The ECB has not bought any Greek covered bonds under CBPP3 as it deems them to have not met its eligibility criteria, despite issuers’ efforts and in contrast to analysts’ assessments, with market participants unclear on the ECB’s reasoning and suggesting it is not forthcoming.

Under the ECB’s rules, Greek and Cypriot covered bonds that are rated below investment grade are eligible for the third covered bond purchase programme (CBPP3) provided they meet additional criteria, with an issue share limit of 30% per ISIN – compared with a 70% per ISIN limit applied to other bonds.

When National Bank of Greece (NBG), Eurobank and Alpha Bank revived the Greek market with landmark public trades, each said on a self-assessment basis that their covered bonds met the ECB’s requirements.

However, it was understood that the ECB did not participate in the deals at launch, and an ECB spokesperson confirmed to The CBR yesterday (Tuesday) that the ECB has still not bought Greek covered bonds under CBPP3 because they do not fulfil its eligibility criteria. He declined to elaborate on which criteria specifically the bonds did not meet.

Bankers at a Greek covered bond issuer told The CBR that they were already aware the ECB had not yet bought any Greek covered bonds, on the understanding that it considered the deals had not met some aspect of its eligibility criteria. They said the ECB has not yet explained which exact criteria had not been met and why the covered bonds of all Greek banks are deemed ineligible.

“A combination of structures, the names behind the structures, the quality of the pool and credit quality all matter in the shortlist they have,” they said. “Apparently something doesn’t fit in correctly, and we don’t really understand what it is.

“We feel that it is going to be still quite difficult to have an answer imminently. We are pushing a lot to understand why they are not pursuing that.”

National Bank of Greece reopened the Greek covered bond market on 10 October with a EUR750m three year conditional pass-through (CPT) issue, before Eurobank followed with a EUR500m three year CPT issue on 24 October. The issuers stated at the time that their programmes had been structured with the aim of meeting requirements to be eligible for CBPP3.

However, the ECB did not take a share of either deal and then announced in November that, as of 1 February, CPT programmes of issuers that do not have a first-best investment grade rating would be ineligible for its covered bond purchase programme – affecting NBG and Eurobank.

Alpha Bank in January announced plans to issue an inaugural benchmark covered bond. It, too, said its programme had been structured with the objective of meeting eligibility criteria for the ECB’s covered bond purchase programme. Among the preparations taken by Alpha was the conversion of its programme from a CPT structure to a soft bullet structure.

Prior to their issuances, each issuer said on a self-assessment basis that their programmes met both the ECB’s general eligibility criteria and the additional eligibility criteria for Greek and Cypriot issuers, but said the final eligibility was dependent on the ECB’s decision.

The Greek bankers said that besides the announcement regarding CPTs, there has been no public communication from the ECB that makes clear which features of Greek covered bonds are “more-ineligible” than others.

“The ECB seems not willing to look into this matter very seriously,” they said. “They seem to be avoiding coming to a final verdict.”

Analysts also told The CBR that in their view, each of the new issues had been eligible for the covered bond purchase programme at the time of issuance, and were unaware of a reason why Alpha’s soft bullet deal would be ineligible.

“Possibly they did not want to buy Greek covered bonds in the first place, and came out with the CPT announcement because they had to move the goal posts, and then Alpha came out with their programme,” said an analyst. “My assumption was always that all of the deals were eligible at the time of issuance and that Alpha’s deal should be technically eligible now.”

The analysts added, however, that the ECB has the final decision on what it chooses to buy.

CBPP3 rules state that “for covered bond programmes which currently do not achieve the CQS3 rating in Cyprus and Greece, a minimum asset rating at the level of the maximum achievable covered bond rating defined for the jurisdiction will be required for as long as the Eurosystem’s minimum credit quality threshold is not applied in the collateral eligibility requirements for marketable debt instruments issued or guaranteed by the Greek or Cypriot governments”.

Additional risk mitigants are also required: (i) monthly reporting of the pool and asset characteristics; (ii) minimum committed overcollateralisation of 25%; (iii) currency hedges with at least BBB- rated counterparties for non-euro-denominated claims included in the cover pool of the programme or, alternatively, that at least 95% of the assets are denominated in euro; and (iv) claims must be against debtors domiciled in the euro area.

Alpha’s covered bonds were rated B3/B by Moody’s and Fitch at launch, with each rating being the maximum achievable under the rating agencies’ country ceilings. In late February Fitch and then Moody’s each upgraded Alpha’s covered bonds, to Ba3/B+, although both are now one notch below the respective country ceilings. Moody’s at the same time upgraded the NBG and Eurobank CPT benchmarks to Ba2, in line with the country ceiling.

The Greek bankers expect that as Greece and the Greek banking sector make progress in their recovery the ECB “will have a better view of the country”, and feel that it could therefore begin buying Greek covered bonds in the future.

One of the Greek bankers said the lack of ECB buying had not hindered performance of Greek covered bonds on the secondary market, and suggested that if the ECB were to begin buying certain Greek covered bonds it could result in just a modest tightening of spreads – “by 10bp or 15bp, perhaps”. He said, however, the true benefit would be clear in the pricing of any new issue that did qualify for the purchase programme.

Fitch meanwhile upgraded the EUR650m CPT covered bonds of Bank of Cyprus from BBB- to BBB yesterday (Tuesday). The upgrade reflects the provision of new line-by-line borrower income information made available by the issuer, accounting for 87% of the cover pool, as opposed to 43.9% as of September 2017.

“This has allowed Fitch to refine the debt-to-income (DTI) ratio used in the cover pool analysis and resulted in a lower weighted average (WA) foreclosure frequency (FF),” said the rating agency. “However, missing income information still results in a DTI Class 5 assumption. We have revised the ‘B’ expected loss for the cover pool to 6.6% from 9.4%, leading to a decrease in breakeven overcollateralisation (OC) for the covered bonds rating.”