The Covered Bond Report Issue 1

www.coveredbondreport.com March 2011
To the
lifeboats!
Can covered bonds offer safety
after bail-in panic?
Australia
A whole new ball game
Sterling
UK gains home advantage
US legislation
The FDIC rears its head
The Covered
Bond Report
THECOVEREDBONDREPORTMARCH2011WWW.COVEREDBONDREPORT.COMNUMBER1

CréditAgricoleCorporateandInvestmentBankisauthorisedbytheAutoritédeContrôlePrudentiel(ACP)andsupervisedbytheACPandtheAutoritédesMarchésFinanciers(AMF)inFrance
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issuers than Crédit Agricole Corporate and Investment Bank.
January2011
January2011January2011
January2011January2011
January2011
EUR 1,000,000,000 EUR 1,250,000,000
EUR 1,250,000,000 EUR 1,250,000,000 EUR 1,500,000,000 EUR 1,000,000,000
Joint Bookrunner Joint Bookrunner
Joint Bookrunner Joint Bookrunner Joint Bookrunner Joint Bookrunner
4.25% French
Obligations Foncières
Due 2021
3.5% Dutch
Legal Covered Bond
Due 2018
3.9% French
Covered Bond
Due 2021
2.75% French
Covered Bond
Due 2015
4.125% Cédulas
Hipotecarias
Due 2014
4% Hypotheken
Pfandbrief
Due 2021
DEXIA MUNICIPAL AGENCY ABN AMRO
CAISSE DE REFINANCEMENT
DE L’HABITAT
GCE
BANCO BILBAO VIZCAYA
ARGENTARIA
ERSTE GROUP BANK AG
EUR 1,000,000,000
Joint Bookrunner
2.75% Öffentlicher
Pfandbrief
Due 2016
BAYERISCHE LANDESBANK
January2011February2011
January2011
EUR 1,250,000,000 EUR 1,000,000,000 EUR 1,000,000,000
Joint Bookrunner Joint Bookrunner Joint Bookrunner
5.250% Covered Bond
(Italian OBG)
Due 2023
4.25% French
Due 2023
3.25% French
Due 2016
January2011
UNICREDIT SpA SOCIETE GENERALE SCF CIF EUROMORTGAGE
EUR 2,000,000,000
Joint Bookrunner
3.250% Dutch
Covered Bond
Due 2016
ING BANK N.V.
February2011
EUR 2,250,000,000
Joint Bookrunner
2.625% French
Covered Bond
Due 2014
CREDIT AGRICOLE
COVERED BONDS
January2011

March 2011 The Covered Bond Report 1
CONTENTS
FROM THE EDITOR
3 Aim high
MONITOR
4 Legislation & regulation
8 Market
11 People & institutions
14 Ratings
BUY-SIDE: ICMA’S CBIC
16 The voice for investors
ANALYSE THIS: COVER POOL DISCLOSURE
19 Living with the data deﬁcits
Is legal or voluntary disclosure yielding the most
useful information? Florian Hillenbrand, senior
covered bond analyst at UniCredit, weighs the results
and recommends how investors cope with a lack of
transparency.
36
16
19
Cover Story
BAIL-INS
36 Room for everyone?
European Commission bail-in proposals have
prompted senior unsecured investors to seek the
security of covered bonds, raising fears of an over-
reliance on the asset class among the buy and
supply sides. But proponents warn that investors
have nothing to fear but fear itself.
By Neil Day and Maiya Keidan
The Covered
Bond Report

2 The Covered Bond Report March 2011
The Covered
Bond Report
22
STERLING MARKET
22 UK gains home advantage
Last November the ﬁrst sizeable sterling UK covered
bond in four years kicked off what market participants
hope could become a stable source of funding.
Can UK ﬁnancial institutions get better results at home?
By Hardeep Dhillon
COUNTRY PROFILE
28 Australia winds up for delivery
After years of watching from the stands, Australia’s
banks are taking a run up for issuance as early as the
third quarter. The banking industry is therefore hard
at work ensuring the right balance is struck between
issuer and investor needs in impending legislation. But
could RMBS and smaller banks be dismissed cheaply?
By Neil Day
OBLIGATIONS A L’HABITAT
42 France’s new model
The latest fashion in Paris this spring is the obligation
à l’habitat. Created by bringing France’s common law
covered bonds under a legislative framework, the new
instrument offers a new take on an old favourite. As
such, can it command couture prices? By Neil Day
LEGAL BRIEF
46 US: Today’s reality & tomorrow’s
potential
The US Covered Bond Act of 2011 has reignited the
debate over whether legislation is necessary to seed
issuance and, if so, how it should relate to the Federal
Deposit Insurance Corporation. Lawton Camp and John
Hwang of Allen & Overy in New York examine the
proposed bill and the arguments being made against it.
FULL DISCLOSURE
52 Postcards from Mainz and
Washington
28
42
CONTENTS

FROM THE EDITOR
W
elcome to the launch edition of The
Covered Bond Report, the first maga-
zine dedicated to the asset class.
We launch at a critical moment in
its history.
After years of skirting the issue, the biggest market of
them all, the US, is poised to make a decision on whether
or not to put in place the foundations necessary for cov-
ered bonds to thrive.
This has thrown the spotlight on some of the funda-
mental arguments surrounding the asset class, and never
before have so many governments, regulators and inves-
tors scrutinised the pros and cons of covered bonds in
such depth.
In Australia, interested parties are seeking to strike
the right balance between issuers’ and investors’ needs
after finally winning around public opinion. In the UK
and elsewhere, investors new to the product are asking
tough questions of issuers. And at a European level, the
industry faces a battle to achieve what it considers cov-
ered bonds’ rightful position to be under Basel III.
An immediate focus of attention is transparency, a
theme that runs through many of the articles in this issue.
Among these is a column from the International Capital
Market Association’s Covered Bond Investor Council, in
which the buy-side’s agenda is laid out.
If proponents of covered bonds are to win over scep-
tics and doubters, to win over investors and regulatory
authorities, they must engage them. Their opponents
surely will.
Few asset classes have come out of the financial crisis
in such good shape as covered bonds, but being the least
worst option is not enough.
Neil Day, Managing Editor
Aim high
The Covered
Bond Report
www.coveredbondreport.com
Editorial
Managing Editor Neil Day
+44 20 7263 2732
nday@coveredbondreport.com
Reporter Maiya Keidan
mkeidan@coveredbondreport.com
Contributor
Hardeep Dhillon
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Creative Director: Garrett Fallon
Senior Designer: Sheldon Pink
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Wyndeham Grange Ltd
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38a Bramshill Gardens
London, UK
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www.coveredbondreport.com March 2011
To the
lifeboats!
Can covered bonds offer safety
after bail-in panic?
Australia
A whole new ball game
Sterling
UK gains home advantage
US legislation
The FDIC rears its head
The Covered
Bond Report

MONITOR: LEGISLATION & REGULATION
The introduction into the House of Rep-
resentatives of a new bill on 8 March put
covered bonds firmly on the agenda in
the US, as supporters and critics posi-
tioned themselves for what looks set to
be a tough fight to get legislation final-
ised this year.
Republican Congressman Scott Garrett,
who has led the US covered bond push,
made the opening gambit, introducing the
latest iteration of proposed legislation to the
House Financial Services Subcommittee on
capital markets, insurance and Government
Sponsored Enterprises. The bill is co-spon-
sored by Democrat Carolyn Maloney.
Supporters of legislation have hoped
that the passage of the Dodd-Frank Act
last summer would help clear the way for
due consideration to be given to a covered
bond bill, with Washington’s focus on GSE
reform helping put it on the agenda.
However, at a hearing on 11 March of
the subcommittee, which Garrett chairs,
it quickly became clear that the United
States Covered Bond Act of 2011 (HR
940) could become bogged down in the
objections of the Federal Deposit Insur-
ance Corporation, which have stifled
previous efforts to stimulate a US market.
“We support the covered bond mar-
ket,” FDIC chairman Sheila Bair had
said only a week earlier, before adding
a caveat that was expanded upon in the
regulator’s submission to the subcom-
mittee hearing: “I think it is important to
get it right and we don’t want the FDIC
as the implied government guarantor of
covered bonds.”
In its subsequent submission, the FDIC
said that any legislation “must preserve the
flexibility that current law provides to the
FDIC in resolving failed banks” and that
“any legislation that fails to preserve these
important receivership authorities would
make the FDIC the de facto guarantor of
covered bonds and the de facto insurer of
covered bonds investors”.
Witnesses testifying at the hearing,
aware that the issue of whether tax-
payer support would be necessary for a
market to develop, were quick to rebut
such claims.
“HR940 does not provide an explicit
federal guarantee of covered bonds is-
sued under the provisions of this bill,”
said Bert Ely, a financial institutions
and monetary policy consultant. “Fur-
ther, no provision in HR 940 even sug-
gests an implicit federal guarantee of
covered bonds.”
And Tim Skeet, board member of the
International Capital Market Association,
said that – contrary to claims made by fel-
low witness Stephen Andrews, president
and CEO of the Bank of Alameda, a com-
munity bank European covered bonds did
WASHINGTON
FDIC unmoved by new US covered bond push
“We don’t want the FDIC as the
implied government guarantor”
US Bank Covered Bond Capacity
3Q10 2009 2008 2007 2006 2005
Aggregate FDIC Insured Depository Institution Liabilities 11,859 11,642 12,550 11,687 10,614 9,761
Capactiy for Covered Bonds Outstanding (4% of Total Liabilities) 474 466 502 467 425 390
Fannie Mae and Freddie Mac MBS Outstanding 4,390 4,761 4,411 4,119 3,454 3,169
Covered Bond Capacity % GSE MBS Outstanding (%) 11 10 11 11 12 12
Fannie Mae and Freddie Mac Mortgage Purchases 643 1,159 915 1,110 867 906
Source: FDIC, Fannie Mae and Freddie Mac public ﬁlings, Fitch Ratings.
Legislation & Regulation

