 1 Boligkreditt issuing in May. 144A deal was in line with that achievable
As The Covered Bond Report was go- in euros.
ing to press, the only other issuer with “We are the only Nordic issuer that
concrete plans to tap the US market was has been able to twice issue $2bn five year
Credit Suisse, which had roadshowed deals, which is very good,” he said. “And
ahead of a dollar debut. while there are some key investors in the
Market participants suggested that any US that participated in both transac-
lack of supply in the second quarter was tions, we saw a widening of the number
no reflection of any dissatisfaction with of smaller investors that were involved,
the asset class among US investors. Indeed with some 55 to 60 accounts in the book
a banker said that it could only serve to and more than 90% of the bonds sold in
help any potential issuers, with secondary Arve Austestad: ”We had been looking the US.”
paper tightening. at US for some time” The other Scandinavian to issue was
A Swedbank Hypotek $1bn five year Nordea Eiendomskreditt, the Norwe-
fixed rate benchmark launched in late gian issuer of the Nordea group. It sold
March — alongside a $1bn three year SpareBank 1 Boligkreditt to price its a $2bn three year split into fixed and
FRN — had tightened from 71bp over $1.25bn five year inside its peers, at 62bp floating rate tranches at 42bp over Li-
Libor to the low 60s by mid-May, while over mid-swaps. bor. Crédit Agricole sold the only other
a $2bn five year fixed rate deal came in “We had been looking at the US mar- dollar covered bond in the period to
from 66bp over to the high 50s over the ket for some time, but we felt that the dif- mid-May (see obligations à l’habitat ar-
same interval. ferential to Europe was too large,” Arve ticle for more), which was also a float-
Indeed the tighter levels enabled Austestad, chief executive officer of Spare- ing rate note.
KOREA
KHFC eyes second pooling deal
Korea Housing Finance Corporation Korea, and indeed Asia, after Kookmin rea’s Financial Supervisory Service to this
could launch its second covered bond Bank sold a $1bn issue in 2009. KHFC, end. Korea has no covered bond law, but
in June or July as the country’s banks a government institution, pools collateral KHFC issues under the law governing the
are showing a renewed interest in taking from Korea’s banks in its issuance. Its first institution.
advantage of the funding instrument. issue was backed by mortgages originated “The KHFC Act authorises KHFC to
KHFC launched its first, $500m five by Standard Chartered First Korea Bank, issue mortgage backed bonds,” said
year issue in July 2010. That was led by Shinhan Bank and Woori, although its Moody’s in a pre-sale report ahead of
BNP Paribas and Standard Chartered, forthcoming issue is open to all its mem- KHFC’s debut. “These are dual recourse
and the new issue is mandated to those bers, which also include Kookmin Bank, obligations that represent both (i) a claim
two banks as well as Nomura. The issuer Korea Exchange Bank, Industrial Bank of on the general assets of KHFC and (ii) a
is understood to be considering issuing in Korea and Hana Bank. priority claim on the residential mortgages
dollars again or turning to the Japanese Korea’s banks nevertheless remain which are designated to secure payment
yen market. keen to be able to issue on a standalone of the mortgage backed bonds, which are
KHFC’s debut was only the second basis, according to market participants. segregated and managed separately from
covered bond to have been issued out of They have been in discussions with Ko- the other assets of KHFC.”
May 2011 The Covered Bond Report 15

18. MONITOR: MARKET
FRANCE
Grand Départ for obligations à l’habitat
New French covered bond legislation in- told The Covered Bond Report that the
troduced to bring its common law cov- issuer had been working on the US dollar
ered bonds under dedicated legislation project for a couple of months.
was inaugurated shortly after the Au- “The dollar market opened up last
torité de Contrôle Prudentiel (ACP) on year and there have been many issuers
28 March gave the go-ahead for issuance that have chosen to go to the US dollar
by granting authorisations to potential market as well as euros,” she said, “and
issuers. we thought that, being the biggest home
A stepping stone to the new instru- loan lender in France, it was a logical
ment was put down on 30 March when next step to diversify our investor base by
Crédit Mutuel Arkéa Covered Bonds going to the States.”
sold a Eu1bn 10 year issue accompanied The issuer held a roadshow starting in
by a letter to investors committing to the week of 21 March, just ahead of the
transforming the issue into obligations à expected approval from France’s Autorité
l’habitat. de Contrôle Prudentiel (ACP) on 28
“This first step will be followed by the March for Crédit Agricole to issue obli-
transformation of the company itself,” gations à l’habitat and convert Crédit Ag-
said the issuer. “We undertake to seek all ricole Covered Bonds to Crédit Agricole HSBC, Natixis, Santander and UniCredit
necessary internal decisions to transform Home Loan SFH. priced the Eu2bn five year benchmark at
Crédit Mutuel Arkéa Covered Bonds into “We didn’t want to launch the deal 63bp over mid-swaps.
a SFH, which shall be renamed: Crédit before our bonds could be issued as obli- Rather than merge the two issuers of
Mutuel Arkéa Home Loans SFH.” gations de financement de l’habitat,” said BPCE that had previously issued outside
The deal was priced at 90bp over mid- Fedon. “It would have been more com- a dedicated legal framework — Banques
swaps by leads Crédit Agricole, DZ Bank, plicated to say that we are issuing a con- Populaires Covered Bonds and GCE
JP Morgan and Crédit Mutuel Arkéa. tractual covered bond but will soon be Covered Bonds — the group created a
“We are very pleased with the result operating under a legal framework. new issuer, BPCE SFH, to issue under the
as the issuer only has one outstanding “We wanted to be able to go to inves- legislation.
benchmark,” said a syndicate official at tors and provide them with clarity on “We priced very close to the two old
one of the leads. “More and more people what covered bonds they are buying.” curves,” said the syndicate official at one
now are getting comfortable with buying BPCE gave the new product a home of the leads. “For me, the success of this
the name and are keen on this kind of launch on 3 May, issuing the first obliga- transaction is an indication that the new
rare exposure (French residential home tions à l’habitat in euros. Danske Bank, law will make them trade better.”
loans in Brittany).
