ING Bank has set up a Eu5bn soft bullet covered bond programme to take advantage of a lack of pricing discrimination compared with hard bullets and the efficiencies the maturity profile offers, an official at the bank told The CBR.

The programme was approved by the Dutch financial supervisory authority, AFM, yesterday (Tuesday), after work began on it some three months ago, according to Martin Nijboer, head of securitisations, global capital markets, at ING Bank.

ING Bank is sole structurer and arranger of the programme, and Clifford Chance was the legal adviser.

The programme will run alongside ING’s existing, Eu35bn, hard bullet covered bond programme, with separate cover pools maintained, according to Nijboer. The programme should be registered with the Dutch central bank in the coming months.

He said that the bank has no plans to issue benchmark covered bonds in the near future, but that the next such issue from ING would likely be launched off the soft bullet programme.

Soft bullet structures, which typically come with 12 month maturity extensions, can be more economical for issuers than comparable hard bullet programmes given lower overcollateralisation requirements, with Nijboer noting that the soft bullet structure also dispenses with the need for a burdensome pre-maturity test and that the market does not appear to be discriminating against soft bullet covered bonds versus hard bullet issuance.

“The market is in very good shape and the pricing difference between hard and soft bullets has gone, so we decided to set up a soft bullet programme next to the hard bullet programme,” he said. “In the end a soft bullet programme is just more efficient – you have lower overcollateralisation requirements from the rating agencies and your liquidity risk management is more efficient.

“Below certain ratings, under the pre-maturity test in hard bullet bonds you need to put aside cash to cover redemptions in the next upcoming six months, and our central bank sees this already as an outflow.”

This could have an impact for ING Bank in the coming years given that it has some Eu4bn-Eu5bn of covered bonds maturing, said Nijboer.

“That’s already quite a substantial number, so we asked ourselves how we could minimise that risk in the future,” he said.

ING has some Eu30bn equivalent of hard bullet covered bonds outstanding and does not intend to expand its issuance, according to Nijboer.

“It should be assumed that the total outstanding volume of covered bonds should stay roughly the same, between Eu30bn-Eu35bn,” he said. “So if we issue soft bullet bonds that means the hard bullet programme will be run down.

“We don’t have the intention to issue more covered bonds, just off a more efficient programme.”

The issuer considered incorporating a soft bullet structure in its existing programme, but decided against this to be more transparent and also to ensure it had a programme available that would allow it to access the market in all conditions, according to Nijboer.

“We didn’t want to throw that away,” he said.

The soft bullet programme provides for a one year maturity extension, and has been structured in accordance with Dutch covered bond legislation, including to meet forthcoming amendments to the framework.