Some expansive credit-related thoughts arrive from Alberto Gallo at RBS, for a quiet May Day when Europe’s capitalists take the day off in honour of its workers.
In short, its the safe stuff that may not be safe anymore as/if/when the continent’s economy expands: Read more
Eurobank recently lowered the over-collateralisation (OC) of its second covered bond programme to the bare minimum allowed by Greece’s covered bond law. Avid covered bond-watchers (there must be a handful of you out there) will know of course, that specially designed legal frameworks are one of the big perks of the covered bond structure – along with juicy benefits like an overstuffing of assets and the dual recourse nature of the centuries-old debt instruments. Read more
Covered bonds. The sacred cows of the fixed income universe. The instruments which have never knowingly failed (thanks to their cover pool of secured assets). Magic bonds.
It should be news then that the cover pool backing Spanish multi-cedulas — Spain being one of the biggest issuers of covered bonds in Europe — is for the first time experiencing a wobble. Read more
The covered bond LTRO carry trade. Pretty attractive in December. Not so much now.
That at least, is the view of Leef Dierks at Morgan Stanley on Friday. Read more
Seems kinda churlish to throw this out amidst the biggest bank bond rally since 2009. But…
We believe investors should assume a low (possibly 0%) recovery rate on most senior unsecured bank bonds
UniCredit is planning to raise up to €25bn through the issue of covered bonds as Italy’s largest bank by assets seeks to open up a new stream of funding amid ongoing pressures on bank liquidity in the eurozone, says the FT. In documents deposited with the Luxembourg Stock Exchange, UniCredit said the proceeds of the covered bond issuance will be used “for general funding purposes including the funding of the mortgage loans business of the group”. The Italian bank is already in the middle of a €7.5bn rights issue undertaken at the behest of regulators to shore up its capital strength. Shares in the bank have risen 51 per cent in a fortnight on reports that the rights issue would be fully subscribed and thanks to a broader European banking stock rally as concerns over the sector’s capitalisation requirements have receded.
January is on track to be one of the busiest in more than a decade for global covered bond sales by banks, as lenders race to secure funding after the eurozone sovereign debt crisis led to a dearth of issuance, the FT reports. The first three weeks of the year have seen a flurry of covered bond issuance, a type of over-collateralised debt that is considered very safe by investors, from northern European banks such as Aereal Bank, Lloyds Banking Group and UBS, as well as Australian lenders. So far this year $43bn has been raised by global banks using covered bonds, the second strongest start to the year since 2000, according to Dealogic. Significantly it is the first time that European banks have issued more covered bonds than senior unsecured debt, traditionally seen as the bedrock of bank funding but which in the second half of last year saw issuance in Europe slow to a crawl.
In terms of issuance, covered bonds seem to have had a strong start to the year, but is the market warping all of a sudden?
We hear there was a rush of issues from French banks just last week, but suddenly this week they are missing. Reportedly. Read more
And the winner of European credit markets so far in 2012 is…
…covered bonds! Read more
Citigroup on Tuesday sold $2.5bn of debt in its biggest bond offering since 2009. The bank lured strong interest by offering investors a hefty risk premium, or spread, of 360 basis points to US Treasuries on the five-year bonds, the FT reports, in the latest sign that US banks can still access the capital markets at a price while their European counterparts have struggled. The bonds were sold with a so-called new issuance concession of about 30bp more in yield than Citigroup’s existing five-year debt. The yield at the pricing was 4.48 per cent. Bloomberg reports that banks elsewhere geared up for covered bond issues, with UBS on Tuesday selling €1.5bn of five-year bonds for less than a third of the spread on its existing senior unsecured notes with a similar maturity. ING Bank is planning a €1.75bn issue, the agency said, citing a banker, and Credit Agricole, Caisse de Refinancement de l’Habitat, Lloyds, Norway’s Boligkreditt, and three large Australian banks were also planning covered bond sales.
We know from the ICMA European Repo survey that European repo market participants have been using more covered bonds for collateral in 2011 than ever before.
The thinking, we imagine, is that in a world where there isn’t enough ‘risk free’ collateral to support outstanding funding needs, the next best thing is collateral which itself happens to be collateralised. Read more
Europe’s banks are seeking increasingly creative ways to finance themselves as they attempt to make up for a dearth of traditional debt funding amid market turmoil, the reports the FT. Banks have rushed to issue covered bonds in record numbers this year, with investors eager to buy since the bonds are backed by collateral and are also secured by the bank’s other assets in the event of the issuer’s bankruptcy. However, banks are constrained in the number of covered bonds they can sell because of regulatory limits on balance sheet ‘encumbrance’ and a shortage of high-quality assets. Some banks are examining whether ‘quasi-’ or ‘structured’ covered bonds – sitting somewhere between covered bonds and a traditional securitisation – can help fill the gap.
