An auto covered bond programme successfully inaugurated with a CHF260m deal earlier this month delivered AMAG Leasing the “big benefits” it was targeting, according to head of treasury Norman Meileck, who said the project was accelerated after the pandemic hit the Swiss ABS market.

AMAG Leasing AG (ALAG) is the financing arm of Switzerland’s AMAG Group, which is the sole Swiss importer of VW group vehicles and has a leasing portfolio of around CHF4.2bn (€4bn). The company has been active in the ABS market since 2015, with seven deals totalling CHF1.8bn, and has around CHF700m outstanding alongside CHF1.3bn of senior bonds and CHF950m of syndicated loans.

Meileck told The CBR that the company had explored alternative secured funding options ahead of Covid-19, but that the onset of the pandemic and its impact on the ABS market prompted the issuer to prioritise the project.

“The biggest trigger was the lockdown,” he said, “when we saw a really inefficient ABS market in Switzerland. “In the beginning of 2020 it was quite difficult to issue an ABS and again in 2021 – it was hard work to reach the minimum size we had set as a target.

“So we pushed our core banks to think about if there’s any chance to issue a covered bond in Switzerland, with a little more simplified structure than an ABS. Fortunately, ZKB did a deep dive and came back with the suggestion that this would be possible and then we started on the project around eight months ago.”

Matthias Ogg, head of special products at Zürcher Kantonalbank (ZKB), said the establishment of contractual mortgage covered bonds in Switzerland – by Valiant, followed by Credit Suisse and then Crédit Agricole next bank – offered a template for the structure, which in combination with ALAG’s track record in auto ABS made for a smooth process.

“ALAG is a very frequent and very well known issuer in the Swiss capital markets,” he said. “The covered bond structure is well known from the three mortgage programmes, and although the assets are different from those covered bonds, they have been used for ABS transactions.

“So we put all the elements together in a different way, but it was helpful that we were building on things that already exist in the Swiss market and could really base our discussions with investors around this.”

When the debut transaction was launched on 10 November, the 3.25 year conditional pass-through (CPT) transaction, rated AAA by Fitch, was around twice subscribed, allowing the issuer to achieve its maximum CHF260m size at a yield of minus 0.02%, equivalent to 41.25bp over SARON. Thirty-one accounts participated.

“With ABS, the number of investors in the Swiss market is limited, and we had 10 to maybe a maximum of 15 accounts,” said Meileck (pictured). “With this new structure – a senior bond with a cover pool – reaching a much wider investor base than we had seen before was one of the main targets, and we absolutely achieved this.”

The pricing was around 38bp inside senior unsecured debt and some 80bp inside ABS, while offering ALAG further benefits.

“The pricing is the best result we have seen since our first issuance in 2015,” said Meileck. “And we could improve our internal process. For an ABS, we have a project time of two to three months and it’s quite expensive. For the auto covered bond, we have a time to market of two to three weeks, so although we naturally had to pay to set up this programme, it makes auto covered bonds much more attractive than ABS over the coming years.

“We are also quite fast on the senior unsecured side,” he added, “but the auto covered bond programme looks like one of the best programmes we have set up.”

ZKB’s Ogg also noted that the overcollateralisation (OC) requirements for the covered bond are not more onerous than for an ABS, with the new structure also offering greater flexibility.

“If you look at the minimum required OC for the triple-A rating, it is the almost the same as for an ABS,” he said. “The issuer set the asset percentage lower, but that was a voluntary decision – it can be changed subject to the rating agency condition.

“Something else to consider is that although we have eligibility criteria for the auto covered bond, we don’t have any replenishment criteria, whereas in the ABS a minimum yield of 2.5% is required for the assets and there is a maximum RV of the total portfolio of 50%.”

After the successful proof of concept, auto covered bonds could now become the norm for ALAG, according to Meileck.

“It depends on the development of our portfolio, and we have to keep in mind the secured financing ratio limited to 30% of the total portfolio, but we definitely foresee some issuance next year,” he said. “We still have two ABS running, so we first of all need to focus on whether we will continue with ABS, and if not, there’ll be much more scope to issue more and more auto covered bonds.”

AMAG Leasing issued a CHF175m debut green bond in September linked to electric vehicles and the company could also issue green auto covered bonds in future.

Although some covered bond-style instruments linked to auto loans have been issued in India, ALAG’s deal is the first in Europe to have auto receivables as collateral. Ogg said such structures could prove attractive to other issuers.

“It’s a very attractive structure for all the reasons we’ve highlighted for ALAG,” he added, “so it certainly has a lot of merit for other issuers in Switzerland and elsewhere in Europe.”

The status of ALAG’s deal as a covered bond has nevertheless been called into question by some participants in more traditional parts of the market. DZ analysts, for example, said they find it difficult to regarding ALAG’s issuance as covered bonds “in the strict sense of the word”.

Ogg noted that unlike EU and some other countries, the only legislative covered bond-type product in Switzerland is the Pfandbrief issued by its two centralised institutions (Pfandbriefzentrale der schweizerischen Kantonalbanken and Pfandbriefbank schweizerischer Hypothekarinstitute), whereas the contractual product is known as covered bonds in the country.

“We haven’t received any direct pushback and feel comfortable calling it a covered bond,” he said. “In my view, it’s a covered bond, but not a labelled covered bond.

“We also call it an auto covered bond to distinguish it from mortgage covered bonds. Investors were very clear on the differences between the products and found the name helpful.”