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ifr surveys | June 2011 | | 3 COVERED BONDS


the quality of cover pools, sovereign volatility and potential downgrades are foremost on the minds of many respondents. Notably, the quality of cover pools and sovereign volatility were the chief concerns surrounding Spain’s future issuance. Downgrades were of small significance in the broader scheme of things with only 17% of respondents saying they were a chief concern. As for investors, core markets remain on buy-side wish lists as an overwhelming 84.4% of those surveyed said investors are looking to back covered bonds from France, Germany and Spain.


Looking at issue sizes going forward the market seems to lack consensus when it comes to jumbolinos or sub-jumbo benchmark transactions. Less than half of the survey believed that they are a positive developments but only 7% indicated they are negative for the market. Interestingly a large portion of those surveyed said that they should only be used for small issuers or banks that do not have sufficient cover pools to support jumbo transactions.


Covered bond supporters believe US legislation is in the hands of the FDIC that has the power to put a cap on what banks can issue.


"The majority of investors are getting used to €500m issue


sizes,” said Loder. “ It really depends on the size and capacity of the respective issuer.” Focusing in on Germany, IFR asked a series of questions about the Namenspfandbriefe, or private placement market. The majority of respondents (47.9%) said they expect the private market to account for a sizeable 10%-20% of total issuance volumes. What’s even more interesting is over a third (34.3%) said they expect it to climb to 20%. “I would expect it to be more than 20%,” said Tim Skeet, managing director at RBS. “We know this market is growing and once


the full terms of Solvency II are known the number will increase further.” He added.


More than a third of respondents said they liked the structuring and pricing flexibility of private placements, while another significant minority liked the accounting arbitrage, mainly the fact that investors don’t have to mark to market. Nordic and French issuers are expected to enter the German private placement market in droves this year in a bid to diversify their funding; 70% of respondents believe there will be an increase of foreign issuers in the market.


US in focus Attitudes towards US covered bond legislation revealed a mixed bag of sentiment with the largest number 42.3% saying US legislation was likely to be introduced by the end of 2011, while 34.5% said it was unlikely. Added to that over half of respondents think the US is the most important covered bond market outside of Europe.


Covered bond supporters believe US legislation is in the hands of the FDIC that has the power to put a cap on what banks can issue. At the moment there is talk of a maximum of 4% of the balance sheet being allocated to covered bonds. “A 4% cap would significantly reduce the potential number of issuers,” said Verbeek. In response to one of the most important questions surrounding US covered bonds, 75% say covered bonds will provide the most cost effective funding tool compared to alternative options and over half of respondents believe the US is the most important covered bond market outside of Europe this year.


Casting an eye over the survey results it is clear to see that covered bond supporters are bullish about the future. When asked whether or not covered bonds will become a substitute for securitisation almost two thirds of those surveyed believe it is likely or very likely. “We will see securitisation coming back but for now investors are focused on covered bonds,” said Skeet. “It continues to have regulatory incentives under Basel and we are likely to see issuers looking to replace senior unsecured funding with covered bonds.”


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