‘Sellers’ market’ lifts credit positive long dated covered, says Moody’s
Strong demand supported by CBPP3 helped lift the share of euro benchmark covered bonds in the seven to 10 year maturity bracket to 40% in the first quarter, with the increases in long dated issuance a credit positive, according to Moody’s.
The rating agency today (Monday) highlighted the proportion of long dated issuance, noting that it is much higher than in any of the last four years, when its share fell to as low as 7%.
Issuance of 12 years and longer reached a record share of 12% of issuance in the first quarter, it added, compared with 4% on average over the past four years, while the share of three to five year issuance fell to a four year low of 4%, versus 26% in 2011.
“The issuance of more long term paper reflects the current ‘sellers’ market’: high demand, in particular supported by the ECB’s quantitative easing efforts in the form of the third purchasing programme for covered bonds (CBPP3), has allowed issuers to dictate bond terms,” it said. “A number of issuers took advantage of this favourable environment by lengthening their liability profile.
“This is credit positive for European covered bonds,” Moody’s said of the trend, “because the lengthening of bond maturities strengthens the asset-liability match of the covered bond programme and reduces the likelihood of a fire-sale risk of assets, by reducing the likelihood of a large bond maturity occurring shortly following an issuer default.”
It noted that new mortgage loans often have a weighted average life (WAL) of 20-30 years.
“We estimate that the WAL of Q1 2015 bond issuances is about a year longer than the WAL of issuances in 2014,” Moody’s added.
The rating agency nevertheless said that the trend has been uneven. UK and Austrian issuers only tapped the euro benchmark market with maturities of 10 years or longer, it noted, and Spaniards issued only in seven years or longer.
However, Moody’s said that in Germany, for example, where issuance has been across a wider range of maturities, the asset-liability profiles of German issuers are already strong.