Covered
bonds?
Aaa/AAA covered bonds backed by mortgages
Average LTV of 60.5%
Match-funded structure
Core capital ratio of 18.5%
Largest mortgage bond issuer in Europe
nykredit.com/ir
Figures as of 17 March 2011

not require government support.
“There are no implicit guarantees,”
he said. “What there is – and we mustn’t
confuse the two things – there’s explicit
legislation, and there is good supervision
provided by arms of the state. But that is
not the same as any form of guarantees –
nor do the investors factor that in.”
The FDIC also claimed that legislation
is unnecessary to stimulate a market, say-
ing that the Best Practices and a Policy
Statement on covered bonds it released
in 2008 were sufficient, and pointing to
issuance before this from Washington
Mutual and Bank of America.
But Ralph Daloisio, chair of the
American Securitization Forum board of
directors, contradicted this.
“Without the right kind of legislation,
there will be no US covered bond mar-
ket,” he said. “It should be clear by now
that a US covered bond market can only
be seeded by a specific enabling act of
legislation, which has, at its cornerstone,
a dedicated legal framework for the treat-
ment of covered bonds in the event the
issuer becomes insolvent.”
FHLBanks enter the debate
Democrat Senator Charles Schumer gave
the covered bond cause a fillip days later,
when he said on 15 March during a Sen-
ate Banking Committee hearing on hous-
ing finance that he is considering intro-
ducing a covered bond bill in the Senate.
Schumer, who co-sponsored with Re-
publican Senator Bob Corker covered
bond legislation introduced into the Sen-
ate in May 2010 – raised the prospect of
introducing legislation when questioning
Geithner – and Shaun Donovan, secre-
tary of the US Department of Housing &
Urban Development – in a hearing fol-
lowing up on the Obama administration’s
“Reforming America’s Housing Market”
report to Congress.
“Covered bonds work in Europe,
haven’t caught on in the US because we
don’t have a statutory framework that
provides certainty regarding their treat-
ment in the event of insolvency,” said
Schumer. “There has been a bill intro-
duced just recently in the House that I’m
considering introducing in the Senate, by
Representatives Garrett and Maloney on
covered bonds.”
The senator noted that Geithner had
indicated a willingness to work with
Congress on exploring a legislative
framework for covered bonds, and asked
him what he thought of the proposed bill
and the FDIC’s concerns.
“Yes, we would support a legislation
that would help create better conditions
for a covered bond market,” said the Treas-
ury Secretary. “It’s important to recognise
that we do have a covered bond market in
the US today in the form of the Federal
Home Loan Banks financing structure. It’s
essentially the functional equivalent.
“The questions you raise about the
FDIC are very legitimate concerns – we
have to work through those. Again, for
this to work, you’d be putting the taxpay-
er in some sense behind private inves-
tors and that has its own consequences.
But that’s something that we can work
through and I think it can play a better
role, a greater role in our system.”
Geithner’s reference to the Federal
Home Loan Banks system recognised
criticisms made by Bank of Alameda’s
Andrews and the FDIC in their com-
ments to the House subcommittee hear-
ing, with the FHLBanks said to be siding
with the regulator and community banks
to fight the introduction of legislation.
Moody’s said in a report that the avail-
ability of covered bonds as an alternate
funding tool could reduce “the overall
footprint and profitability” of FHLBanks.
In a report quoted by Representative
Maloney in the hearing, Fitch noted that
a 4% limit on covered bond issuance rel-
ative to total assets could limit issuance
volumes.
See Legal Brief on pages 46-51 for an explo-
ration of the proposed bill and its criticisms.
“We don’t have a
statutory framework
that provides
certainty”
PROGRESS?
2008: Rocket scientist Neel Kashkari
(left), formerly of spacecraft manufac-
turer TRW, leads covered bond push.
(His time at TRW took in work on the successor to the Hubble
Space Telescope.)
2011: Senator Chuck Schumer (right):
“That’s why I want to get involved: it’s
not rocket science. I can probably deal
with it…”
(Although he is campaigning for a retired shuttle to go to the
Intrepid Museum in New York.)

The Reserve Bank of New Zealand has set
a limit on the amount of assets allowed
to be encumbered by covered bond issu-
ance at 10%, with a review of the limit to
be held within two years.
The New Zealand central bank con-
firmed its position in March, when com-
menting on feedback to a consultation it
had launched in January, where the plan
for such a cap had been set out.
“An initial limit of 10% will allow
banks to develop covered bond pro-
grammes, whilst providing a conserva-
tive ceiling on issuance in the short
term,” said RBNZ deputy governor Grant
Spencer.
Unlike limits set by several other reg-
ulators, which base their limit on issu-
ance relative to total assets or liabilities,
New Zealand references the amount of
assets encumbered for the benefit of cov-
ered bondholders.
Regulators have typically set limits on
covered bond issuance because it subor-
dinates the claims on a bank’s assets of
senior unsecured bondholders and, most
importantly, depositors. However, as
overcollateralisation levels change over
time, the amount of assets encumbered
in favour of covered bondholders will
change even if the amount of issuance
remains consistent.
The RBNZ said in March that there
was broad agreement among respond-
ents to its approach, at least for the short
term, and rebuffed alternatives.
“The Reserve Bank does not consider
that a limit based on the face value of
the bond would be appropriate as it does
not address the primary prudential con-
cern arising from the issuance of covered
bonds, namely the encumbrance of as-
sets,” it said. “The Reserve Bank recog-
nises that this approach places the onus
on institutions to set issuance levels that
include sufficient headroom to reflect the
level of risk of downgrade that is inherent
in their operations.
“As a result, stronger institutions may
feel more comfortable issuing a higher
volume of covered bonds. The Reserve
Bank considers that this outcome is more
appropriate than weaker institutions en-
cumbering a higher proportion of assets
to support the same level of issuance as
more robust entities.”
The central bank said that the review
would consider the level of the constraint
as well as “the merits of adopting a more
case-by case, or sliding scale, approach to
reflect the specific characteristics of the
institution”.
Issuance on hold
Bank of New Zealand opened the New
Zealand covered bond market in June
2010, shortly after the Reserve Bank had
released its first guidance to recognise
covered bonds. BNZ sold a a NZ$425m
two tranche domestic issue, and followed
this up with a Eu1bn seven year deal in
November.
“This inaugural euro covered bond is-
sue is a very cost effective form of term
funding for BNZ,” said Tim Main, BNZ
treasurer. “It also increases the bank’s ac-
cess to a significantly broader range of
global investors.”
Westpac NZ had hoped to issue its
first covered bond in euros in February,
a five year deal, but put plans on hold
after the Christchurch earthquake and
amid deteriorating market conditions.
Barclays Capital, BNP Paribas, UBS and
Westpac had the mandate for the subsidi-
ary of Australia’s Westpac.
In December a new company, ANZNB
Covered Bond Trust Ltd, was established,
suggesting that ANZ National Bank will
be entering the market, while ASB Bank,
a subsidiary of Commonwealth Bank of
Australia, has indicated an interest in is-
suing covered bonds.
NEW ZEALAND
RBNZ targets encumbrance
STOP PRESS
UK budget promises pro-investor covered
bond review
The UK government announced plans for a review of the UK covered bond regime
as part of its budget on 23 March.
“The Government and the Financial Services Authority (FSA) will shortly publish
a review of the UK’s regulatory framework for covered bonds,” said HM Treasury.
“The review will consult on measures to enhance the attractiveness of UK covered
bonds to investors, making it easier for banks and building societies to raise fund-
ing in order to lend to households and businesses.”
See news.coveredbondreport.com for updates.
“It is important to get standardisation
of reporting formats” page 24

Market
MONITOR: MARKET
Geopolitical events totally unexpected at
the turn of the year became the key driv-
ers of market sentiment as the first quar-
ter of 2011 drew to a close.
When Fitch surveyed investors in
December about the biggest challenges
ahead for the covered bond market, rev-
olutions in the Middle East and natural
disasters in Japan were so impossible to
forecast that such events barely regis-
tered on investors’ radars, save possibly
as part of a 4% “other” vote.
Another potential challenge not cap-
tured by Fitch’s detailed answers was sup-
ply, as one head of covered bond origina-
tion commented on The Covered Bond
Report’s website. But in the first week of
the year alone issuers piled into the mar-
ket with 15 new benchmarks (of Eu500m
or more), taking the week’s issuance to a
record of more than Eu18bn.
This resulted in a rather predictable
turn of events, as Commerzbank analysts
noted after the record week.
“The market soon began showing
some first signs of fatigue,” they said.
“The spread targets became increasingly
defensive, most new papers are now trad-
ing above their issuance levels, the books
have recently tended to fill up at a more
sluggish pace, and the first postpone-
ments of projects have taken place.
“In view of these contradictory sig-
nals, it is not easy to assess the funda-
mental strength of the market.”
It proved more resilient than could
have been expected, with more than
Eu43bn of benchmarks being priced by
the end of January and over Eu24bn in
February. Around Eu13bn during a slow-
er first half of March took issuance from
1 January to 18 March above Eu80bn.
Regulatory developments helped
maintain the market’s momentum. While
the inclusion of covered bonds in liquid-
ity buffers envisaged under Basel III were
a theme going into the year, a European
Commission paper proposing that senior
unsecured creditors be “bailed-in” when
banks are bailed out catalysed fears of
this outcome, leading to a flight of some
issuers and investors into the secured as-
set class.
In the second week of March only one
new benchmark was launched, a Eu1bn
three and a half year Pfandbrief for
Berlin-Hannoversche Hypothekenbank,
with markets volatile in the wake of the
earthquake, tsunami and nuclear fears
in Japan and awaiting impending United
Nations-sanctioned action against the
Gaddafi regime in Libya.
This overshadowed improved senti-
ment towards southern European debt in
the government markets that might oth-
erwise have opened the door to further
supply from the region. Spanish covered
bonds had rallied since mid-January
and, alongside Italian covered bonds, de-
linked themselves from Portugal.
An EU summit beginning the day of
the Japanese natural disasters had even
raised hopes that the euro-zone’s leaders
might finally be ready to take decisive ac-
tion to stem the region’s debt crisis. As The
Covered Bond Report was being printed,
the outcome of a follow-up meeting on
24-25 March was being awaited.
EUROS
A ﬁrst quarter of shock and awe
0
50
100
150
200
250
300
350
04/01/201018/01/201001/02/201015/02/201001/03/201015/03/201029/03/201012/04/201026/04/201010/05/201024/05/201007/06/201021/06/201005/07/201019/07/201002/08/201016/08/201030/08/201013/09/201027/09/201011/10/201025/10/201008/11/201022/11/201006/12/201020/12/201003/01/201117/01/201131/01/201114/02/201128/02/201114/03/2011
Basispoints
Date
iBoxx spreads against asset swaps
Canada
France
Germany
Other
Spain
UK

