Markit will provisionally assign SME structured covered bonds to its “Other Collateralised” iBoxx EUR sub-index, it said yesterday (Tuesday), meaning that the index provider has not classified a recent Commerzbank Eu500m SME loan-backed deal as a covered bond.

Commerzbank last Thursday became the first major European bank to launch what has been marketed as an SME loan-backed covered bond, doing so outside the Pfandbrief Act. The nomenclature has, however, been contested, as demonstrated for example by Markit’s decision on the Commerzbank issuance’s index membership.

The index provider said that it will enter the bonds into its iBoxx EUR Benchmark index once a rating agency has provided a confirmed rating, which will have to be publicly available three business days before the index provider’s month-end rebalancing date.

Barclays, in contrast, is understood to have decided on including the Commerzbank deal in its covered bond index, under “other covered” and “non-Pfandbriefe”.

A portfolio manager said that Markit’s decision, in addition to the widely reported statements that Commerzbank’s deal should not be considered a covered bond, shows that most market participants have not bought into the issuer’s marketing of the bond as a covered bond.

Florian Eichert, senior covered bond analyst at Crédit Agricole, said that together the index providers’ moves mean that Commerzbank has scored a partial victory.

“They made it in one covered bond index, namely the Barclays Covered, while missing the iBoxx EUR Covered,” he said.

However, he noted that the bonds are ultimately part of the wider iBoxx collateralised index, of which the main iBoxx covered bond index is a part and which is still used for some covered bond mandates, older ones in particular.

“As such while asset managers were fairly hesitant in the primary issue at least some will now have reasons to look at the bonds,” he said, with the caveat that because the Commerzbank bonds only account for Eu500m of an index exceeding Eu900bn “not focussing on this deal for a while or waiting to see how this market evolves is certainly not going to lead to a massive tracking error versus the index for the near future”.