The article discusses potential changes to covered bond issuance in Canada as the country develops its first covered bond legislation. Specifically, it focuses on how ending the use of mortgages insured by the Canada Mortgage and Housing Corporation (CMHC) as collateral could impact future issuance. Key points: - Six of the seven major Canadian bank issuers currently rely entirely on CMHC-insured mortgages for collateral. CMHC is nearing its C$600 billion cap on mortgage insurance. - Without CMHC insurance, issuers may have to use uninsured mortgages, which would require higher overcollateralization due to greater credit risk. This raises questions if a proposed 10% cap would be sufficient.

1. The Covered
Bond Report
www.coveredbondreport.com Jan-Feb 2012
Mario
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Covered bonds caught up
in ECB LTRO rally
Markets return Asset encumbrance The Pfandbrief
Aussies, Spain, sterling Second thoughts Roundtable 2012

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3. The Covered
Bond Report CONTENTS
4
FROM THE EDITOR
3 It’s time to let go
Monitor
LEGISLATION & REGULATION
4 End to CMHC pools could hit plans
15
RATINGS
10 Sovereign risk dominates,
demand rises
MARKET
15 CBPP2 path reflects primary focus
LEAGUE TABLE
21 Euro benchmarks
51 FULL DISCLOSURE
51 From Brussels to Mainz via Las Vegas
Jan/Feb 2012 The Covered Bond Report 1

4. The Covered
CONTENTS Bond Report
26
Cover Story
26 Mario gets the joke
Neil Day
FOCUS
22 CBA delivers on Aussie promise
30
SPONSORED FEATURE
30 The Pfandbrief Roundtable 2012
ASSET ENCUMBRANCE
38 Freeing Thinking
Susanna Rust
ANALYSE THIS
44 Behind Australia’s new bonds
44
2 The Covered Bond Report Jan/Feb 2012

5. FROM THE EDITOR
It’s time to let go
C
anadian covered bonds have come a long
way since October 2007 when the first
issue from the country hit the market.
Today, Canadian banks are among the
most active covered bond issuers, thanks
largely to their success in cracking the US
dollar market since the beginning of 2010.
Indeed, their success at raising this funding in the
wholesale markets from investors south of the border
has been widely cited by US proponents of covered
bonds keen to see their country’s mortgage lenders ben-
efit likewise.
Although covered bonds in general have been increas-
ingly embraced by US accounts, DCM and syndicate of-
The Covered ficials in New York attribute much of the Canadians’ suc-
cess to the collateral backing most of their issuance being
Bond Report insured by Canada Mortgage & Housing Corporation,
which is in turn backed by the Canadian government.
www.coveredbondreport.com But with Canada’s Department of Finance finalising
Editorial the country’s first legislative covered bond framework
Managing Editor Neil Day
and questions being raised about CMHC’s role, in light
+44 20 7415 7185
nday@coveredbondreport.com of mortgage market developments and a rapid growth
Deputy Editor Susanna Rust in bulk insurance, the future of insured cover pools is in
srust@coveredbondreport.com
doubt (see page 4).
Reporter Maiya Keidan
mkeidan@coveredbondreport.com Need this be a problem?
Far from it. Canada has had a good crisis. It has not
Design & Production
Creative Director: Garrett Fallon been immune (remember the Canadian ABCP Crisis of
Designer: Kerry Eggleton 2007, anyone?), but the country can claim to have been a
safe haven amid the global financial storms — and this ap-
Printing
Bishops plies not just to the sovereign, but to its banking industry.
This is thanks mainly to behaviour not during the cri-
Advertising Sales sis, but beforehand. That its mortgage market did not suc-
ads@coveredbondreport.com
cumb to the subprime and securitisation temptations and
Subscriber Services machinations that afflicted its US neighbour is especially
subs@coveredbondreport.com
impressive.
Editorial While euro investors might have been slow to under-
editorial@coveredbondreport.com stand this and undervalued Canadian covered bonds
The Covered Bond Report is a
when Royal Bank of Canada pioneered the market, Ca-
Newtype Media publication nadian issuers could surely today command prices com-
mensurate with their quality and collateral without the
25, Finsbury Business Centre
40 Bowling Green Lane need for CMHC insurance. If not, US investors appear
London EC1R 0NE ready to oblige.
+44 20 7415 7185
Neil Day, Managing Editor
Jan/Feb 2012 The Covered Bond Report 3

