The proportion of investors who consider regulatory treatment to be the biggest concern facing covered bonds has risen since last year, with some expecting the EU bail-in framework to increase credit risks, according to a recent Fitch investor survey.

The share of investors identifying regulatory treatment as the biggest concern for covered bonds increased from 5% a year ago to 24% in Fitch’s year-end 2013 survey, according to the rating agency.

“Given the favourable capital charge applicable to covered bonds held by EU banks and the relatively low haircuts for central bank repo purposes, it may come as a surprise to hear that investors are concerned about the future regulatory treatment of covered bonds,” said Fitch.

The uncertain impact of regulatory treatment was highlighted by mixed views on whether the Bank Recovery and Resolution Directive (BRRD) would increase or decrease the credit risk of covered bonds, it noted.

Of 53 investors polled, 37% expect the BRRD, the European Union (EU) bail-in framework, to lead to increased credit risk for covered bonds, 36% expect a decrease in risk – anticipating an exemption for covered bonds from bail-in, while 27% believe there will be no change in the risk to their investments. A key investor concern linked to BRRD is that voluntary overcollaterisation could disappear during a bank resolution.

Although a larger share of the respondents cited regulatory treatment as the biggest concern facing covered bonds this year than last year, sovereign risk remained the main concern.

Source: Fitch

Investors from outside of Europe made up 19% of those surveyed in the 2013 year-end survey, compared with 5% last year. Respondents selected Australia (32%), Canada (38%) and the UK (36%) as the regions they are most likely to increase investments in over the next 12 months. Despite strong interest in the UK, the percentage of respondents expecting to invest therein dipped 8%. More than 20% of those polled expect to increase their holdings in the periphery of the euro-zone ­- Ireland, Italy, Portugal and Spain. The mature markets of Germany and Austria, France and Scandinavia are most likely to be the focus of decreased investments.

In addition, close to a third of respondents were happy to invest in covered bonds backed by small and medium size enterprise (SME) loans.

The importance of issuer ratings doubled from last year, with 21% of respondents believing it was more important than the rating of the covered bond itself, while 33% considered the issuer rating to be as important as the covered bond rating. However, the proportion of respondents who felt the issuer rating was unimportant increased six-fold from 2% to 12%, reflecting a stance in line with responses from 2009-2011.