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Eurosystem reclassifies Commerz SME as covered

An SME-backed structured covered bond issued by Commerzbank in February has been reclassified as a covered bond within the Eurosystem’s collateral framework, where it was previously treated as senior unsecured debt, in a fillip to the innovative instrument.

Commerzbank imageThe deal was the first covered bond backed by SME loans from a major jurisdiction and as such proved controversial, with traditionalists decrying a potential dilution of the asset class.

The Eurosystem’s move – shifting Commerzbank’s deal from liquidity category 4 to 3, and its classification as a “non-jumbo covered bond” – means that its haircut falls from 11% to 5% within the collateral framework.

“While this doesn’t sound like much,” said Florian Eichert, senior covered bond analyst at Crédit Agricole, “it essentially means that the Eurosystem has reclassified the bonds from senior unsecured to non-jumbo covered bonds, which is substantial.”

In the run-up to launch, the deal’s treatment as senior unsecured debt rather than as a covered bond had been cited as a negative.

The Covered Bond Report understands that the issuer had no involvement in the reclassification, but that the Luxembourg Stock Exchange was involved from a technical standpoint as the market where the bond is listed, and that the Bundesbank was consulted.

The reclassification will lend weight to arguments for Commerzbank’s deal and any other SME-backed issuance that follows being treated more generally as covered bonds. Index providers have so far taken a mixed view of the new instrument, with Barclays having included Commerzbank’s issue in an “other covered” classification but iBoxx having excluded it from its covered bond categories.

The European Central Bank has recently shown a focus on improving SMEs’ access to finance.

Benjamin Sahel, market operations analysis at the ECB, told a European Covered Bond Council plenary meeting on 21 March that the central bank regards SMEs as “crucial” and that they are taken into consideration in monetary policy discussions of the ECB, including the funding environment they face.

He said that the launch of an SME-backed covered bond raised three issues: ABS, which traditionally have used SME loans as collateral, would “feel the heat”; traditional covered bonds could be “in some sense challenged”; and the move would point to increased asset encumbrance.

Sahel appeared non-committal as to whether or not the introduction of SME covered bonds can be a good thing, and said that one of the questions the market would have to consider with regard to SME covered bonds is how actions in the covered bond space can contribute to a revival of ABS activity.