The ECB is considering having another go at supporting the $1.58tr eurozone covered bond market.
Now, the last time the ECB entered this market, things didn’t go exactly to plan, as the graph below from Barclays Capital demonstrates.
Here it is in full, from Jacques Cailloux and team at RBS:
Despite some early signs of a slightly firmer Q3 GDP (our GDP Tracker is at 0.2% q/q vs 0.1% q/q last month) on account of strong German industrial production (boosted by favourable working day effects), we are revising down again our economic forecasts thereafter and now expect a full blown recession. The September composite PMI fell to 49.2, its weakest since July 2009 (and first sub-50 reading since then too). At this level, the PMI is consistent with a 0.1% contraction in GDP on a 3m/3m basis and both forward looking elements of the survey and ongoing financial market developments imply further weakening ahead. The manufacturing PMI was 48.4 – the weakest since August 2009 – while the services PMI was 49.1 – the weakest since July 2009. Read more
Covered bonds are not the universally safe assets that some investors think they are, rating agency Standard & Poor’s has warned in a new report, says the FT. Many investors consider the bonds “super-safe” because, if the underlying assets sour, they also have a claim on the issuing bank. However, in the report, S&P warns that “the common perception of mortgage covered bonds as a homogeneous and universally low-risk product is misleading. In fact, the characteristics of individual mortgage covered bonds are not only diverse, but can change over time.” The bonds are gaining in importance since, for many European banks, they remain the only source of funding amid eurozone turmoil. They have also been boosted by forthcoming regulations such as Basel III.
New international bank capital rules are “anti-American” and the US should consider pulling out of the Basel group of global regulators, Jamie Dimon, chief executive of JPMorgan Chase, told the FT. Mr Dimon said he was supportive of forcing banks to have more capital but argued that moves to impose an additional charge on the largest global banks went too far, particularly for American banks. “I’m very close to thinking the United States shouldn’t be in Basel any more. I would not have agreed to rules that are blatantly anti-American,” he said. “Our regulators should go there and say: ‘If it’s not in the interests of the United States, we’re not doing it’.” Mr Dimon also criticised global liquidity rules, arguing that regulations that viewed covered bonds – a European market feature – as highly liquid but discounted government-backed mortgage-backed securities in the US were unfair and that other details hit investment banking activity core to US banks hardest.
We know that private placements have become a popular method of European bank funding recently.
Though smaller, the deals do allow issuers access to cheaper, more flexible funding — or even money that might not otherwise have been available to them given recent eurozone sentiment. Plus the banks don’t have to worry about providing, for example, billions worth of collateral upfront in a benchmark covered bond issue that would have been closely scrutinised by the market. Read more
A break in the clouds, for Denmark’s stormy covered bond market:
(Bloomberg) Denmark’s covered bonds are likely to be snapped up by U.S. buyers even after Moody’s Investors Service downgraded the securities, according to Alan Boyce, the head of the George Soros joint venture Absalon Project. Read more
A counter-intuitive headline, to be sure, given that Greece has just one publicly outstanding covered bond left (but over €12bn of ‘retained’ covered bonds used as fodder for central bank liquidity).
Hidden in the details of Greece’s planned privatisation fund are a few interesting tidbits. For a start, it looks like the fund will be able to issue bonds, possibly with a Greek government guarantee. It could then use proceeds from issuance to buy back debt, offer exchanges or set-up other guarantees. Read more
Hidden in the €144.2bn of euro-denominated covered bonds issued so far this year is a number.
€18.2bn. Read more
So Ireland has been busy threatening to throw senior bank debt investors under a bus. Again.
Earlier this week, Irish finance minister Michael Noonan announced plans to force “substantial” burdensharing for investors in the senior debt of Anglo Irish Bank and Irish Nationwide . As a reminder, senior debt investors have traditionally ranked above sub-debt and pari passu (the same) with depositors in a bankruptcy. Forcing losses on them has therefore been a very rare event. Read more
Investors and regulators must be wary of banks’ growing use of covered bonds, two European policymakers have warned. Banks have increasingly turned to the bonds, considered an ultra-safe form of secured funding, because the market for straightforward securitisations is still struggling to recover from the financial crisis, writes the FT. For more on all things covered bonds, see FT Alphaville‘s coverage.
The Wall Street Journal has more details of the €1bn covered bond issued somewhat disastrously by Spanish bank Santander last week. Why disastrous? Deal managers were only able to sell about half of the bond, despite reasonable yield (195bps), leaving bookrunners with a €500m rump in their books. Read more
A milestone, of sorts, in the European structured finance market.
At the end of the first-quarter of 2011, retained securitised debt made up a bigger proportion — at 51.7 per cent — of total outstanding debt (€2,076bn) than debt placed with investors, according to new figures from the Association for Financial Markets in Europe’s (AFME) securitisation data report. Read more