Disagreements over just what constitutes a covered bond were brought into focus by the first Turkish issue this week, from Sekerbank, as analysts offered arguments for and against it belonging to the asset class. However, even those that highlighted scepticism about its claims were encouraged by the development.

Analysts questioned the validity of the covered bond tag on the grounds that the cover pool for the TL800m ($473m/Eu327m) covered bond programme comprises loans to small and medium sized enterprises.

“Any small and medium sized enterprise loan backed covered bond is not a traditional covered bond,” said an analyst. “Traditional assets are mortgages, public sector loans, maybe shipping, but not small and medium sized loans.

“I’m not sure that’s a covered bond.”

Leef Dierks, head of covered bond strategy at Morgan Stanley, also said that there were doubts that the transaction should be categorised as a covered bond.

“The market purists would definitely say it is not a covered bond,” he said. “The collateral pool is not what the typical covered bond investor sees as attractive.”

However, José de León, senior vice president at the rating agency, said that Sekerbank’s issue was easily identifiable as a covered bond. Moody’s on Tuesday assigned a provisional A3 rating to the deal.

“It was very easy to define,” he said. “The notes issued by the bank are on balance sheet, they have full recourse to the issuer, and they are secured by a pool of SME loans.

“I don’t really understand why this has been questioned to be a covered bond when you have full recourse to the issuer and the deal is governed by the Turkish covered bond law,” he added.

Turkish covered bond law permits two kinds of covered bonds, one being mortgage backed and the second asset backed.

“Sekerbank decided, because they wanted to refinance their SME loan portfolio, to use the law that is in place for asset covered loans,” said De León. “In most jurisdictions you have only two possibilities – either mortgage loans or public sector loans – backing your covered bonds, so it’s good for Sekerbank that it has another opportunity to refinance its portfolio.”

And even those that noted the questions over the deal’s status were positive about the Turkish development.

“From what I can tell, this is a very encouraging sign,” said Dierks. “What I like is that we see an ongoing shift toward newer legislation in places like Canada, New Zealand, and Turkey.

“It’s clear the Turkish covered bonds do not compete with the Pfandbrief, but you still get a sense that covered bonds are gaining ground around the world.”