6. MONITOR: LEGISLATION & REGULATION
Legislation & Regulation
CANADA
End to CMHC pools could hit covered plans
The future of Canadian issuance backed by According to Fitch, Canadian banks Six of the seven Canadian banks issuing
mortgages insured by Canada Mortgage & have since 2008 issued roughly C$40bn covered bonds have cover pools that consist
Housing Corporation is being questioned (Eu30.3bn) of covered bonds backed by entirely of CMHC insured mortgages. The
ahead of the introduction of covered bond CMHC insured assets, the majority of these Covered Bond Report understands that were
legislation, with CMHC nearing a C$600bn covered by discretionary lender-paid bulk new legislation to prohibit the use of such
cap on bulk mortgage insurance. policies. The rating agency said that issuers mortgages, there would be grandfathering for
A consultation paper released in May are likely to have sufficient insured assets outstanding bonds featuring CMHC insured
2011 outlining legislative proposals asked if to cover existing covered bond obligations, collateral.
the use of uninsured collateral should be en- but was less confident about the future. Royal Bank of Canada is the only
couraged, and how this might be achieved, “Reduced access to bulk insurance Canadian bank that has not relied upon
noting that such a move could, in the longer could potentially affect future covered CMHC collateral. According to a syndi-
term, reduce reliance on government- bond issuance as allocations of more cost- cate official, its covered bonds in US dol-
backed mortgage insurance and also im- effective NHA-MBS (National Housing lars tend to trade around 5bp wider than
prove the liquidity of uninsured mortgages. Act mortgage-backed securities) become other Canadian issuers with CMHC col-
Market participants said that they un- sufficient to meet banks’ funding needs lateral. However, being regarded as the
derstand Canada’s department of finance for diminishing amounts of insured mort- strongest Canadian bank, RBC typically
to be considering preventing the use of gages,” said Fitch. “Covered bond issuance trades tighter than its peers on a senior
CMHC insured mortgages as collateral has generally been pursued to finance unsecured basis, so the difference in val-
for covered bonds. One said that the insured loans after issuers have reached ue between the two types of collateral is
Canadian government is also reflecting their limit of NHA-MBS.” likely to be higher.
more generally on the role of CMHC, not The rating agency said that this could Responding to an enquiry on the po-
just in relation to covered bonds. force banks to use uninsured mortgages as tential move from The Covered Bond Re-
covered bond collateral, but that potential port, a department of finance official was
“Reduced access resistance from trustees to amending ex- non-committal.
to bulk insurance isting programmes could mean that new
programmes have to be set up. The higher
“Canada released a consultation paper
in May 2011 which laid out a number of
could affect future credit and market value risks that unin- proposals and questions for discussion, in-
issuance” sured assets would be subject to would lead
to “considerably higher” levels of overcol-
cluding asking if the legislative framework
should encourage the use of uninsured col-
This question has come to the fore as lateralisation (OC) being necessary, said lateral,” he said. “After receiving feedback
CMHC nears a C$600bn cap on mort- Fitch — which raises questions over a 10% on the consultation paper, the government
gage insurance. OC limit floated in the Department of Fi- will be coming forward with legislation on
The Canadian crown corporation nance covered bond consultation. covered bonds in the near future.”
was C$59bn short of this limit as of the
end of September 2011, having reached
C$541bn, and although the Canadian
parliament has steadily raised CMHC’s
capacity from C$200bn prior to 2006.
However, Fitch warned in a report in
early February that further increases are
not guaranteed.
“While CMHC can petition the gov-
ernment for another increase, an expan-
sion of the insurer’s balance sheet is un-
likely as it would contradict recent steps
— i.e. tightening lending standards —
CMHC, Ottawa: Fitch said “an expansion of the
taken by the Minister of Finance to curb
insurer’s balance sheet is unlikely”
mortgage lending,” said the rating agency.
4 The Covered Bond Report Jan/Feb 2012

