Investor concern about the handling of consent solicitation exercises whereby issuers have, for example, converted hard bullets to soft bullets has risen up the ECBC’s agenda, with the European Central Bank having told the industry body it is sceptical about prevailing practice.

In the past year several issuers have followed the example of Credit Suisse, which in November 2014 successfully sought bondholder approval to convert hard bullet covered bonds into soft bullets, with the latter having become the most common format for new issuance, being priced with a negligible pick-up to hard bullets, and being more efficient for issuers. Consent fees of 5 cents have typically been paid by issuers.

In the latest example of the trend, Barclays is in the process of seeking consent to convert four euro benchmarks totalling Eu5.8bn from hard to soft bullets, with meetings scheduled for Monday. Meanwhile, in June Banca Monte dei Paschi di Siena gained approval to convert its outstanding covered bonds to a conditional pass-through (CPT) structure, and in August Banco Popolare was able to ease the terms of its programme in a way that resulted in its covered bonds being junked in an exercise in which no fee was offered.

Some investors and other observers have complained that they are not being compensated enough for conversions and that consent solicitation processes are skewed against bondholders – arguments those active in the liability management exercises have disputed.

The European Central Bank (ECB) – whose involvement in the asset class includes repo collateral and some Eu160bn of covered bonds it owns under its three purchase programmes – has now added its voice to the debate, raising concerns about how consent solicitations are handled.

At a European Covered Bond Council (ECBC) technical issues working group meeting in Frankfurt yesterday (Thursday) attended by ECB representatives, two points were discussed, according to a memo:

The Eurosystem is sceptical about a compensation structure whereby the consent solicitation fee is only paid to bondholders voting in favour of the proposal. The ECB views this as inadequate and has the opinion that any fee should be paid to all bondholders when changes are approved in order to compensate all bondholders for the impact of those changes.

Furthermore, efforts to make the consent solicitation process more transparent (for example, more precise data on voter participation) should also be considered in light of the fact that they are becoming increasingly common and, as highlighted by a number of analysts, a binding decision could in principle be made by a small minority of bondholders.

The concerns chime with those of some investors.

However, practitioners point out that the mechanics of consent solicitation exercises are drawn from market practice across a range of asset classes – such as subordinated debt/capital instruments and securitisation – and often based on national legal practice.

And a market participant also suggested that the financial authorities should bear in mind the wider benefits of the trend.

“The soft bullet mitigates the liquidity risk of banks,” he said. “It is reducing overcollateralisation, it is reducing asset encumbrance.

“So there is a benefit generally in the system and hence is a positive development.”

The European Covered Bond Council is nevertheless now focusing on the issue and, according to Luca Bertalot, secretary general of the EMF-ECBC, will be addressing it in the technical issues working group and at the steering committee level.

“This is the first time this topic has been addressed around the table and such a dialogue already represents progress,” he said. “We are aware that in the end it remains a commercial decision of each individual institution embarking upon this exercise, and that there is a limited scope of action for a market initiative in this kind of space, but for sure the community is taking this issue seriously and is ready to tackle it.

“The ECBC wants to analyse the issue and investigate ways to contribute to enhancing transparency and market best practices, and to make sure, as always, that investors are comfortable with the product.”

Meanwhile, Morten Bækmand Nielsen, head of investor relations at Nykredit, has been nominated to replace, next July, Ralf Grossmann, head of covered bond origination at Société Générale, as chairman of the technical issues working group.