MONITOR: MARKET
FRANCE
CFF flies European flag
Compagnie de Financement Foncier launched the only dollar
benchmark for a European issuer in the year to mid-March,
with a $1.5bn three year deal that took its dollar benchmark
issuance to $6.3bn (Eu4.56bn) since the beginning of 2010.
“Last year we issued $4.8bn in dollar benchmarks and
with this transaction we now represent 20% of the existing
covered bonds outstanding in the US, so we are definitely
one of the key players on this market,” said Paul Dudouit,
head of medium and long term funding at CFF. “We are
now marketing to tier two accounts and we see more and
more interest from these, which is very important in terms
of diversification, not hav-
ing only the big players in-
volved.”
However, as The Cov-
ered Bond Report was go-
ing to press, several issuers,
mainly Nordic, were said to
be preparing to access the
US investor base.
DOLLARS
US goes loonie for Canadians
Marfin Popular Bank is preparing to launch a debut covered
bond off a Eu2bn programme, which would be the first public
issue from Cyprus after the country’s framework was finalised
in December.
The Marfin group has previously issued Greek law covered
bonds backed by residential mortgages through Greek subsidi-
ary, Marfin Egnatia Bank.
“We have experience utilising the Greek assets using the
Greek law and it’s a very good opportunity for us now to use the
Cypriot law,” Dimitrios Spathakis, Marfin Egnatia bank deputy
head of wholesale funding, told The Covered Bond Report.
“Our view is that the law is very strong and it will facilitate
us in going to the market”, he added. “There is a more positive
outlook towards Cypriot as compared with Greek banks.”
The bank plans to have two separate programmes, one com-
prising Cypriot assets and the other mainly Greek assets. It
plans to enter the market with residential mortgages and grad-
ually move to commercial assets and eventually to a shipping
portfolio, which Spathakis acknowledges is “the most challeng-
ing one of all”.
The Central Bank of Cyprus, the Ministry of Finance and
the Association for Cyprus Banks and all its members worked
together on the project.
“Now the legal and regulatory framework is in place, it is
up to each individual bank to go ahead with its issuing,” said
Christina Antoniou Pierides, senior officer at the Association
of Cyprus Banks.
Moody’s has estimated the potential of the Cypriot covered
bond market as Eu4bn.
Marfin Popular was downgraded from Baa2 to Baa3, on negative
outlook, by the rating agency at the beginning of March. Its Greek
covered bond programme is rated A3, on review for downgrade.
National Bank of Canada sold its first
covered bond in January and Caisse Cen-
trale Desjardins was roadshowing a new
programme for US investors in March,
as Canadian banks picked up where they
left the US dollar market last year.
Dollar issuance, at just four bench-
marks totalling $6bn to mid-March,
was subdued compared with last year’s
surge, especially when compared with
the record volumes witnessed in the euro
market, but Canadian issuers sold three-
quarters of the new dollar supply.
National Bank of Canada’s $1bn three
year 144A issue was sold in late January
after Bank of Montreal had returned for
$1.5bn and Canadian Imperial Bank of
Commerce had returned for $2bn.
“People just love Canadian risk,” said a
banker on Bank of Montreal’s deal, “and all
the US investors are happy to add more.”
NBC’s US$5bn (Eu3.75bn/C$4.94bn)
global covered bond programme are
backed by a Canada Mortgage & Hous-
ing Corp (CMHC) insured pool of resi-
dential mortgages, like all of its peers’ bar
Royal Bank of Canada.
Caisse Centrale Desjardins, part of
Quebec’s Desjardins Group of credit
unions, was marketing its new pro-
gramme, also backed by a CMHC pool,
in March with Royal Bank of Scotland.
The Desjardins Group forms Canada’s
largest credit union and would be the
first such institution to enter the cov-
ered bond mark from Canada.
Paul Dudouit, CFF
National Bank of Canada
CYPRUS
Marfin carries Cypriot hopes
“No evidence to suggest that a legally stipulated publication
obligation necessarily leads to a better result” page 19

MONITOR: MARKET
Denmark’s mortgage banks achieved bet-
ter than expected yields in auctions in the
first two weeks of March, despite com-
ments from European Central Bank presi-
dent Jean-Claude Trichet having initially
threatened to push rates higher.
The auctions faced high volatility be-
cause of comments from Trichet suggest-
ing a possible move to tighter monetary
policy at the start of the month and the
Japanese natural disasters.
“The outright yield level increased just
at the start of the auction and then we have
seen this risk aversion scenario after the
events of Japan,” said an analyst at Danske
Bank. “It pushed down the outright yield
levels at the end of the auctions.”
Nykredit Realkredit was the most ac-
tive, selling Dkr80bn in local currency and
Eu1.6bn in euros over an 11 day period.
“The positive thing was that over the
11 days of the auction the average yield
tightened 10bp to swap and that’s defi-
nitely more than usual,” said Nykredit
first vice president Lars Mossing Madsen.
“Another thing of interest was that we saw
the bid-to-cover being much higher than
normal during the auction.”
The average bid-to-cover was 4 times,
compared with 2.6 in December and 3.4
in October.
Realkredit Danmark, a subsidiary
of Danske Bank, had planned to issue
Dkr26.6bn and Eu408m; it came close
to those targets with Dkr26.4bn and
Eu410m. The bank edged up to a bid-to-
cover of 3.2 this month, compared with a
rate of 2 in December.
The Danske analyst said spreads gener-
ally tightened at the auction, in euros and
Danish kroner.
“At the beginning of the auction they
were priced around 40bp-45bp to Eonia,
the one years, and they ended up being
priced around 37bp,” he said.
Nordea Kredit had anticipated a spread
of 57bp over Eonia, according to Jacob
Skinhøj, chief analyst at Nordea Kredit,
but was “very happy” with spread tighten-
ing during the auctions.
The bank issued Eu115m and
Dkr8.205bn over two days, with an aver-
age bid-to-cover of 3 or 4, roughly on par
with previous auctions.
“I think in a world such as that we have
today, with the uncertainty about Japan,
investors go for safe havens and these cov-
ered bonds are a safe haven and will re-
main a safe haven in a situation like this,”
said Skinhøj.
INDEX
CSI: Europe
A new Covered Bond Market Sentiment index (CSI) unveiled by Crédit Agricole in
February aims to provide market participants with a quantitative tool to measure
conﬁdence across the asset class.
It measures investor and issuer conﬁdence in funding conditions and investment
conditions, respectively, resulting in a score on a scale from 0 to 10, with 0 being the
worst and 10 the best. Like Germany’s established Ifo Business Climate Index, the
CSI includes current situation and expectation components.
“The ultimate goal is to get this established among issuers and investors and
get as much feedback so I can actually break it down country by county,” says
Crédit Agricole senior covered bond analyst Florian Eichert. “Then the main use
would be for the issuer community, for example, to say: ‘OK, it doesn’t make a lot
of sense to go marketing in this region.’”
More than 106 investors and 19 issuers from a variety of countries participated
in the January survey, released in February, which arrived at an opening level of
5.2. The latest month’s scored edged up to 5.5, but had fewer respondents, with 86
investors and 28 issuers.
Investors and issuers received CSI surveys in the last week of each month and
results were produced at the beginning of the following month. Eichert expects the av-
erage number of participants to stabilise within the next couple months and attributes
the drop in responses to European holidays in some countries when it was conducted.
“I’m surely hoping to get that number up,” he says. “One hundred and six was
quite nice, but I’d certainly like to get that number even higher.
Eichert said his survey was greeted with an enthusiastic response, with many
investors and issuers showing interest.
“This is kind of what I’ve been doing all along – just trying to talk to issuers and in-
vestors and trying to relay the information back and forth,” said Eichert. “I’ve just never
done it in as systematic a way as the index before.”
AUCTIONS
Crises lower Danish yields
F1 SDO DKK
3/3 4/3 7/3 8/3 9/3 11/3 14/3 15/3 16/3 17/3
2,30
2,20
2,10
2,00
1,90
1,80
DAILY YIELD (GREY) AND CUMULATIVE AVERAGE YIELD (BLUE) OVER NYKREDIT AUCTIONS

