The resilience of covered bond issuance in the midst of the euro-zone sovereign debt crisis led panellists at the European Mortgage Federation annual conference on 18 November to contrast the state of the primary market with that which existed before the European Central Bank’s Eu60bn covered bond purchase programme.

EMF covered bond panel

(Please note: this article was written after the EMF conference in November.)

Whereas issuance from January-May 2009, when the programme was announced, was restricted to only around Eu15bn of supply from almost exclusively French and German issuers, a wide variety of financial institutions have sold benchmarks since the covered bond purchase programme (CBPP) ended in June, despite wider market conditions having deteriorated.

“Now we stand in the middle of a very deep crisis, but a lot of banks are still able to access the covered bond market,” said Claus Tofte Nielsen, senior portfolio manager at Norges Bank Investment Management and chairman of the Covered Bond Investor Council. “So something has certainly happened.”

Bernd Volk, head of covered bond strategy at Deutsche Bank, echoed this sentiment in a panel discussion on funding at the conference, which took place at the Sheraton in Brussels.

“In the midst of catastrophic pricing for Irish government bonds, Nordea was able to price a Eu2bn transaction at an extremely tight spread,” he said. “And even Spain, which is always in the headlines to some extent, issued around 20% of the market after the ECB stopped buying.

“So it really seems that the systemic risk is gone and the market is differentiating. And there is a good chance that even without market access for Portugal and Greece, the covered bond market will do quite well next year again.”

Issuance of benchmark covered bonds, including Eu500m (or jumbolino) deals, has reached around Eu180bn this year, according to research published by Volk last Friday. It is forecasted to hit a new record.

“When you look at the figures and you look at the different entities that have accessed the market since also the end of the programme,” said Antonio Torío, director, capital markets funding at Banco Santander, who chaired the panel, “we can see that indeed the covered bond market has kept pace, as opposed to the kind of stoppage that happened in the beginning of 2009.”

Andrew Porter, global head of covered bonds at HSBC, said that the almost uninterrupted issuance in the primary market since the CBPP ended had been aided by the growing acceptance of jumbolinos.

“The market has become more flexible in terms of what it is willing to engage with in terms of the definition of a benchmark size,” he said. “We have pretty much seen the major banks and most of the middle tier banks from European jurisdictions already come to the covered bond market, and what we are seeing now is, if you like, the filling out of that spectrum, with the additional issuance very much coming from the ranks of the smaller or regional banks.

“Italy’s a very good example,” he added. “Having seen the inaugural issues from Italy only two years ago, we are still now seeing the Italian sector fill out with a range of regional banks coming in, and given the market receptivity for benchmark sizes of Eu500m-Eu750m, there is really no impediment for these names to come.”

ECB impact gives way to US dollars

Looking back on the CBPP, Michel Stubbe, head of the market operations analysis division at the European Central Bank, declared it a success.

“If you remember the situation as it was in May 2009, the market was completely different at the end of the CBPP,” he said. “Spreads narrowed, business was distributed more generally throughout the euro area, and from the point of view of the ECB, as a non-standard measure this was indeed successful.”

Nielsen said that more important than the size of the programme was the message it sent out.

“It was more the recognition by the ECB and later by all kinds of regulators in Europe that actually the covered bond is an extremely important product for Europe,” he said. “A lot of investors who had never really looked at covered bonds suddenly saw a headline in the Financial Times that the ECB is buying covered bonds.”

Deutsche’s Volk agreed that the ECB’s message was more important than the level of buying under the CBPP, but he said that the Eu60bn nevertheless made a significant impact.

“I would fully agree that the Eu60bn as such is not a big volume for a non-standard measure of a central bank, and is also not bit compared with a total outstanding volume of covered bonds overall of Eu2,400bn,” he said. “But compared to the market segment the ECB bought in it was significant because it was equivalent to around 30% of issuance in the record year, 2006, so it simply allowed a third of a record year to be taken out in the next 12 months.”

HSBC’s Porter pointed out that benchmark covered bond issuance in dollars, most of it sold into the US, was having an impact of a comparable magnitude.

“To put it in context,” he said, “we talked about the ECB purchase plan absorbing Eu30bn of covered bonds in the first half of year – we will probably have seen about Eu30bn equivalent of US dollar issuance by the end of this year. So, again, it kind of puts it on a par with how important that has been for the covered bond market, the fact that that issuance is actually being absorbed away from the main traditional euro buyers of covered bonds.”

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