Conditional pass-through covered bonds of sub-investment grade issuers will from February no longer be CBPP3-eligible, the ECB has announced, citing “potentially higher risks”. Four active programmes are thought to be affected, but upcoming decisions are deemed more important.

In a decision dated Monday of last week, the European Central Bank said covered bonds that both have a conditional pass-through structure and are issued by an entity with a first-best issuer rating below CQS3 will not be eligible for purchase under its third covered bond purchase programme (CBPP3), as of 1 February.

The ECB governing council, it said, decided on 4 October to further refine the rules on CPT covered bonds’ eligibility for CBPP3 “in view of the potentially higher risks to which they expose the Eurosystem”.

According to analysts, four covered bond programmes that have been used for benchmark issuance will be affected by the amendment, those of Italy’s Monte dei Paschi di Siena, Portugal’s Caixa Económica Montepio Geral, and Greece’s National Bank of Greece and Eurobank Ergasias.

“No other CPT covered bond appears affected as they all have higher issuer ratings,” said Cristina Costa, senior covered bond analyst at SG.

NBG and Eurobank both used conditional pass-through programmes for recent euro benchmark transactions, the former issuing a Eu750m three year on 10 October and the latter a 24 October Eu500m three year on 24 October.

The Greek covered bond programmes are currently CBPP3-eligible only under a waiver, as the covered bonds themselves are rated sub-investment grade. Under the waiver, the Eurosystem is able to purchase Greek and Cypriot issues that meet additional criteria – such as a minimum 25% OC requirement – up to a limit of 30% per ISIN. NBG and Eurobank took steps to ensure their programmes could be CBPP3-eligible. However, it is understood the Eurosystem has not bought either deal.

Montepio converted a soft bullet covered bond programme to a CPT structure in 2016, before issuing a Eu750m five year issue on 9 October this year – the first CPT benchmark covered bond from Portugal. Banca MPS converted its programme to CPT format in 2015, and subsequently sold two benchmarks at the end of that year.

A banker who works in covered bond origination said, however, that the announcement is unlikely to dissuade issuers from setting up CPT programmes.

“It’s obviously not a good signal of the ECB’s view of maturity extension, but these bonds are still ECB-eligible, they’re still eligible as collateral for TLTROs, and we haven’t yet heard about haircuts for retained extendible maturity covered bonds, so it could have been much worse,” he said.

“This one ruling isn’t necessarily reason to opt for a different kind of programme,” added the banker. “There are products that have done fine without participation from the purchase programme, and this is a change to a programme that is effectively ending anyway.”

The ECB is due by year-end to adjust the haircuts it applies to retained soft bullet and CPT covered bonds to reflect “additional risks”, following an announcement of its plans to do so in November 2016.

Meanwhile, upcoming European Commission proposals on covered bond harmonisation, including an anticipated Directive, will have much greater long term importance for CPT covered bonds, said the banker, with the Commission expected to set out what is required of programmes with extendible maturities.

“I think CPT programmes still have the same future that they always have had,” he added.

Picture: National Bank of Greece