GERMANY
New analyst pairing for DZ
DZ Bank is hiring Joerg Homey from Moody’s as part of a new pairing for its
covered bond research, after Sebastian Sachs left the bank to head up research
at Berenberg Bank.
Homey was a vice president and senior analyst at Moody’s. He is set to join
DZ in April to work alongside Michael
Spies, who joined DZ in November and
has been working as a covered bond
analyst since January.
Sachs, who worked at DZ from Feb-
ruary 2006, left for Berenberg Bank in
early March, where he will be establish-
ing credit and rates research. Berenberg
Bank, which claims to be Germany’s
oldest private bank, is headquartered in
Hamburg, but Sachs will be based in the
bank’s Düsseldorf office when he joins
in April.
André Hovora, who previously
worked alongside Sachs as a covered
bond analyst, recently moved to work
in the bank’s credit department.
MONITOR: PEOPLE & INSTITUTIONS
Scott Stengel has joined King & Spald-
ing as a partner from Orrick, Herrington
& Sutcliffe, while a former colleague,
Howard Goldwasser, also recently moved
to a new firm.
Stengel is a member of the steer-
ing committee of the US Covered Bond
Council, which operates under the aus-
pices of the Securities Industry & Fi-
nancial Markets Association (Sifma). He
testified in the House Financial Services
Subcommittee hearing on the US Cov-
ered Bond Act of 2011 on 11 March.
“This was a compelling opportunity
to join a first class global law firm, where
I can draw on an extraordinarily deep
bench of capital markets and regulatory
lawyers to grow the covered bond and the
general banking practices,” Stengel told
The Covered Bond Report.
“King & Spalding is widely recog-
nized as a global leader in both finance
and real estate, and our expertise there
will be critical to clients as we move for-
ward on covered bonds as well as GSE
reform in the US.”
Stengel worked at Orrick from 1997
until February.
Goldwasser, who worked with Sten-
gel for many years at Orrick before join-
ing Allen & Overy in 2006, joined K&L
Gates last month. He arrived at K&L
Gates from Curtis, Mallet-Prevost, Colt
& Mosle, which he had joined after leav-
ing A&O in September 2009.
“To me, one of the big draws at K&L
Gates is that the firm has one of the mar-
ket-leading housing finance practices in
the US and can offer a level of expertise
in that space that will position us well
when the covered bond market starts up
in the US,” said Goldwasser. “And it also
has a very international footprint.”
Goldwasser has been a member of
the US Covered Bond Council and
the American Securitization Forum’s
covered bond sub-forum. At A&O, he
worked on the first US covered bond
programmes and some of the early Ca-
nadian programmes.
HIRES
Syndicate moves
Lorenz Altenburg returned to covered
bond syndicate in late February, joining
Nomura from Crédit Agricole.
Altenburg worked in covered bond
syndication for Société Générale in Paris
until late 2009, before moving to sover-
eign, supranational and agency trading.
He left SG to join Crédit Agricole in Lon-
don in a similar role in December.
Meanwhile, Martin Rohland will
be joining Barclays Capital’s syndi-
cate desk in April. He will be joining
from Landesbank Baden-Württemberg,
where he was a director on the bank’s
fixed income syndicate.
LEGAL
Orrick alumni on the move
Scott Stengel: Capitol witness
Sebastian Sachs: head for Berenberg
“This was a
compelling opportunity
to join a first class
global law firm”
People & Institutions

MONITOR: PEOPLE & INSTITUTIONS/RATINGS
SPAIN
Multi-cédulas withstand cut
Fitch cut 51 classes of multi-cédulas issues on 10 March, driven by collateralisa-
tion rates, but the impact of the news on the asset class was muted, even along-
side a downgrade of the Kingdom of Spain from Aa1 to Aa2 on the same day by
Moody’s.
“As far as I can see, things are holding up in the secondary market and they
haven’t really been hit too hard,” said one syndicate official. “A couple of basis
points widening here and there, but nothing tragic.”
An analyst added: “Spreads will be more driven by headlines on savings banks
and details of mergers and not by ratings – at least not as long as they are in
double-A territory.”
Fitch cut 50 classes from AAAsf to AAsf and one from AAAsf to AA+sf, with the
downgrades relating to 46 transactions. The actions concluded a review of the
sector by Fitch.
“CR (collateralisation rate) is the major driver of the downgrades,” said the rat-
ing agency. “The agency’s MICH (multi-issuer cédulas hipotecarias) rating meth-
odology is based on the ‘first dollar loss principle’ implying that if the weakest link
in the CDO failed in a particular stress scenario, regardless of its participation in
the overall transaction it would imply a default of the transaction as a whole under
such rating stress. MICH transactions have traditionally comprised CH issued by
multiple Spanish financial entities.
“Fitch’s CR analysis includes updated cover pool market value risk assump-
tions. Market value risk stems from the assumption that in the event of a CH
default, the insolvency administrator may be forced to sell cover pool assets at a
distressed price in order to meet payments on CHs. This is addressed by applying
a refinancing spread that accounts for the cost of funding of a potential buyer
plus a profit margin. Fitch has updated the components of the liquidity risk market
value discount considering current market conditions and future expectations.”
Tim Skeet is understood to be joining
Royal Bank of Scotland, where he will
work in debt capital markets.
Skeet left Bank of America Merrill
Lynch, where he was head of covered bond
origination, in October after four years at
the US bank. He has recently been work-
ing as a consultant for Amias Berman.
Skeet is a board member of the Inter-
national Capital Market Association. He
testified on behalf of the association at a
House Financial Services Subcommittee
hearing into US covered bond legislation
in March.
Prior to joining BAML he worked at
ABN Amro before its European invest-
ment banking operations were acquired
by RBS.
NETHERLANDS
ABN builds with Hessels
ABN Amro has hired Joop Hessels from
ING as it builds out in debt capital markets.
Hessels joined as a director in ABN
Amro’s FIG origination team in March.
Previously he worked at ING as a vice
president in DCM origination, where he
was responsible for coverage of Dutch
and Nordic financial institutions.
At ABN Amro, Hessels reports to
Maurizio Atzori, head of debt capital
markets origination.
ANALYST
CreditSuissegetsWinkler
Credit Suisse is understood to have
hired Sabine Winkler as a covered bond
analyst. Winkler resigned from Bank of
America Merrill Lynch in March.
She joined Merrill Lynch in March
2007. Beforehand she worked as a cov-
ered bond analyst at ABN Amro.
Bank of America Merrill Lynch is un-
derstood to be seeking a replacement for
Winkler.
UK
Skeet on way to RBS
Don’t forget to visit our website at
www.coveredbondreport.com
Tim Skeet

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Bond Report
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To register for trial access to The Covered Bond Report, visit
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The Covered Bond Report is not only a magazine, but also a
website providing news, analysis and data on the market.

A request for comment from Standard
& Poor’s is being awaited after the rat-
ing agency in January made a last minute
decision in the face of criticism to delay
the application of new counterparty risk
criteria to covered bonds.
Until then the proposed changes had,
not for the first time in S&P’s experi-
ence, cast a shadow over the rating out-
look for the asset class, with those fall-
ing foul of the new criteria due to have
been placed on CreditWatch negative
the following week.
“Had the initial criteria been applied
to the covered bond market,” says an
analyst, “we could have seen a sizeable
chunk of the market being downgraded.
Even covered bonds by well rated issuers
would not have escaped unscathed.”
Market participants had been critical
of the application of the criteria to cov-
ered bonds alongside structured finance
transactions, but were not wholly unsym-
pathetic to S&P’s covered bond team.
“It seems S&P has a lot of discussions
internally,” said one analyst, “covered
bonds versus structured finance.”
When Fitch released new covered bond
counterparty criteria in mid-March mar-
ket participants contrasted the actions of
the two rating agencies. The introduction
of Fitch’s criteria followed an exposure
draft released in October 2010 and a cov-
ered bond banker who had met with Fitch
ahead of its final criteria, and also with S&P
regarding their counterparty criteria, said
that he felt Fitch had handled the changes
to their criteria more carefully.
“Fitch said that there would be some
changes given the feedback that had been
made,” he said. “They were more taking
on board the feedback in terms of what
we wanted to change, making some im-
provements, and they seemed quite open
to the ideas we presented to them.
“We also got the feeling that the whole
approach was more thought-through and
convincing than S&P, where the changes
seem to have been driven by people not
close to covered bonds.”
Fitch described in its release changes
it had made to its proposals in light of in-
dustry feedback.
“Market participants generally ex-
pressed their support for a separate cov-
ered bond-specific counterparty criteria
report that takes into account the dual-
recourse and dynamic nature of covered
bond programmes,” it said. “Having
reviewed the feedback, the agency has
made various changes and clarifications
to the final counterparty criteria com-
pared to the exposure draft.”
When S&P in January announced
that it was delaying its implementation
to covered bonds of counterparty criteria
for structured finance transactions, and
would be reviewing the relevant criteria,
it said that the new review would take
into account “the dual recourse nature of
covered bonds” as well as “the multiple
number of counterparties that may pro-
vide support to the covered bonds”.
A market participant said that he ex-
pected revised proposals from S&P to
emerge by next month.
The impact of Fitch’s counterparty
criteria changes is also expected to be
smaller than was feared from S&P’s.
“The agency expects that application
of the criteria to existing rated covered
bond programmes will have an immedi-
ate effect on a limited number of covered
bond ratings,” it said. “Most programmes,
particularly those with internal counter-
parties, will only be affected if the issuer’s
rating deteriorates by several notches.
This is based on the expectation that is-
suers, notably of programmes with ex-
tended maturity for principal payments,
will be able and willing to improve the
liquidity protection against potential
missed interest payments shortly after an
issuer or account bank default.”
The rating agency said that a potential
mitigant issuers may choose to increase
is overcollateralisation.
“If this risk remained insufficiently
mitigated, according to the new criteria,
the affected programmes’ ratings would
be tied more closely to the applicable Is-
suer Default Rating (IDR) through a
largely increased Discontinuity Factor
(D-Factor),” added Fitch. “This may auto-
matically result in downgrading covered
bonds’ ratings from their current level.”
MONITOR: RATINGS
CRITERIA
Fitch counterparties on after S&P delay
“The whole approach was more
thought-through and convincing”
Ratings
S&P loomed large