7. The Covered
Bond Report
The ICMA Covered Bond Investor Council & The Covered Bond Report present:
The Covered Bond Investor Conference
Date: Thursday,10 May 2012 Venue: InterContinental Hotel, Frankfurt
On the agenda:
The ICMA CBIC transparency
standards initiative
Regulatory changes including CRD IV
and Solvency II
Secondary market liquidity and
price transparency
Evolving covered bond structures
and legislations
Primary market practices and new
issue developments
“In a context of record issuance, investors are invited to many events on covered
bonds but usually agendas are driven by issuers’ concerns. The ICMA
CBIC/Covered Bond Report event will be reviewing investors’ concerns and
provide them with a forum to express their views and priorities.”
Claus Tofte Nielsen, Chairman of the ICMA Covered Bond Investor Council
Register via: www.icmagroup.org/events
E-mail: Suzanne.Atkins@icmagroup.org
Call: +44 20 7213 0328
The conference is free to eligible investors and ICMA members
Supported by:

8. MONITOR: LEGISLATION & REGULATION
NEW ZEALAND
RBNZ plans ‘simple, low cost’ framework
The Reserve Bank of New Zealand pub- Bank in the new consultation. participants appear to be uncertain as to
lished proposals for covered bond legisla- “The regime proposed in this document the potential application of the statutory
tion in December, saying that existing is- provides a simple and low cost approach to management regime to cover pool assets.
suance should be able to be brought under regulating covered bonds,” it added. “The Reserve Bank considers that a
the framework easily and that the plans The new consultation is open until 16 statutory framework aimed at clarifying the
will clarify treatment of cover pool assets March 2012. treatment of cover pool assets in the event
in the event of a bank failure. “The Reserve Bank considers that there an issuing bank fails would be beneficial.
“The proposed legislative framework are unnecessary costs involved in establish- The proposal involves two main elements:
aims to provide investors with legal cer- ing current structures in order to provide a requirement that covered bond issues are
tainty as to the treatment of cover pool priority for covered bond holders to cover registered and a ‘carve-out’ of registered is-
assets in the unlikely event that the issu- pool assets,” said the Reserve Bank in the sues from specific parts of the statutory
ing bank becomes insolvent,” said Reserve consultation paper. “Further, some market management and liquidation regimes.”
Bank deputy governor Grant Spencer.
“Legislative frameworks exist in most other Key elements of the RBNZ proposals:
countries with covered bond markets.”
The proposals follow a consulta-
tion launched in October 2010 on a
framework for covered bond issuance -
by New Zealand banks. tory management of the issuing bank and that certain “moratorium provisions”
“Industry responses to the consulta-
tion indicated widespread support for a gaining full legal control of cover pool assets.
legislative framework,” said the Reserve
TRANSPARENCY
Vdp responds to CBIC, plans amendment
The Association of German Pfandbrief Banks (vdp) is pursuing an of high importance for German Pfandbrief Banks,” said the
amendment to the Pfandbrief Act to expand the information issu- vdp in a letter to the CBIC released in mid-December. “Our
ers need to disclose under Article 28 in response to a transpar- members have discussed your proposals in several commit-
ency initiative of the ICMA Covered Bond Investor Council and tees very intensely and identified several useful information that
feedback from other investors. you request, which go beyond the legally binding transparency
The association has decided to ask for Article 28 of the requirements and which should be of interest for a wide range
country’s Pfandbrief legislation to be amended to require the of investor groups.”
disclosure of information about interest rate and currency risk, The extension of the transparency requirements, as men-
and the vdp said that the weighted average seasoning of real tioned above, should mean that all relevant information re-
estate loans in cover pools and the share of cover assets eligi- quested by the CBIC is addressed by Article 28, said the vdp.
ble for repo with the European Central Bank (ECB) should also “On top of that, the maturity structure of Pfandbriefe and
be disclosed thereunder. cover assets should be disclosed in more detail,” it said.
Article 28 of the Pfandbrief Act governs transparency require- The vdp expects the Pfandbrief Act to be amended in 2013.
ments for Pfandbriefe, setting out the information that issuers are Nathalie Aubry-Stacey, secretary of the CBIC and director,
obliged to publish on a quarterly basis. Under a transparency ini- regulatory policy and market practice at the International Capi-
tiative launched in 2010 the vdp publishes Article 28 transparency tal Market Association, told The Covered Bond Report that the
reports on its website in a standard format based on a uniform CBIC is pleased with the vdp’s move.
interpretation of the legal requirements. “This is a very positive step for us because it is a very concrete
“The vdp highly appreciates CBIC’s initiative to enhance result,” she said. “We look forward to more discussions with the
transparency in the Covered Bond market as transparency is vdp and other issuers and issuer organisations.”
6 The Covered Bond Report Jan/Feb 2012

