Maturity concentration in the nascent Australian covered bond market, although manageable, is an area of concern, Fitch said yesterday (Monday) in a report that also addressed refinancing risk in Canada, France and Germany.

The comments were made in a report on refinancing risk in structured finance and covered bonds, with the rating agency in the appendix focussing on covered bond maturity profiles in the Australian, French, and German markets.

Fitch noted how Australia’s four major banks issued covered bonds in close succession with very similar terms after legislation was passed at the end of 2011 allowing use of the funding instrument – up to a “tight” limit of up to 8% of total Australian assets.

“The result is a large concentration of maturities, whereby more than half of all outstanding bonds mature in Q1 2017,” it said. “While overall covered bond volumes remain limited and should be manageable within the overall funding profile of the banks, the creation of concentrated funding pressure across the market is an area of concern.”

Australia’s majors have issued around Eu10bn equivalent of euro and dollar benchmark covered bonds since November, and have also been active in other currency markets, with Commonwealth Bank of Australia, for example, having set a domestic record for the largest bank bond sold in Australia.

Claire Heaton, director, covered bonds, Fitch, said that the rating agency is looking at maturity concentrations in Australian covered bonds more closely given that the market is fairly new but has generated large issuance volumes.

“The banks were very keen to support the covered bond market and issue when they could, with the choice of maturities very much driven by investor appetite,” she said. “This is understandable, but we make an assessment of market liquidity for the refinancing of covered bonds, and the amounts in the Australian market are potentially beginning to exceed what we would consider to be a reasonable level for a stressed market scenario.

“It’s something that we are keeping an eye on.”

Newer markets such as Canada and Australia, said Fitch, could potentially face more difficulty in a liquidity crisis given a lack of depth to the sector compared with a more established market such as the German Pfandbrief.

“However, while the sector remains small in these newer markets, covered bond maturities could be met from more established forms of funding.”

In addition to the Australian market the rating agency’s report highlighted the redemption profiles of German Pfandbriefe and French covered bonds. With respect to the former, it said that redemptions of public sector covered bonds are skewed toward shorter dated maturities, between 2012 and 2014, as issuance has declined due to shrinking bank balance sheets and the expiry of bank state guarantees in 2015.

“Mortgage Pfandbriefe, in contrast, have a well diversified profile with an average maturity around the European average,” it added.

France stands out for being overweight on longer term maturities, according to Fitch.

“After experiencing significant funding pressure in 2011, banks turned successfully towards longer term secured issuance,” it said. “The average maturity is therefore relatively long at about 5.5 years.”

Covered bonds maturity profile (as of 3 February 2012)

Source: Fitch, Dealogic