DOWNGRADE
Portuguese on watch
MONITOR: RATINGS
Investors are more willing than previously
to consider buying non-triple-A covered
bonds, according to a survey released by
Fitch last month, which also highlighted
a surprising flexibility among the buy-side
towards innovative structures.
Some 88% of investors surveyed by
the rating agency in December said that
they were prepared to examine non-tri-
ple-A covered bonds, with 14.6% view-
ing a triple-A rating as irrelevant, while
73.2% found it important but were open
to non-triple-A issues.
Hélène Heberlein, managing director,
covered bonds, at Fitch told The Covered
Bond Report she was surprised to find
that “some investors are disregarding the
covered bond rating and looking at the
bank rating first”.
However, a triple-A rating was still
viewed as “very important” by 84.2% of
respondents.
The idea of pass-through covered
bonds was also gaining acceptance, the
survey found. The majority of respond-
ents (52.5%) said they would consider
purchasing either partial or full pass-
through covered bonds. Only 38.8% re-
fused to even consider non-bullet pay-
back structures.
Head of covered bond strategy at Deut-
sche Bank, Bernd Volk, was surprised by
the willingness of investors to accept pass-
through covered bonds when “all existing
pass-through covered bonds are on balance
sheets of central banks for repo reasons”.
“A pass-through structure would re-
duce overcollateralisation requirements,”
he said, “and hence allow higher covered
bond issuance, i.e. the need for expensive
unsecured funding would be reduced.”
Heberlein cautioned that the diversity
of investors polled must be taken into
consideration when noting this result.
“If you had conducted this survey
primarily among insurance companies
and pension funds, they would probably
have said they only want hard bullets,”
she said.
The survey found that 43% of inves-
tors were uncomfortable with the inclu-
sion of residential mortgage backed as-
sets in cover pools, while the remainder
either viewed it as acceptable (19%), rea-
sonable as long as they were compensat-
ed with higher spreads (20%), or stated
no opinion (18%).
Eighty-two investors, all but one based
in Europe, participated in Fitch’s survey.
The majority of respondents, 58%, had
less than Eu5bn of covered bonds under
management, while 34% had between
Eu5bn and Eu50bn, and the remaining
8% upwards of Eu50bn.
FITCH
No triple-A? No problem
“A pass-through structure would reduce
overcollateralisation requirements”
The fate of Portuguese covered bonds
has been under scrutiny after Moody’s
on 15 March cut the sovereign from A1
to A3, putting ratings pressure on the
country’s banks.
Moody’s warned in December that if
the senior unsecured long term ratings
of Caixa Geral de Depósitos or Banco
Espiríto Santo were downgraded by
more than one notch then the mortgage
covered bonds of each bank would be
downgraded by one notch.
However, the knock-on effects of the
sovereign action on covered bond rat-
ings could be limited, suggests Frank
Will, head of covered bond and fre-
quent borrower strategy at RBS.
“We expect that the Aa2 covered
bond rating of BES will be conﬁrmed
as we expect only a one notch issuer
downgrade (unless the standalone rat-
ing of BES is downgraded as well).
“With regard to mortgage cov-
ered bonds issued by Caixa Geral de
Depósitos,” he added, “we expect a
one notch downgrade of the Aa1 cov-
ered bond rating as we view a two notch
issuer downgrade as likely (unless the
standalone rating of CGD is downgrad-
ed by a few notches as well).”
Fitch had the previous week afﬁrmed
the triple-A rating of Caixa Geral de
Depósitos’ mortgage covered bonds
(obrigacoes hipotecarias) and removed
them from Rating Watch negative.

Transparency
Investors have been asked many times by
issuers, in different contexts, what their
information needs are. So far there has
been no unified answer to this question,
but following the growth of the covered
bond market there has been an increased
fragmentation in the type of information
provided by issuers.
The CBIC has set up a transparency
working group that has tried to indentify
the key information that investors in cov-
ered bonds need in order to make a fully
informed investment decision as to covered
bond issues, including their respective cov-
er pools and the issuer itself. It is expected
that the information required would be
available on a regular basis (for example, a
half yearly update) to meet investors’ trans-
parency and information needs.
The CBIC believes it is of vital impor-
tance to improve transparency in order
to increase the investor base. The objec-
tive is to make it possible for investors
and analysts to compare and form an
independent qualified assessment of all
covered bond programmes.
The internationalisation of formerly
domestic covered bond markets began 10
years ago and many European countries
introduced new covered bond legislation
or updated existing rules to be a part of
this development, and to also respond
to the considerable growth of mortgage
lending activities in the European Union.
Each different country’s covered bond
laws regulate what assets are eligible to
back covered bonds, minimum quality
requirements for assets, and how inves-
tors will be protected if the issuing bank
The International Capital Mar-
ket Association is one of the few
trade associations with a European
focus having both buy-side and
sell-side representation. One of the
Association’s industry groupings,
created nearly two years ago —
the Covered Bond Investor Council
(CBIC) — serves to consider issues
related to the evolution of the prod-
uct in Europe and the type of infor-
mation available to investors.
The Council is an investor driv-
en organisation, independent of
issuers and the sell-side. It aims
to promote the quality of the cov-
ered bond product and represent
the interests of European covered
bond investors. The CBIC promotes
greater harmonisation in the mar-
ket, the transparency and simplicity
of the product, and the quality of
the underlying assets.
Nathalie Aubry-Stacey, direc-
tor of regulatory policy and market
practice at ICMA and secretary of
the CBIC, sets out the Council’s
agenda.
The voice
for investors
“It is of vital
importance to improve
transparency in order
to increase the
investor base”

goes bankrupt. The legislation therefore
stipulates how the collateral framework
must operate.
It is also clear that the quality of the
information available to investors re-
mains uneven. Key information such as
loan to value (LTV) and non-perform-
ing loans (NPLs), for instance, need to
be fully explained when presented to in-
vestors, allowing them to assess how the
calculations are being made.
The CBIC is also addressing the issue
of creating a level-playing field in terms
of access to this information, looking at
a common platform that would provide
information to investors.
Simplicity and quality
Following governmental discussions re-
garding the inclusion of loans to small
and medium sized enterprises (SMEs)
in covered bonds’ cover pools, the CBIC
discussed the definition of a covered
bond and what should be included in the
cover pool.
The CBIC promotes the view that cov-
ered bond pools should be “clean” and
should consist only of specific types of
loan. The CBIC believes that SME loans
do not belong in the covered bond cover
pools. High quality cover pools of cov-
ered bonds should only include tangible
assets with a long historical track record
and/or public loans.
This is considered one of the essen-
tial cornerstones for the future develop-
ment of a sound European covered bond
market. Covered bonds are best used for
strong prime mortgages and some pub-
lic loans.
Likewise, it is important for the CBIC
that covered bonds are not confused with
ABS. The two asset classes attract different
types of investors and by lowering the qual-
ity of the cover pool and therefore blurring
the distinction between the two asset class-
es there is a risk that banks’ accessibility to
term funding may be weakened. The CBIC
will be interacting with the relevant policy-
makers on this specific issue.
There is another question raised by
the directive amending capital require-
ments for trading books and for re-secu-
ritisations and the supervisory review of
remuneration policies (CRD III) propos-
al, as to whether ABS should be allowed
in covered bonds’ cover pools at all. The
proposal highlights that the exception
made for the use of intra-group ABS in
the cover pool could end up being per-
manent as from 2013. The CBIC will also
be considering this issue.
The European covered bond market
as a financing tool for mortgages has
survived the crisis without massive pub-
lic intervention and the CBIC believes
that only a continued focus on uphold-
ing quality will safeguard the market
against any future crisis. Any dilution of
the quality of the product or confusion
with other fixed income products should
be avoided.
Engage
The CBIC has been recognised by regula-
tors as the voice for investors.
However, the CBIC would like to take
the Council further in actively engag-
ing investors with an interest in covered
bonds in its work, and be more active in
the regulatory space.
This market will continue to develop
and it is essential that investors, as a
group, participate in discussion on the
future development of this market which
is so essential for mortgage and public fi-
nancing in Europe.
“The CBIC would like
to take the Council
further in actively
engaging investors”
CBIC chairman Claus Tofte Nielsen (second from left) engages with (left to
right) Michel Stubbe, head of monetary operations analysis division at the ECB,
Deutsche Bank head of covered bond strategy Bernd Volk, HSBC global head
of covered bonds Andrew Porter, and Santander’s Antonio Torío, European
Covered Bond Council chairman.

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W
hen Fitch recently pub-
lished its covered bond
investor survey, it was
hardly surprising to
find that “underlying collateral per-
formance” was ranked second among
the key covered bond spread drivers for
2011 – beaten only by “sovereign risk”.
The surprising fact was that “indi-
vidual issuer quality” was completely
missing.
However, since mortgage books usu-
ally constitute a considerable share of
the issuers’ balance sheets, it is quite
reasonable to assume a high correlation
between issuer credit quality and cover
pool performance.
Another aspect also weighs heavily
on the importance of “underlying col-
lateral performance”: numerous classi-
cal ABS/MBS investors have in recent
months – albeit involuntarily – shifted
away from their original investment
home base and explored the covered
bond universe. Traditionally, invest-
ing in ABS/MBS has meant keeping a
close eye on the cashflow situation of
the ABS/MBS collateral. The outcome of
these cashflow models formed the basis
of conclusions on the future valuation of
the various tranches of a specific trans-
action.
But cashflow reporting for ABS/MBS
is way beyond what is currently deemed
state-of-the-art in cover pool disclosure
practice among covered bond issuers;
and given the rather complex situation
of covered bonds as quasi-master-trust
structures, it is unlikely to become stand-
ard practice on a broad basis anytime
soon.
Here we provide an overview of
what constitutes state-of-the-art in
various countries with regards
to homogeneity and detailed-
ness of reporting. We discuss
the deficits, and provide
an overview of the range
of opportunities given
the lack of loan-by-
loan data, and how
these deficits can
be overcome by
way of secondary
sources.
Pfandbrief ﬁrst
For quite some time, the only covered
bond law setting explicit standards for
disclosure of cover pool metrics was
the Pfandbrief Act. The relatively young
Greek covered bond law, too, regulates
certain disclosure to the investing pub-
lic. Legislation in some other countries,
such as Spain, tackles disclosure in a dif-
ferent context: not vis-à-vis investors but
regulators, a topic that we do not address
in this context. In fact, after the introduc-
tion of §28 Pfandbrief Act, the cover pool
disclosure of German issuers was setting
standards.
However, it was, admittedly, in 2005
that the transparency regulations be-
came legally binding in a format com-
Living with
the data deﬁcits
Is legal or voluntary disclosure yielding the most useful information?
Florian Hillenbrand, senior covered bond analyst at UniCredit, weighs the
results and recommends how investors cope with a lack of transparency.

