Investors’ preference for indexation to be used in ongoing LTV valuations appears to have prompted Australian issuers to promote the feature in their programmes, although a decision on how NAB might incorporate it is said to be pending.

Indexation is often incorporated into covered bond programmes as part of asset coverage tests and amortisation tests that calculate the value of loan balances qualifying as eligible for the cover pool, e.g. up to an 80% loan-to-value ratio, based on property values adjusted on an ongoing basis in accordance with a recognised index. House price declines are typically adjusted to their full extent, while increases are not credited to their full extent.

Jennifer Wu, vice president, senior credit officer at Moody’s analyst, told The Covered Bond Report that as of this (Wednesday) morning ANZ, CBA, and Westpac had opted for indexed valuation with respect to their covered bond programmes. When provisional ratings were first emerging last week, pre-sale reports based on information that Moody’s had been provided with beforehand suggested that out of ANZ, CBA and NAB, only CBA was including indexation.

With all four prospective Australian issuers carrying out investor work ahead of potential inaugural deals, a syndicate official involved in one of the issuer’s roadshows said that some investors had noticed that NAB had not opted for indexation, and that he wondered whether, depending on the significance attached to this, it could delay the bank’s plans to launch a deal.

NAB did not respond to questions from The Covered Bond Report by the time of going to press, but a syndicate banker familiar with the issuer’s covered bond plans said yesterday (Tuesday) afternoon that indexation of LTVs was under discussion, with no decision having been taken. NAB started a roadshow on 31 October, and has also met with investors this week, stopping in Switzerland on Monday and The Netherlands yesterday, with conference calls also planned for this week, according to the banker.

An NAB covered bond investor presentation accessed yesterday does not state whether the asset coverage test (ACT) and/or amortisation test in the programme will be performed on the basis of indexation, referring only to “latest valuation” and the fact that Australia’s covered bond legislation does not require security property indexation.

John Needham, head of structured funding, group treasury at ANZ told the Covered Bond Report that the issuer will be indexing its cover pool for movements in property prices, and that the indexation will form part of the asset coverage test.

“We made the determination that we would include indexation prior to the commencement of the roadshow,” said Needham. “We have included the requirement within the asset coverage test, which goes to the heart of the determination of collateralisation requirements.

“It has been a key structural enhancement that has been discussed with all investors we have seen on the roadshow, with a number of investors particularly focussed on that issue –indexation is applied across northern European covered bond jurisdictions and investors are consequently eager to see it applied in Australian programmes, too.”

ANZ is understood to have last week met with investors in the US, and is this week carrying out investor meetings in Europe.

Needham said that the issuer’s approach to indexation, in applying price declines in full and 85% of price rises, mimics the method used in UK covered bond programmes, and that provision for the application of indexation as part of the ACT would be made explicit in the relevant section of the issuer’s covered bond prospectus, which has not yet been released.

A syndicate official said that while assets can still be marked to market in the absence of an indexation provision, the latter is “a reliable way of being sure that marks will be marked down if there is a downturn” and that in the absence of it being spelled out as a rule an investor would have to rely on “the fine print”.

He said that there was a desire among the Australian issuers to differentiate themselves.

A Europe-based portfolio manager said that he does not think indexation is a “dramatic” issue, and that his main concern is whether Australian issuers will sufficiently regularly tap the euro market given that the dollar market is offering better conditions.

“It may well be that the Australians show themselves in euros,” he said, “but I think that conditions are such at the moment that they will certainly either issue in dollars and euros in parallel, or initially going forward focus on dollars.”

He said there was a “danger” that Australian issuers execute a one-off transaction in the euro market, and that although covered bond supply from the country would be a “nice to have” his house was not under pressure to diversify their exposure toward Australia given in part a plenitude of European issuers.