Rabobank is establishing a covered bond programme and could issue a benchmark debut in 2017, it said today (Tuesday), and a spokesperson at the Dutch bank told The CBR the issuer wants to reach new investors amid regulatory changes under which covered bonds are becoming more attractive.

Rabobank this morning announced that it has started the process of registering a covered bond programme with the Dutch central bank (DNB) and intends to incorporate covered bonds into its future funding mix.

“An inaugural benchmark transaction could be contemplated in 2017 but timing will depend on market conditions and the overall funding needs of the bank,” the Dutch bank said.

It added that it requires DNB approval of the programme before it can decide to issue covered bonds.

“Adding covered bonds to the funding mix is a new source of diversification to Rabobank’s funding base and provides cheaper funding, especially for longer duration issues,” a Rabobank spokesperson told The CBR. “There are specific covered bond investor groups that Rabobank currently does not have access to.

“Its continuous ambition is to further diversify its investor base and it would be good to have access to this group of investors as well. This also fits well within our resolution planning, as this will give us access to an investor base that proved to be there in times of stress.”

The spokesperson said the addition of covered bonds to Rabobank’s funding mix is a long term strategy, and not just related to the ECB’s covered bond purchase programme.

“The regulatory developments resulting in the build-up of capital buffers – with a target of over 25% Total Capitalisation – have decreased the probability of default significantly,” he added. “Also, with bail-in regulation coming into practice, Rabobank is of the view that asset encumbrance is losing some of its relevance to senior unsecured investors.

“Therefore, Rabobank is of the view that a measured increase in asset encumbrance can be accommodated.”

Rabobank will be the last of the big four Dutch banks to issue covered bonds. ING Bank, ABN Amro, and SNS Bank, which like Rabobank are designated D-SIBs in the Netherlands, and the smaller NIBC Bank have been active in the market for some years, and were joined in 2015 by F van Lanschot Bankiers and Aegon Bank.

Analysts noted that Rabobank has focussed on senior unsecured and RMBS issuance, rather than covered bonds, despite having the biggest residential mortgage book of any Dutch bank (although it is currently reducing its mortgage exposure, with more burdensome capital requirements a factor in this).

“One of the reasons was probably that it was always able to fund itself relatively cheaply with unsecured funding and RMBS notes, benefitting from its strong credit rating,” said Joost Beaumont, senior fixed income strategist at ABN Amro. “However, in recent years, the senior spread advantage over its peers has diminished, making the use of covered bonds as an additional funding tool increasingly attractive.”

Rabobank is rated Aa2/A+/AA- at Moody’s, S&P and Fitch, respectively, and is the highest rated Dutch bank.

The Rabobank spokesperson said pricing considerations are a “continuous focus” within Rabobank, and said its participation in the ECB’s TLTROs can be seen in a similar light.

“The important distinction is that we view the TLTROs as a temporary source of funding, while covered bonds will be a sustainable source of funding,” he added. “Covered bonds do provide a cheaper source of funding than senior unsecured. This gap has been growing in the last few years, which has made it more economically advantageous and thereby will support future profitability of the bank.

“This will support organic capital generation over time, to the benefit of the key stakeholders of the bank, and is in line with the strategic plan of the bank.”

The spokesperson added that this does not reflect a material shift in Rabobank’s approach to senior unsecured investors, who will remain “the key part” of the bank’s funding strategy going forward. He said it is also not currently envisaged that Rabobank’s covered bond issuance will come at the expense of RMBS issuance, adding that the two products have different investor bases.

Rabobank’s budget for senior funding in 2017 will be Eu15bn.

“Covered bonds will be part of that,” said the spokesperson, “but senior unsecured will remain a key part of Rabobank’s funding strategy going forward, and Rabobank will remain committed to its main benchmark markets.”

He said Rabobank supports the French model for senior non-preferred issuance – which the European Commission has proposed be adopted throughout the EU and is being debuted by Crédit Agricole today – and said Rabobank could decide to issue non-preferred senior debt to meet MREL requirements should such a proposal be implemented in the Netherlands.

The Dutch market was the first to embrace issuance of legislative benchmark covered bonds with conditional pass-through (CPT) structures, with NIBC selling the first such deal in 2013 and Van Lanschot and Aegon adopting the structure when making their debuts last year.

The spokesperson declined to comment on the maturity structure Rabobank will use. He said the exact size of the programme is still to be decided, but that in absolute terms it is envisaged that it will be in line with those of its peers.

Updated to change attribution