parable to today and at that time other
markets (except for Germany, France and
Spain) were still in a ramp-up phase: the
UK and Ireland were emerging, Austria
and Luxembourg were absolute niche
markets, while Nordic issuers as well as
Portuguese and Italian banks were still a
long way from issuing.
Since the introduction of the disclo-
sure policy for Pfandbrief issuers in 2005,
German practice has barely changed or
improved. In April 2006 the Associa-
tion of German Pfandbrief Banks (vdp)
started an initiative to further develop
practical issues, such as timeliness of
publication, positioning on the issuers’
webpages, and increasing homogeneity
of publication. Nevertheless, improve-
ments in the form and function of the
disclosures did not materialize until
2010. Most issuers currently present their
historical as well as current cover pool
metrics in harmonized Excel and PDF
format. Furthermore, the vdp provided
an internet platform where investors can
easily access cover pool metrics. Strong
pressure from outside the Pfandbrief
market certainly accelerated the process
of improving quality of disclosure.
In the meantime, Pfandbrief disclo-
sure is quite streamlined and the degree
of detail is also quite solid. According
to the Pfandbrief Act, a Pfandbrief bank
shall publish on a quarterly basis the total
volume of mortgage Pfandbriefe, public
Pfandbriefe, ship Pfandbriefe and aircraft
Pfandbriefe outstanding, as well as the
corresponding cover pools in the amount
of the nominal value, the net present
value and the risk-adjusted net present
value. In addition, issuers have to pub-
lish the maturity structure of each type
of Pfandbrief outstanding, as well as the
fixed interest periods of the correspond-
ing cover pools in pre-specified bands.
Furthermore, information has to be pro-
vided regarding the share of derivatives
in the pool and the amounts held in the
form of further or substitute collateral.
Mortgage Pfandbrief issuers have
to provide the distribution with the
amounts assigned as cover in their nomi-
nal values according to their amount in
specified tranches, as well as according to
the states in which the real estate collat-
eral is located, and according to the pur-
pose of financed properties. In-arrears
figures and foreclosures, etc, must also
be supplied. Issuers of public Pfandbriefe
have to provide information regarding
the individual states in which the bor-
rowers and, in the case of a full guaran-
tee, the guaranteeing bodies are based.
UK raises the stakes
Although the degree of detail is quite
solid – as previously mentioned – there
is still room for improvement. We have
already mentioned the pressure on Ger-
man issuers from abroad. UK covered
bond issuers were the driving force with
regards to cover pool disclosure, fol-
lowed by US, Canadian and French issu-
ers of non-obligations foncières.
Without any legally binding disclosure
obligation, each group of issuers managed
to establish an outstandingly homogene-
ous, highly detailed reporting format.
Next to the conviction that in the long
term openness pays off in terms of inves-
tors’ trust, the high quality of the reporting
was facilitated by two technical factors.
Firstly, the vast majority of issuers in
the aforementioned countries are experi-
enced ABS/MBS issuers and are therefore
usually eager to meet ABS/MBS report-
ing standards. Secondly, all issuers in
the respective countries or markets have
recently set up covered bond IT systems
and are therefore also technically capable
of producing highly sophisticated data.
Not only do we consider original LTV
ratios as an example of sophisticated
data, but also current ones and even in-
dexed current LTV ratios. Also, the depth
of information on the debtor provided by
some issuers, such as debt-to-income ra-
tios or employment status, is something
that far exceeds what can be considered
standard in Germany.
The voluntary disclosure formats we
see also show some higher standards with
regards to frequency of publication. While
quarterly publications can certainly a be
deemed sufficient as long as the time lag is
not too large, the majority of issuers out-
side the German market are able and will-
ing to stick to a monthly schedule.
A wish list
Overall, there is absolutely no evidence
to suggest that a legally stipulated pub-
lication obligation necessarily leads to a
better result than a voluntary publica-
tion. The question is rather: is there any
more room for improvement and, if so,
what is the direction of improvement?
In order to point out fields of im-
provement, one has to recognize the
limitations of current disclosure formats.
We identify two areas that have become
increasingly important in recent years:
the first is the assessment of liquidity is-
sues; the second, the full comprehension
of credit quality.
With regards to liquidity issues, inves-
tors and analysts are mostly dependent
upon what is published by rating agencies,
which is, however, also the result of agen-
cy models rather than figures fed into own
analytical models. This is one of the fields
in which traditional ABS/MBS investors
request more information. What would
be needed in order to assess liquidity risk
would indeed be classical cashflow report-
ing – at least providing cash inflows and
cash outflows per period. However, this
is quite demanding with regards to cover
pool IT. And, since in an ABS/MBS con-
text we have already seen reporting like
this, we do not deem cashflow reporting
as unrealistic going forward.
“Discussing both
ﬁelds of improvement
has always been
wishful thinking”
Florian Hillenbrand

The second aspect – comprehension of
cover pool credit quality – is likely to re-
main a “problem” going forward. In order
to assess credit quality, it is necessary to
either obtain detailed loan-by-loan data
(banking confidentiality might constitute
an obstacle) or in depth information about
cross-effects such as covariances of the
distribution of all details provided in the
cover pool reporting – in layman’s terms:
providing information as to how certain
combinations of characteristics material-
ise. Analyses of the cover pools without
the knowledge of covariances is nothing
but rolling dice, i.e. are higher LTV ratios
(bad) associated with higher (bad) or low-
er (good) debt-to-income ratios? Since in-
formation would be needed for each and
every combination of characteristics, the
complexity becomes ridiculous. Hence, in
this context, going forward we will realis-
tically have to rely on secondary sources,
such as Moody’s collateral score.
Coping strategies
Discussing both fields of improvement
has always been wishful thinking. The
question is rather: what is the best ap-
proach for assessing cover pool quality
given current limitations?
As previously indicated, we believe
that, given current deficits, the most
proper way to assess current cover pool
quality is to use secondary sources.
Moody’s collateral score appears to us
to be the most comprehensible figure –
however, Fitch and Standard & Poor’s
provide similar information.
But since we are talking about covered
bond investments that are usually longer
dated, quality is multidimensional: it can
vary over time. Hence, cover pool dis-
closure documents have to be checked
in combination with each investor’s in-
dividual view on the future development
of the asset types in the pool. This is of
paramount importance since cover pools
usually reflect the average business the is-
suer is underwriting; a negative view on
a specific type of lending in the pool also
has kickbacks to the issuer itself.
This brings us to the last point: changes
in the cover pool must always be assessed
versus the overall business strategy. As an
example, investors should be alerted if a
typical owner-occupied residential mort-
gage lender is adding significant amounts
of buy-to-let loans to its cover
pool without any proper
explanation.
In a
nutshell,
we be-
lieve that
the com-
bination of
an external
quality meas-
urement and an
analysis of cover
pools with respect
to both market ex-
pectation and busi-
ness plan-matching
is the optimal strat-
egy given current con-
straints.
“So, tell me about your cover”

STERLING MARKET: HOME ADVANTAGESTERLING MARKET: HOME ADVANTAGE
Last November the ﬁrst sizeable sterling UK covered bond in four years kicked
off what market participants hope could become a stable source of funding.
Can UK ﬁnancial institutions get better results at home? By Hardeep Dhillon
Sterling gives UK
home advantage

STERLING MARKET: HOME ADVANTAGE
£
3bn of covered bonds have hit the sterling mar-
ket this year in the wake of a £250m issue for
Leeds Building Society in November, the first
sterling covered bond benchmark in four years.
The surge in supply – from Nationwide Building
Society, Lloyds TSB and Abbey National Treasury Services –
was long overdue in the eyes of many observers.
Indeed the development of the sterling market contrasts
with how the asset class has developed elsewhere.
“Other jurisdictions targeted their domestic markets
and then moved out after that,” says Sally Onions, partner
in the covered bond and securitisation group at Allen &
Overy. “It is a reverse situation in the UK, where issuers ac-
cessed the euro market first and are now further accessing
the sterling market.”
The first sterling covered bond backed by UK assets was is-
sued in December 2004, a £500m 20 year transaction off a Bank
of Scotland £3bn Social Housing Covered Bond Programme.
This was less than 18 months after a euro deal off the bank’s
residential mortgage backed programme had opened the UK
market, and was followed by a £500m five year transaction in
February 2005 and a £500m 10 year in November 2006.
However, the asset class failed to gain a strong foothold and
become a liquid product in the UK.
“We were really focussing on the best way to fund the un-
derlying assets and not on development of the UK investor base
for covered bonds per se,” says Robert Plehn, head of structured
securitisation and covered bonds at Lloyds Banking Group.
“Given UK investor familiarity with the underlying social hous-
ing assets and the bank’s desire not to confuse European inves-
tors with multiple covered bond programmes from the same
issuer, it chose to focus on the UK investor base and only issue
in sterling.
“However, this clearly required a fair degree of education on
the nature of the covered bond instrument. We were still at an
early stage in the use of covered bonds by UK issuers and many
still had not come to market with the traditional resi mortgage
covered bond product that was being sold to European inves-
tors. Our hopes of a development of a deeper and more liquid
sterling investor base were, to a certain extent, curtailed by the
credit crunch.”
He cites other factors relating to the lack of the develop-
ment of the UK investor base, including the fact that many
UK investors were relatively full on UK bank risk and were not
capable of providing for risk adjusted investments in terms
of line allocations. In addition, investors were sanguine with
bank risk and preferred to buy higher yielding bank capital
instruments that provided a pick up to the very tightly priced
covered bonds spreads.
“Covered bonds were not a natural part of investors’ portfo-
lios, which usually would have included equities and real estate
in the risk bucket and Gilts and government securities in the
non-risk bucket,” adds Tim Skeet, board member and adviser
to Covered Bond Investor Council (CBIC) at the International
Capital Market Association.

