A treasury official at prospective issuer ING Bank Australia described how covered bonds are likely to fit into the bank’s funding strategy at an Australian Securitisation Forum (ASF) seminar in London yesterday (Monday), where the market’s prospects were explored.

ING Direct, Sydney

Peter Casey, deputy treasurer, asset and liability management, at ING Bank Australia (ING), said that when the bank begins issuing covered bonds it will probably start with an Australian dollar issue, as did Suncorp in May when becoming the first Australian bank away from the big four to issue covered bonds.

Casey said that this was a “logical first step” given that ING already has an investor base for senior unsecured paper in Australia and that selling covered bonds locally would therefore not be such a big leap. Issuance in euros, sterling and US dollars would then be explored, depending on cost, he added.

Casey said that the bank sees covered bonds becoming part of ING’s general funding mix. He said that covered bond issuance will be complementary to senior unsecured issuance and RMBS, although is more likely to replace the former than the latter.

An attraction of covered bonds, said Casey, is the longer duration available through the instrument. He said that RMBS typically had an average life of around three years and senior unsecured issuance was usually in the two to four year bracket, while covered bonds would allow funding in five years and longer, with foreign currency issuance allowing for the longest maturities.

Commonwealth Bank of Australia has already issued covered bonds in six currencies – US dollars, euros, sterling, Swiss francs, Australian dollars and Norwegian kroner – and Liam Carden of CBA’s funding team said that covered bonds will be a core part of CBA’s funding going forward. He said that he expects covered bonds to make up around 30% of CBA’s funding mix in the long term.

ING’s Casey said that when it has a covered bond programme up and running some 5%-6% of the bank’s balance sheet could be funded through covered bonds given APRA’s 8% limit on covered bond issuance as a percentage of total Australian assets.

Irene Kleyman, an assistant vice president at Moody’s, gave an upbeat assessment of the credit quality of the four majors’ covered bonds, which are all rated Aaa. She noted that the big four are, at Aa2, “some of the highest rated financial institutions in the world”, and benefit from a sovereign that has “some of the lowest debt levels in the world”.

She said that a combination of the issuers’ Aa2 ratings and their programmes’ Timely Payment Indicators (TPIs) of “probable” (matching those of UK and French programmes, for example) means that the issuers can be downgraded as far as A3 before the programmes’ ratings will be cut. According to Kleyman, this compares favourably with the general European picture, with only around 10 other programmes backed mainly by residential mortgages enjoying such a four notch buffer.

Amber Rabinov, senior economist, global economics and strategy, at ANZ, said in a presentation that the Australian economy is doing well in absolute and relative terms, with property prices “pretty well based”. She said that while house prices had fallen in the capital cities of all Australian states, there is a “pretty solid floor in place”, with ANZ expecting a possible 5% fall over the next 12-18 months, “so neither here nor there”.

Ben McCarthy, head of APAC structured finance at Fitch Ratings, said that the rating agency is more negative on Australian property prices than ANZ’s analysis, while Phil Adams, a director in securitisation research at Royal Bank of Scotland, said that the impact of Chinese developments on the Australian economy would also be something to keep an eye on. However, all agreed that investors should take a close look behind headline economic figures and perform an in-depth analysis of individual transactions.