The time has come for CEE covered bonds, according to Jacek Kubas of the EBRD, with projects across the region nearing fruition. Underdeveloped markets in Romania, the Czech Republic and Slovakia – whence VÚB printed Eu250m last week – could show progress next year, while work towards a pan-Baltic framework is underway.

Speaking at a European Covered Bond Council (ECBC) plenary in Barcelona on 13 September, Jacek Kubas, principal, local currency and capital markets department at the European Bank for Reconstruction & Development (EBRD), said this is time for the CEE region to truly emerge on the covered bond map.

“Not only in conferences and in panels, but in reality,” he said. “I think next year, looking at Romania, Slovakia, the Czech Republic and of course Poland will show us how reforms have progressed and are helping to create safe and efficient markets for covered bonds.”

The EBRD has worked with governments across the CEE region to assist in the establishment or redevelopment of covered bond laws that can facilitate functioning markets and has further supported issuers as an active investor.

Covered bonds can be valuable for banks in these countries and across the CEE region, Kubas said, because they provide longer term funding and a diversification of funding sources. He noted that the European Bank Coordination Vienna Initiative 2 is encouraging banks in the region to seek such new sources of funding.

Kubas discussed progress made in “the new seven” – seven EU member states where covered bond markets are at various stages of development and the EBRD is active.

He first cited the successful example of Poland, whence three euro benchmark covered bonds have been launched by PKO Bank Hipoteczny following an update to the country’s covered bond law – the most recent a Eu500m short seven year issue on Wednesday.

“The Polish example is a really good example of how the EBRD not only develops the legislation, but further on make it usable for the market,” he said.

In Romania, a revised covered bond law was approved in November 2015. However, issuance has not yet been brought forward, in part because of a law passed in April 2016 allowing most Romanian borrowers to opt for a strategic default on their mortgages.

Kubas said the foreclosure law “slightly changed the direction of what we were doing”.

Nevertheless, he said Romanian banks will hopefully enter the covered bond market next year.

In Slovakia, Croatia and Lithuania, draft covered bond frameworks are being discussed by the relevant authorities, and Kubas added that further progress will hopefully be made in each jurisdiction next year.

The Slovak project is the most advanced of the three. The draft law was recently published for public consultation and has now been passed on to the parliament for discussion.

“Hopefully, next year we will see the legislation entering into force and the issuance of covered bonds in Slovakia,” said Kubas.

Slovakia already has a covered bond law in place, but it stems from 1990 and has many idiosyncrasies, and as a result Slovakia’s covered bond market has remained relatively small.

On Tuesday, Všeobecná úverová banka (VÚB) issued a Eu250m covered bond, sold via an American auction without syndicated lead managers. The weighted average of accepted bids was around 31bp-32bp over mid-swaps, in line with the price indicated by the issuer before the auction. Some 59% of the deal was allocated to foreign investors.

VÚB issued Slovakia’s first Eu250m-sized covered bond in January, of which the EBRD bought Eu49m, kicking off an investment programme in Slovak covered bonds. However, the EBRD did not invest in the latest issue, as it is now waiting for the implementation of the new law.

The Czech Republic is at a similar stage in updating its covered bond law, noted Kubas, although the EBRD does not invest or operate in the country.

Kubas said the EBRD has meanwhile agreed with the European Commission to work on a number of technical assistance projects with certain EU member states to further support the deepening of financial markets.

“We are privileged to work with them and obtain funding from them to further progress the CMU,” he said.

Under one such project, the EBRD will work with the finance ministries of Estonia, Lithuania and Latvia to explore the possibility of a pan-Baltic covered bond framework that would facilitate the cross-border pooling of assets from the three countries for covered bond issuance.

Kubas said this would allow issuers to access the covered bond market in spite of the relatively small size of the countries’ individual mortgage markets, noting that the banks that operate in the Baltic region are members of the same banking groups.

“Also, the landscape is changing,” he said. “We recently saw in that region the merger of DNB and Nordea and a new entity being established in Estonia.”

This joint venture between the two Nordic banks, Luminor, will start operations on 1 October. The bank will operate across the Baltic region.

Since the EBRD started its work on covered bonds in Poland, it has invested around Eu400m in covered bonds from its countries of operation – comprising issuance from Poland, Slovakia, Hungary and Turkey.

“Looking forward, we have a healthy pipeline of investments to come this and next year,” said Kubas.

He concluded with an appeal to delegates to support the reformation of the market.

“You are the covered bond community,” he said. “We need your support, we need you to really look at this region.

“We at the EBRD are really trying to transform the CEE covered bond market, and we cannot to do it without your support, your investment and your knowledge.”

Photo: Jacek Kubas (left) and EBRD colleagues in Barcelona