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4 | ifr special report | June 2009 INVESTORS Placement pattern of post-ECB new issues %

100 80 60 40 20 0

Banks Asset manager Insurer* 12y 10y 7y

Investor type 5y

4y 3y

100 80 60 40 20 0

12y 10y 7y “

generates significant buying interest from the banks,” said Volk.

For short to medium term bonds, banks

have again proved the most important buyer group. Fund managers have become the second pillar of investors, buying 30% to 50% of non German covered bonds said Packmohr.

In longer dated issuance, the share of banks will naturally decline relative to insti- tutional investors, which currently comprise the third investor stronghold, according to Packmohr. “Only under exceptional circum- stances did they reach a similarly high share placement before the crisis. The fact that the importance of this investor group has increased so considerably is in part due to low market yields, in our view, which generally boost interest in spread products. Yet, we believe that insurers will focus on highly rated issuers, thus supporting issue placement from the second issuer rank to a limited degree only,” he said.

Back in vogue

According to a recent investor survey conducted by the European Covered Bond Dealers Association, some 64% of investors – including asset managers, commercial banks, pension funds and other institution- al buyers – said they still had an appetite for covered bonds and intended to increase or at least maintain their holdings this year. Though the findings also suggested that 53% of the investors were deterred from investing due to the reduced liquidity. An ECB’s announcement that it will be buying covered bonds has transformed the market (see next story). "The ECB stance has actually reopened the market by rebalancing clients' interests and providing a backstop bid for covered bond holders. This has brought back to the primary market several clients that were staying on the sidelines and

Region 5y

4y 3y Germany***

* For ING Bank incl pension funds, **funds and insurers combined, ***some incl Austria and Switzerland Source: IFR, Dresdner Kleinwort

waiting for such a signal to re-enter," said Sebastien Gianfermi, head of SAS and covered bond trading at BNP Paribas. The survey was based on responses from

65 investors from 18 different countries. According to the association, the top three issues to be addressed with almost equal weighting are increased B2C liquidity, improved secondary market transparency and increased inter-dealer liquidity.

According to a recent investor

France Benelux Nordics UK

survey some 64% of investors said they still had an appetite for covered bonds and intended to increase or at least maintain their holdings this year. Though the findings also suggested that 53% of the investors were deterred from investing due to the reduced liquidity.

Liquidity is key. "We have always regarded covered bonds as a relatively safe asset class – with dual recourse to the issuer and the cover pool – so from this perspective we are relatively comfortable with the product," said Michiel de Bruin, head of Euro government bonds at F&C Amsterdam.

Though the recent revival of new issuance is starting to provide a benchmark for investors, De Bruin stressed he would like to see liquidity reestablished. Covered bonds were marketed for their liquidity, he said. “Market participants should be looking very carefully at how we can restore this liquidity and maintain liquidity when circumstances become difficult.” An active participant in benchmark covered bonds; DWS Investments stressed its approach towards the asset class has remained constant throughout the crisis. "We still have a three-fold analysis," said Torsten Strohrmann, a senior portfolio manager at DWS. "When deciding whether to invest, we look at the issuer, the cover pool, and the governing legislation." DWS Investments (the mutual funding arm of Deutsche Asset Management, itself the global asset management service division of Deutsche Bank) had €160bn in assets under management domiciled in Europe as of September 2008. This made it one of the leading mutual funding groups in Europe. But concerns that the ECB induced correction could be short lived appear unfounded. "Covered bonds have not followed the positive market movement that corporate bonds have benefited from," said Strohrmann. "There has been a lag where this is concerned, but I judge this latest development from the ECB as a trigger for covered bonds to catch up. In my opinion this is a long-awaited correction." It seems that the ECB is now playing a vital role in putting the pieces back together. Covered bonds saw an immediate expansion of the investor base following its announce- ment, said Mauricio Noe, global head of covered bonds at RBS. "In addition to central banks buying again, we are also seeing more credit buyers and new investors beyond France and Germany to the likes of the UK and the Nordic region," he said, something that has been absent in this market for some time. "In a short period of time covered bonds have really felt the benefit. Investors are attracted by the endorsement of the product by the ECB as well as the effective backstop it places on the secondary market, capping any potential mark to market losses if conditions deteriorate as many are predicting." One of the rationales for the ECB choosing covered bonds, aside from their importance in the broader European market, was that there had been the biggest drop off in liquidity of any asset class from the start of the crisis and this was of concern to the ECB. "Clearly any improvement to the provision of liquidity in this market, which was improving anyway, is hugely supportive to investing in the product," said Noe.

CFF DexMA ING EurHyp WL Bank Santander LaCaixa B Popul** Dexia KB

Banesto BNPP


ING EurHyp

WL Bank

Santander LaCaixa B Popul

Dexia KB Banesto BNPP

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