Here’s a useful bit of information as we wait for the commercial real estate crisis to drip into the European banking system:
That is commercial real estate (CRE) exposure for European covered bonds rated by Fitch, via Deutsche Bank’s fixed income team. It’s only for Fitch-rated covered bonds because that particular rating agency has been agitating about the bonds’ (notably German ones — Pfandbriefe) exposure to the sector recently.
And you can see from the data that Anglo Irish, Germany’s Aarealand and BHH have some of the highest CRE exposure on their cover pools.
So are these banks/bonds in trouble?
Maybe, but remember that the other thing happening in the covered bond market at the moment is massive support ops from Europe’s central bank.
To wit, here’s some more detail from Deutsche’s fixed income team:
In our view, in 2008, around 35% of totally issued covered bonds have been funded via central banks. While this share went down significantly in 2009 year to date, some markets are still strongly skewed to central bank funding. In this respect, Ireland is probably outstanding in the Eurozone. Year to date, EBS Mortgage Finance, Anglo Irish Mortgage Bank, Bank of Ireland Mortgage Bank and AIB Mortgage Bank have issued over EUR 10 bn of covered bonds. As public benchmark issuance was only EUR 1.5 bn and floating rate notes issues (which lead to a low haircut at the ECB repo) dominated other issuance, most of the issuance was likely done for ECB funding. The total Irish mortgage covered bond market volume has an outstanding volume of around EUR 30 bn. Of this, probably only around EUR 10 bn have been publicly issued. Hence, around two thirds of the Irish mortgage covered bond market is likely funded via the central bank.
While this analysis of course lacks accuracy (as, beside others, private placements are not included), a simple comparison of EUR benchmark covered bond issuance and all bonds issued according to Bloomberg in market with limited domestic market focus, suggests that also in 2009, numerous issues were done for ECB funding. Of course, in EUR covered bonds in general and also in mature market like German Pfandbriefe, a high share of bank buyers indicates that this mechanism is indirectly used.
Given the significant size of outstanding GBP covered bonds (even though there is no public GBP covered bond market), the situation seems similar in case of UK covered bonds (despite the BoE applying much higher haircuts compared to the ECB). While the situation is likely different in many other European covered bond markets, also some French structured covered bonds with a legal final maturity in 2050 suggest structuring for central bank funding. A further source of hidden covered bond supply is securitizations on central banks’ balance sheets. Given the high haircuts of at least 12% for RMBS and national central banks in addition making use of discretionary power and requiring much higher haircuts (e.g. press reports suggest a 45% haircut in case of DSB bank RMBS), an increasing number of European banks is likely to trying to transfer MBS collateral into covered bond cover pools. Overall, despite low new lending of most issuers, expectations about absorption capacity of primary markets of covered bonds and expectations about primary market spreads are likely a main drivers for upcoming supply. Collateral driven decline in outstanding volume seems only a topic in the German Pfandbrief market.
Related links:
The ECB as liquidity monster – FT Alphaville
How will the ECB ever manage to stop funding Spanish debt? – Edward Hugh, RGE