9. MONITOR: LEGISLATION & REGULATION
“Any access to the markets at the moment is
quite expensive” page 24
INSURANCE
Lower rated gain in Solvency II draft
Draft implementing measures of the Solven- rated covered bonds, albeit differentiating He said that the proposed measures
cy II directive circulated by the European between credit quality step 1A (triple-A) would reduce the additional pick-up for
Commission treat double-A covered bonds and credit quality step 1B (double-A). a double-A rated covered bond versus a
more favourably than earlier proposals and In addition, the implementing meas- government or supranational, sovereign
reduce disincentives for insurance compa- ures are also understood to distinguish or agency (SSA) bond in the 10 year seg-
nies to hold long dated covered bonds. ment from 100bp to 45bp.
A spokesperson for the European Com- “There is indeed a much stronger in-
EC targeting early spring adoption of
mission (EC) said that the Commission centive to invest in longer dated covered
latest proposals
at the beginning of November sent to the bonds,” he said.
European Parliament and Member States Limiting preferential treatment of
a draft working version of Level 2 imple- covered bonds in the spread risk com-
menting measures of the Solvency II Direc- ponent to only triple-A rated covered
tive, with late spring being targeted for their bonds and the linear relationship be-
adoption. The text is not a public document. tween duration and capital charges are
Level 2 implementing measures are two aspects of previous, or existing,
those that will put into practice the Sol- Solvency II proposals that another cov-
vency II Level 1 Framework Directive, ac- ered bond analyst previously identified
cording to the European Insurance & Oc- as encouraging insurance companies to
cupational Pensions Authority (EIOPA). focus their long dated investment expo-
Specialist insurance market Lloyd’s has sure toward sovereign bonds and reduce
said that much of Solvency II’s impact on the average duration of their capital in-
insurers will come from the implement- between spread risk charges for covered tensive products, to the disadvantage of
ing measures rather than the directive, bonds with a duration of up to five, and long dated covered bonds.
which in many places indicates that the duration from five to 10, with the lin- Insurance companies are the largest
EC has powers to adopt implementing ear relationship between duration and investors in Europe, holding, according
measures for specified topics. spread risk capital charges being sof- to Fitch, about 44% of European invest-
According to market participants, tened, thereby providing more of an in- ments — around Eu7tr of assets.
whereas under a previous proposal prefer- centive to invest in long dated covered The rating agency on 22 November
ential treatment under a spread risk mod- bonds. An analyst said he would expect wrote about the implications of the lat-
ule was only given to triple-A rated covered covered bond with a term to maturity est European Commission proposals for
bonds, the Level 2 implementing measures longer than 10 years to also benefit from longer dated unsecured corporate and fi-
extend beneficial treatment to double-A a lower spread risk factor. nancial institution bonds, saying that the
proposals to lower capital charges for this
LEGISLATION type of bonds “should mitigate the capi-
Belgian proposal enters politics tal flight from these asset classes that is a
likely side-effect of Solvency II”.
It said that previously proposed capi-
Belgian covered bond legislation amendments of existing law that does tal charges for long dated unsecured
has entered the formal political law- not concern banking legislation, which bonds were extremely onerous, as a result
making process after a final draft is the focus of the National Bank of Bel- of which at best insurers were likely to
law and royal decree was sent by gium (NBB). switch holdings to shorter dated higher
the central bank to the ministry of “It is out of the hands of the banks rated bonds only — potentially increas-
finance in January, according to a and regulators and in the political proc- ing refinancing risk for borrowers.
banker familiar with the initiative. ess,” he said, adding that he did not However, it said that the changes rep-
He said that the country’s banking know how long this process will take. resent incremental progress rather than
association, Febelfin, separately sent “The new government has a lot of a radical change, and that holding these
to the ministry a draft law setting out projects, but it is being processed.” bonds would still be less desirable than
under existing rules.
Jan/Feb 2012 The Covered Bond Report 7

