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June 2009 | ifr special report | 3 INVESTORS


“ Restoring confidence A


On average, 75% of recent weeks’ new issues were sold in the domestic market or German speaking region. While Spanish banks also managed to sell a relatively large portion of their Cedulas in the UK, the range of countries featuring in the placement remains fairly concentrated overall.





t €16.5bn, May's covered bond issuance already surpassed the total amount of jumbo's issued during the first four months of the year. One could


be forgiven for thinking covered bonds have turned a corner in this financial crisis. Last year was the most challenging year for the covered bond market since its inception in 1995. Secondary liquidity and new jumbo issuance ground to virtual standstill on several occasions. But the remarkable comeback of the primary market since May tells its own story: required new issue premiums are no longer increasing with every deal, which is an encouraging sign of recovery; but a look at the placement statistics of recent new issues highlights how much ground has been lost in terms of investor penetration.


Sprechen Sie Deutsch? There have typically been five core investor groups making up this product: banks, central banks, funds, pension funds and insurance companies. Given its origins, it is of little surprise that geographically, Germans have always represented the largest investor group, followed by Scandinavians, French, Spanish, Irish and UK investors. The latter three had increased sig- nificantly in the years preceding the crisis, but now the balance has shifted again. Besides Germany, the issuers’ home market is still the main sales channel, said Ted Packmohr, head of covered bond research at Dresdner Kleinwort. “On average, 75% of recent weeks’ new issues were sold in the domestic market or German speaking region,” he said. “While Spanish banks also managed to sell a relatively large portion of their Cedulas in the UK, the range of countries featuring in the placement remains fairly concentrated overall.”


Despite the market’s apparent recovery and an ECB induced revival (see next two stories), international interest and trust in


With the crisis came a power shift. Investors, once the price-takers, now call the shots in covered bonds. A change in the required new issue premiums has been supplemented by a shift in the placement of deals. But has there been a fundamental shift in the way investors approach this product, or have they just had their hands strengthened by circumstances? Rachelle Horn investigates.


this market has not yet returned to pre-crisis levels.


For example, Dexia Kommunalbank's €1bn 3.5% June 2014 public-sector Pfandbrief placed 72% with German and Austrian accounts, while WL Bank, a rare issuer in the jumbo market, issued a €1.25bn 3.75% November 2014 public sector Pfandbrief at a spread of 48bp over mid-swaps. A massive 90% of the deal placed with domestic accounts (see graph). In new issuance from the French region, Dexia MA's €1.5bn 4.875% 12-year Obligation Fonciere placed 70% with France and 22% with Germany. But not all jurisdic- tions have the luxury of a robust domestic investor base. The Nordic region, considered part of the “core” covered bond market, has been conspicuous by its absence of late, despite benefiting from a relatively stable housing market. Swedbank's €1bn 4.125% five-year Swedish covered bond priced in late may at a spread of 130bp to mid-swaps, with only 10% placed domestically. The fact that the Benelux region and Scandinavia play only a minor role in the recent placement statistics illustrates the regional concentration of buying orders, said Packmohr. While both regions once had a clear double-digit percentage share of the books, their current order book share is typically no more than a lower single-digit figure. This is perhaps partly because Norges Bank, once a powerful force in this market, no longer plays such a prominent role. In terms of investor type, banks dominated


as investors of covered bonds in 2008, according to Bernd Volk, a covered bond strategist at Deutsche Bank. They hold a significant amount of covered bonds as collateral for their liquidity transactions with the ECB. Deutsche Bank estimates that ap- proximately 40% of banks placed with banks in 2008, while fund managers made up ap- proximately 27% of demand, central banks 11%, insurance 10% and pension funds 6%. “The combination of a low risk weighting, high security and ECB eligibility


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