Andrew Fraser, investment director for fixed income at
Standard Life Investments (SLI), says that at the time of the
Bank of Scotland transaction, banks still had access to relatively
cheaper senior unsecured funding and the securitisation mar-
kets seemed to be the banks’ choice of funding vehicle, rather
than covered bonds.
“Also the legislation was common law, not contractual, and
this all meant that the market remained a niche pre-crisis,”
he says.
Only in March 2008 did the UK’s Regulated Covered Bond
regime come into force.
Moving goalposts
The situation has since changed dramatically and there has
been a shift in the attitude of portfolio managers and issuers
towards covered bonds.
“There is a strong premium under the Basel III guidelines
for banks to get term funding and that has not been so easy
to achieve over the past few years,” says Ted Lord, head of Eu-
ropean covered bonds at Barclays Capital. “Some UK covered
bond issuers are now more willing to pay much more along the
lines of where the market is.”
Cheaper costs relative to alternative funding sources and
the size achievable in the market prompted Leeds Building
Society to favour the sterling covered bond market, says Paul
Riley, the building society’s group treasurer. He acknowledges
that while funding costs have risen, launching a senior unse-
cured transaction would have been uneconomical and at least
100bp wider than the covered bond issued at Gilts plus 175bp.
“We took on that market leader role because it was the right
trade for us,” he says. “Covered bonds have become vital to us
and the backbone of our funding going forward.”
Riley views the new market as being of strategic impor-
tance to the UK mortgage lending sector in its
ability to raise funding for advancing new
mortgages, particularly if slightly tighter
funding spreads are available. In addition,
he believes that if lenders cannot fund at
the right price in the euro market, the
sterling market could offer cheaper
funding, or vice versa.
“Having that access to a number of
markets provides an advantage to an is-
suer and makes it clear to the investor
community that the issuer
has access to more
than one mar-
ket,” says Riley.
This could
provide a
fillip to UK
issuers,
w h o
have arguably not been given full credit for their strengths or the
UK legislative framework by investors in euros.
“UK investors are generally more prepared to give better
credit to domestic issuers than the continental investors, par-
ticularly in longer dated maturities, and that will help the over-
all pricing dynamic for UK issuers,” says Skeet at ICMA.
Regulatory drivers are meanwhile pushing covered bonds to
play a more prominent part in a bank’s funding profile, according
to SLI’s Fraser. The regulatory backdrop, in terms of bail-in and re-
structuring regulations, could impose losses on senior unsecured
creditors, and execution risk for bank unsecured bonds has risen.
“Covered bonds seem to be exempt from any resolution re-
gime so would not absorb losses at that part of the capital struc-
ture,” says Fraser. “The absolute cost of issuing covered bonds
relative to unsecured is obviously much lower as well for UK
banks so it makes sense for them to issue in covered bond for-
mat while that gap still exists.”
With Basel III regulations requiring banks to term out their
funding much more, using covered bonds as a financing vehicle
“It is important to get standardi-
sation of reporting formats”
Andrew Fraser, SLI
“Covered bonds could become a
cheap and permanent source of
funding in the UK”
Lucette Yvernault, Schroders

allows them to more appropriately match their asset pool with
their liabilities.
“The sterling market will help banks maintain access to capital
markets by providing another funding tool at lower cost, which is
good for liquidity and general treasury operations,” adds Fraser.
Mixed results
Gauging pricing references in a nascent market with few com-
parables has been fairly complex.
“To get a rough idea of similar levels, some investors have looked
at triple-A rated RMBS, some at corporate bonds, while others are
attracted to the favourable spread over UK Gilts,” says Lord.
The pricing rationale for Leeds Building Society was to come
inside where its senior unsecured bonds and UK RMBS were
trading, says Riley, but slightly above euro covered bonds to
provide a new market premium.
“The pricing references were well understood and it was
more of a debate on the size of difference between the three
instruments,” he says.
Leeds priced its £250m 10 year deal at mid-swaps plus 175bp
in November. Since then Nationwide Building Society’s £750m
15 year issue came at 150bp over mid-swaps in late January,
Lloyds TSB’s £1.25bn 18 year at 175bp in early February, and
Abbey’s £1bn 15 year at 158bp over in early March.
For those UK issuers that have access to a range of funding
options including securitisation, euros, or the senior unsecured
markets, the sterling covered bond market may not be the most
economical.
“The cost differential for a bank like HSBC to issue an un-
secured or a covered bond is not going to be that great, so they
may prefer not to encumber assets on their balance sheet under
covered bond legislation,” says Fraser.
There is the potential for non-UK issuers, whether from Eu-
rope or elsewhere, to tap the sterling covered bond market and
target a new investor base. However, bankers say that this might
not benefit European issuers that trade tightly in their own ju-
risdictions if UK investors demand a higher premium for them
to access the UK market.
Plehn at Lloyds notes that the cross-currency swap favours
European issuers in the shorter end and could offer them a pick-
up to offset the higher margin potentially being demanded by
UK investors.
“However, demand is lacking at the short end and when you
go out to 10-15 years, that swap benefit disappears,” he says.
“That differential will start to come in, but it has to make sense
for issuers economically.
“It is an interesting diversification for non-UK issuers,” he
adds, “and ultimately we expect that they will access this market.”
Onions at Allen & Overy believes the sterling covered bond
market will develop alongside the UK securitisation markets.
“It does not seem as though one market is replacing another,
as there is still a market for securitisation and it will be down to
particular investor appetite which bonds they prefer,” she says.
“Covered bonds offer recourse back to the issuer, which is dis-
tinct from securitisation.
“Meanwhile, continuing issuance of residential mortgage-
backed securities under Master Trust and standalone programmes
shows there is still strong demand for securitised paper.”
Winning fans
Interest in the sterling covered bond market is already appar-
ent, as there is a ready base of investors attracted to highly rated
long dated bonds in the UK.
“Ratings arbitrage still exists for insurance companies and the
issue of how much capital they must put aside when investing in
the bond market,” Lucette Yvernault, fixed income fund manager
at Schroders. “Senior unsecured bonds carry a lot of capital pen-
alties for them, whereas covered bonds do not as much.”
Under Solvency II insurers will have to hold less risk capital
against a triple-A rated covered bond compared with a similarly
or lesser-rated plain vanilla corporate bond or senior unsecured
bond issued by a UK bank.
“Solvency II will be a driver of demand for the UK covered
bonds and the fact that many UK insurers have long term li-
abilities means it makes sense to match them with these long
dated assets,” says Fraser at SLI.
Leeds Building Society’s Riley believes that in addition to
Solvency II, the advent of a bail-in framework, which will not
affect covered bonds, is another prominent factor driving inves-
tor demand.
“Those two factors have been a catalyst for the speed of cur-
rent development in the market,” he says.
“It does not seem as though one
market is replacing another”
Sally Onions, Allen & Overy

Investors also point to the added security of the cover pool
as a primary benefit of covered bonds. In the event of a bank
encountering problems or even insolvency, investors have first
claim on asset within the cover pool, in addition to a claim
against the underlying issuing bank if these assets are insuffi-
cient to cover losses.
“The probability of default is probably much the same be-
tween a covered bond and an unsecured investment in a bank,”
says Fraser at LSI. “But your loss given default is going to be sub-
stantially lower in a covered bond than unsecured bonds.”
Investor confidence in government debt has waned, says Lord
at Barclays Capital, and as spreads on covered bonds are now more
attractive, the asset class is seeing greater interest from those seek-
ing to invest in an ultra-safe long-term product.
“Investors are considering it relatively safer to be in a cov-
ered bond, an instrument that has never seen a payment prob-
lem since they were created in 1769, than certain sovereign
debt,” he adds.
The new generation sterling covered bonds have also been
finding favour with non-UK accounts, with 10% of the Leeds
transaction, for example, distributed into Europe, while 20% of
the Lloyds deal was non-UK, 15% going into continental Europe.
Riley notes that more non-UK investors seem less wary of
taking on UK housing exposure, particularly in seasoned cover
pools, as the threat of a housing bubble in the UK has dissipated
over the course of the last 12 months.
“The housing market is subdued, but the UK has not expe-
rienced significant price deterioration like we saw in Ireland,”
he says. “Therefore non-UK investors are becoming more com-
fortable with the cover pools, the product and the strong quality
of the underlying assets.”
Lord says that the share of overseas demand has the poten-
tial to grow.
“There are large non-UK funds with fairly reasonable ster-
ling portfolios that are able to buy covered bonds but not tri-
ple-A rated RMBS, and demand from central banks with large
sterling reserves,” he says.
As good as their last result
The UK has already been recognised for having strong disclo-
sure and transparency. Fraser at SLI notes that the UK is more
advanced than some European countries in the reporting of
collateral. While issuers report on a monthly or quarterly ba-
sis in the UK, elsewhere can be published as little as on an
annual basis.
“It is important to get standardisation of reporting formats
so that investors can continually monitor the cover pool,” says
Fraser.
Work by the Bank of England to increase the level of trans-
parency and introduce a national template for UK covered
bonds is a major step forward, says Nathalie Aubry-Stacey, di-
rector of regulatory policy and market practice and secretary of
the Covered Bond Investor Council at ICMA.
“The UK is highly transparent and investors have access to
a lot of information and data,” she says. “Having national tem-
plates in all European jurisdictions will allow investors to com-
pare issuance from different countries on a like-for-like basis.”
Maintaining cover pool quality so it does not deteriorate
over time is one major concern for investors. SLI’s Fraser, for
example, stresses that although a cover pool could initially con-
tain good quality residential mortgage assets, banks in the UK
might have the option to replace these with other assets, such as
commercial mortgages.
“In that scenario, we would question the bank’s actions as
the underlying commercial mortgage market has a different
dynamic and the pool quality would decline,” says SLI’s Fraser.
Yvernault at Schroders believes it is imperative to sub-
stitute any non-performing or high loan-to value (LTV)
loan with a more robust one. Substitution is superior to re-
plenishment, as it does not allow the quality of the covered
bond pool to be diluted over time. She adds that tightening
certain regulations would make sterling covered bonds as
competitive as those on the continent and also reassure for-
eign investors when comparing continental products with
the UK market.
“Once the market fully develops, there is no reason why the
sterling market should not trade on a more comparable level
to the continental market,” says Yvernault. “The covered bond
could become a cheap and permanent source of funding in the
UK, as we have seen through the crisis with well-established
covered bond programmes in Europe.”
“Covered bonds have become
vital to us”
Paul Riley, Leeds Building Society