“This is a very positive signal looking BPCE SFH finds a home in French covered bond landscape
forward. The change into OH will obvi- Cover pool: pledge of
Eligible Home Loans
ously speed up the process of penetration
of the name into the investor base.”
Crédit Agricole Home Loan SFH Eligible Regional
Home Bank #1
launched the first obligations à l’habitat Loans
proper on 13 April, debuting its new issu-
Obligations de
er in the dollar market with a $1.5bn three Eligible Regional Secured Financement de
Home Loans l’Habitat Investors
Bank #n
year 144A floating rate note. Lead manag- Loans (OFH)
ers Barclays Capital, Citi, Crédit Agricole
and Merrill Lynch priced the FRN at 75bp Eligible
Assets BPCE Replacement
over three month dollar Libor. Securities
Capital
Nadine Fedon, chief executive officer, Guaranty and solidarity system
Crédit Agricole Home Loan SFH, and of Groupe BPCE Derivatives (swaps)
global head of funding, Crédit Agricole, Source: BPCE SFH Investor Presentation – April 2011
16 The Covered Bond Report May 2011

19. MONITOR: RATINGS
Ratings
FITCH
Investors fear senior subordination
European investors are concerned about It noted that planned resolution regimes
How concerned are you that bank
an increased use of covered bonds, ac- would make structural and legal subordi- senior unsecured creditors will
cording to a survey conducted by Fitch, nation an even more important issue. become increasingly structurally
subordinated as banks increase
although the rating agency said that it “Holders of bank senior debt are un- the use of secured funding tools
believes that for the majority of “sound derstandably concerned about the growing such as covered bonds?
banks” there should be no material threat use of covered bonds, given that these have Not at all concerned because the access to
to unsecured creditors from the trend. a preferential claim over selected bank as- this additional funding source lowers the
default risk of the bank:13%
In its latest quarterly European senior sets,” said Bridget Gandy, co-head of Fitch’s
fixed income investor survey, released in EMEA financial institutions group. Very concerned
because higher
early May, Fitch found that 87% of respond- However, Fitch said that legal constraints asset encumbrance
ents were concerned about an increased use limit how high much issuance can rise, ref- increases the loss
given default for
of secured funding by banks, which could erencing “regulatory limits on banks’ use of unsecured
lead to structural subordination. secured funding and availability of qualify- creditors: 16%
“Within this sample 16% described ing assets”. It also said that broad risk aver-
Moderately concerned: 71%
themselves as ‘very concerned’ as higher sion should fall as economies recover, which
Source: Fitch Ratings
asset encumbrance increases the loss would make unsecured funding cheaper
given default for unsecured creditors,” relative to secured funding.
said Monica Insoll, managing director in “Fitch would expect to see an equilibri- The rating agency said in a report in
Fitch’s credit market research group. um being reached, which, for the majority March that although in extreme cases
Fitch said that it believes covered bond of sound banks, is unlikely to be a material covered bond issuance could be a “curse”,
issuance will only continue to grow, citing threat to the status of unsecured creditors,” it was in general benign, and in most cases
investor risk aversion and regulatory incen- said Gerry Rawcliffe, managing director in well below levels that might give cause for
tives as the primary reasons for the trend. Fitch’s financial institutions group. concern.
MOODY’S
‘Incomplete’ data stokes cédulas worries
Some Spanish covered bond issuers are there continues to be discrepancies be- slowly but steadily we are running out of
not complying with Bank of Spain dis- tween different issuers’ published data.” reasons to maintain our sympathy.
closure requirements introduced in De- Moody’s said that inconsistencies in “Currently, we see a market with a
cember 2010, resulting in discrepancies reporting made comparisons of pro- large share of troubled issuers, in combi-
in data between different institutions, grammes a challenge. nation with a claim against a pool of as-
according to Moody’s. “Some of the areas where data pres- sets, which – put nicely leaves some open
The rating agency said that it had been entation is inconsistent include (i) the in- questions and a cover pool that turns out to
hopeful that the law, Circular 7/2010, clusion of securitised loans in cover pools; have massive inconsistencies with regards
would lead to greater disclosure through (ii) the amount of collateral relative to the to total size available as well as eligible el-
its requirement for extra information in an- covered bonds issued; and (iii) the defini- ements. Spain, please, please, please give
nual reports on the assets backing cédu- tion of an ‘eligible’ asset,” said Moody’s. us a reason to regain trust in Cédulas!”
las. However, the rating agency said that UniCredit analysts described the in- Moody’s nevertheless noted that it does
important data continues to be obscured. accuracies as “shocking” and said that not expect the reporting inconsistencies to
“Although the new law (effective De- they undermined a sector that is already affect ratings and said that it acknowledges
cember 2010 significantly improves facing several challenges. that making data consistent across a wide
the disclosure requirements of Spanish “Regular readers of our research range of issuer is “an onerous challenge”
covered bond issuers in their annual re- might know that we have a certain pen- and that Spain has set “an extremely high
ports,” said Moody’s, “the fact that some chant for the Spanish market, despite the standard” in disclosure, which had im-
issuers are not yet compliant means that points mentioned,” they said. “However, proved “markedly” in recent years.
May 2011 The Covered Bond Report 17