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COUNTRY PROFILE: AUSTRALIA

T
he Australian government’s decision in December
to free Australian financial institutions from the
shackles of the Australian Prudential Regulation
Authority’s strict interpretation of section 13A
of the Banking Act 1959 and allow ADIs to issue
covered bonds represented a victory for the Australian banking
industry after years of lobbying. However, its success was born
out of circumstances quite different from those that prevailed
when David Addis, then chair of the Australian Securitisation
Forum’s prudential committee and head of structured product
origination and sales at ANZ, and Brian Salter, then partner at
Clayton Utz, in 2005 received the letter abridged above.
“Securitisation was in its heyday back then, so you were
getting very tight deals done,” says Addis, now managing di-
rector at Cygnus Advisory. “But covered bonds were better in
a number of ways. They tended to be bullet with a revolving
structure, which regular securitisations here were not, and
they also went for much tighter prices, and in much bigger
volumes than the local RMBS deals.
“And when you are talking billions of dollars and a few basis
points, it’s actually worth quite a lot of money to everyone.”
But Addis acknowledges that a new funding avenue was not
essential in the same way that it had become as lobbying for
covered bonds intensified post GFC – Global Financial Crisis,
as it is commonly known in Australia.
“It would have enabled the banks to open up a new fund-
ing stream,” he says, “which would have been helpful, but there
wasn’t a pressing need in the same way that obviously there has
been since the securitisation market became so restricted.”
With Australian mortgage lenders so reliant on the securiti-
sation markets, the effects of the US sub-prime crisis changed
the Australian financial landscape.
“Most of the non-banks really struggled through the finan-
cial crisis,” says Addis, “because a lot of them relied very heavily
on securitisation and when they couldn’t, they just basically got
Australia
winds up for delivery
25 January 2005
Dear Messrs Addis and Salter,
Covered bond holders would have first priority over
assets of an ADI (authorised deposit-taking institu-
tion), ahead of the ADI’s depositors. We cannot see
how such arrangements can be consistent with the
principle underpinning Australia’s depositor prefer-
ence regime that depositors have the ability to claim
on the assets of an ADI in Australia in preference to
all other potential creditors…
In summary, APRA believes that the issuance of cov-
ered bonds would not be consistent with Australia’s
depositor preference regime and it is not, as a mat-
ter of principle, prepared to accept issuance of such
bonds (or structures with equivalent effect) by ADIs
in Australia.
Yours sincerely,
John F Laker
12 December 2010To secure the long-term safety and sustainability of
our financial system, we will… allow all banks, credit
unions and building societies to issue covered bonds
to broaden access to cheaper, more stable and longer-
term funding…
The Hon Wayne Swan MP, deputy prime minister and
treasurer
After years of watching from the stands, Australia’s banks are taking a run up
for issuance as early as the third quarter. The banking industry is therefore
hard at work ensuring the right balance is struck between issuer and investor
needs in impending legislation. But could RMBS and smaller banks be
dismissed cheaply? By Neil Day

slammed by their banks or their funders. One of them had a
lot of short term extendible CP paper in the US market and it
couldn’t roll it over.
“Some, like Aussie Home Loans, which was one of the origi-
nal securitisers, were partially bought out and supported by the
banks, but a lot just stopped writing mortgages because they
just couldn’t fund them. During the GFC the banks’ share of
new mortgage origination went to well over 80%, and the 15%-
20% that they were not actually writing directly, they were ef-
fectively funding through those non-bank originators whom
they chose to support.”
However, Australia’s major banks have also come under
pressure. Although they remain highly, Moody’s, for example,
in mid-February put the Aa1 ratings of the country’s big four
– Australia & New Zealand Banking Corporation, Common-
wealth Bank of Australia, National Australia Bank, and Westpac
Banking Corporation – on review for downgrade.
“The review will focus on the Australian banking system’s
structural sensitivity to conditions in the wholesale funding mar-
ket,” says Patrick Winsbury, a senior vice president at Moody’s.
“The global financial crisis has underlined the speed with which
shifts in investor confidence can impact bank funding, warrant-
ing a review of the four major banks, for whom market funds
comprise on average 43% of total liabilities.”
Gail Kelly, Westpac chief executive officer, told a Senate in-
quiry into the government’s banking reform package in January
that covered bonds should help.
“Covered bonds are valuable for us,” she said. “It’s not a pan-
acea for us, but it’s an important next step to allow us to leverage
our mortgages… that’s very helpful.”
Meanwhile, Cameron Clyne, group CEO of National Aus-
tralia Bank has welcomed the government’s move and said that
covered bonds could help lower funding costs for the bank’s
A$28bn of bonds it was expecting to sell this year.
GFC swings the debate
Speaking at a roundtable for the Deloitte Australian Mortgage
Report 2011: Reforming the Agenda, Axel Boye-Moller, head of
mortgages at Westpac, outlined the challenges facing the Aus-
tralian mortgage industry.
“What we have is a structural issue, with a limited depos-
it pool unable to keep pace with growth,” says Boye-Moller.
“There isn’t enough growth in deposits so we are all just fight-
ing over share. Savings are not being channelled into the bank-
ing system hence banks are reliant on wholesale funding, and
offshore wholesale funding in particular.
“Covered bonds could be part of a solution to this struc-
tural issue and we would support that development. But we
need to think more broadly and consider other measures to
facilitate securitisation of mortgages, as well as increasing the
deposit pool.”
Graham Mott, financial services partner at Deloitte, says
that covered bonds are a must in this context.
“Given how significant their funding challenges on an annu-
al basis are, covered bonds are key for our banks locally, partic-
ularly the majors, to allow them to compete and raise funds on
a global scale,” he says. “That’s got to be the underlying driver
here, which is why the government has relented.”
Addis agrees.
“I expect that Treasury has been convinced that, with the
securitisation market and other bond markets really being
quite subdued, the performance of covered bonds was de-
monstrably better than MBS or other funding through the
GFC,” he says.
Westpac highlighted this in its submission to a Senate in-
quiry in December, ahead of the government’s announcement.
“Covered bonds through the GFC provided a stable source
of funding in other countries, retaining their broad investor ac-
ceptance,” it said. “They have stood the test of time including a
“It’s not a panacea for us,
but it’s an important next step.”
Gail Kelly

significant number of economic cycles and financial crises, and
as economic and financial infrastructure has evolved.”
Indeed billions in government guaranteed bank issues ben-
efiting from such support begin come up for redemption from
next year and offering ADIs an alternative funding option that
might appeal to a similar investor base has been cited as an-
other reason for the government’s decision.
And as if these factors were not enough, some observers ar-
gue that the launch in June 2010 of the first covered bond in
New Zealand, by National Australia Bank parent Bank of New
Zealand, was the final straw.
“That was a big help,” says one market participant. “It just
made the Australian position even stranger. It wasn’t just Eu-
rope having covered bonds, it wasn’t just the US and elsewhere,
it was now New Zealand.
“The four major banks in New Zealand are subsidiaries of
the four major banks in Australia, so it made a mockery of the
fact that these same groups were doing it in New Zealand and
yet not at home.”
Boundaries expanded
While a change to the Banking Act will allow ADIs to add cov-
ered bonds to their funding options, the government will not
give Australian banks free rein to issue covered bonds.
“The Treasury will also consult on the appropriate level of
cap to be placed on covered bond issuance for individual insti-
tutions, for example 5% of an issuer’s total Australian assets,”
it said. “This will ensure a substantial buffer of assets to cover
depositor claims, making it extremely unlikely that a levy under
the Financial Claims Scheme would ever be needed.”
As The Covered Bond Report was going to press, a draft law
for Parliament to consider was imminent, but market partici-
pants have expressed confidence that the paper will double the
5% limit to 10% , a level settled on by the Reserve Bank of New
Zealand in March.
“The 5% level was quite swiftly and successfully explained
as totally inadequate,” says one, “and it looks like being 10%.”
According to calculations by Deloitte’s Mott, were banks
across the board to take full advantage of a 10% limit, issuance
could reach around A$180bn, which is more than twice the out-
standing volume of Australian RMBS.
“Certainly that would be the sort of capacity that the balance
sheets would support,” he says.
While the number is impressive, questions remain.
“Initially the government was thinking only a 5% issuance
limit relative to assets, but it seems there is an acknowledgement
that it needs to be higher in order to make individual issuance
the broader market for Australian covered bonds a meaningful
and worthwhile,” says Alex Sell chief operating officer of the
Australian Securitisation Forum. “That should perhaps mean
that the percentage goes higher but with a secondary limit re-
garding liability mix whereby if you’re very highly dependent
on retail deposits you will be able to issue less than if you are
less exposed. We understand that APRA has been calling for
something along those lines, and this resembles the FSA’s ap-
proach in terms of looking at overall asset encumbrance relative
to liability mix.”
Meanwhile, Fergus Blackstock, head of Australian debt capi-
tal markets at UBS, says that the 10% limit takes into considera-
tions the requirements of a variety of players in the market.
“It’s clearly within the comfort limits of the rating agencies
and it would make it efficient for some of the smaller issuers
who have got smaller balance sheets,” he says.
Investors drive law change
The minimum that the government needs to do to trigger cov-
ered bond issuance is amend the relevant section of the Bank-
ing Act, which reads: “If an ADI becomes unable to meet its
obligations or suspends payment, the assets of the ADI in Aus-
tralia are to be available to meet that ADI’s deposit liabilities in
Australia in priority to all other liabilities of the ADI.”
However, while this de minimus approach might have been
sufficient in 2005, when markets were roaring and UK banks
were prospering from a similar position to price covered bonds
just a few basis points back from products based on prescriptive
laws, such as Pfandbriefe, the banking industry is now expect-
ing something more thorough.
“The government has already committed itself to amending
the Banking Act to permit covered bonds by removing the ab-
solute depositor preference provision that has been there since
1959,” says Sell, “which you might think means that structured
and legislative would then be possible. But the government has
indicated that it doesn’t wish to see structured covered bonds
coming about.”
While this might previously have disappointed some banks,
all are said to be moving towards a position where they con-
sider a more comprehensive framework to carry benefits for the
industry.
“The push locally has been that we need a legislative frame-
work rather simply progressing with a structured solution,” says
Mott at Deloitte. “And mainly that’s to demonstrate to the global
investor community that Australia has the rigour of a legislative
framework to support its covered bonds.
“The people that we are listening to the most, which is the
right answer, is now the investor community in our positioning
of covered bonds.”
Louise McCoach, a partner at Clayton Utz, echoes this.
“The current
iteration of the
policy certainly
takes into account
more of the buy-
side perspective.”
Louise McCoach

The Covered Bond Report Issue 1

The Covered Bond Report Issue 1

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