10. MONITOR: LEGISLATION & REGULATION
ICELAND
Arion stresses 100% Kaupthing record
Arion Bank is preparing to inaugurate are fulfilling all the obligations as set out The first covered bonds issued under
a new covered bond programme under in the original documentation,” Eiríkur Icelandic legislation were sold by Íslands-
Icelandic legislation, with a 100% pay- Magnús Jensson, head of funding at Ari- banki in December 2011, Isk4bn of infla-
ment record for Kaupthing contractual on Bank, told The Covered Bond Report. tion linked bonds.
issuance that the bank is taking over set He said that the bank would, for exam-
to prove “extremely important”, accord- ple, be adding collateral where required.
ing to its head of funding. Arion has secured a licence from Ice-
Arion is a successor to Kaupthing land’s Financial Supervisory Authority
Bank, which was Iceland’s biggest bank (FME) to issue covered bonds under leg-
before the collapse of the Icelandic fi- islation introduced in 2008. Eiríkur Mag-
nancial system in October 2008. It issued nús Jensson said that the bank expects to
covered bonds between 2006 and 2008. sign its new statutory programme within
Arion has reached an agreement with a few days. Barclays Capital is arranger.
the Kaupthing Resolution Committee on Although Kaupthing’s senior unse-
acquiring a Isk120bn (Eu750m) mort- cured creditors have faced losses on their
gage portfolio of Kaupthing’s bankruptcy bonds, payments on its covered bonds
estate. At a bondholder meeting in Janu- were maintained throughout the crisis.
ary, Arion secured 100% agreement from This included a coupon payment on 10
holders of outstanding Kaupthing cov- October 2008, the day after Kaupthing
ered bonds for it to replace Kaupthing as collapsed.
issuer of the covered bonds (with a 75% “There was never a hiccup on the pay-
majority having been required). ment of the bonds,” said Eiríkur Magnús Eiríkur Magnús Jensson: “There
was never a hiccup on the payment
“We are replacing Kaupthing Bank, Jensson. “I think this is extremely impor-
of the bonds”
which is in a resolution process, and we tant for covered bondholders.”
SECURITISATION
RMBS fans cite covered bond ‘flaws’
Preferential regulatory treatment of covered bonds is overdone be in the RMBS camp than in the covered bond camp,” he said.
and RMBS strengths are insufficiently appreciated, potentially Gareth Davies, head of European ABS and global covered
“setting ourselves up for a fall”, according to some panellists at bond research, JP Morgan, contrasted what he said was cer-
a Standard & Poor’s covered bond event for investors in January. tainty provided by documentation underpinning RMBS with the
During a panel discussion on “Covered bonds vs. RMBS”, situation in covered bonds, where “you can pretty much drive
Neil Calder, head of the investments credit desk, European a bus through the legislation”. He said that in covered bonds
Bank for Reconstruction & Development (EBRD), and Rob “what really happens when something goes wrong” is less
Ford, partner, portfolio manager, TwentyFour Asset Manage- clear-cut than would be the case in the asset-backed securitisa-
ment, said that they would rather hold a residential mortgage tion market, likening covered bonds to “ABS 2007”, when the
backed securitisation (RMBS) than a covered bond in the event possibility of something going wrong was not contemplated.
that an issuer finds itself in financial distress or is in default. Regulatory support for covered bonds is leading to the as-
Calder said that what he described as recent legislative set class being “overpromoted” to the danger of the Euro-
developments in covered bonds showed an increasing em- pean banking system, added Davies. He said that there needs
phasis on “almost RMBS-light” structural enhancements, such to be a diversity of funding routes available to ensure the
as asset coverage tests, eligibility criteria and minimum loan- European banking system is “as widely funded as possible”.
to-value levels, but suggested that “hard wired” mechanisms However, not everyone agreed, with one delegate after-
in RMBS provide more protection for investors than covered wards saying that he was disappointed by what he described
bonds “when things don’t go quite as expected”. Ford agreed. as “the whining of the MBS issuers and investors about the
“If it was a doomsday scenario, I think I’d definitely prefer to unfair treatment by the regulators”.
8 The Covered Bond Report Jan/Feb 2012

11. MONITOR: LEGISLATION & REGULATION
“The reality is that LTRO funding is much more
attractive in economic terms” page 28
POLICY STATEMENT
HMT tightens RCBs, FSA goes loan level
The UK covered bond industry is hopeful work does not get enough credit from
that changes to covered bond legislation FSA aligns with Bank of England market participants elsewhere in Europe,
announced in November and December despite issuer resistance and UK RCB issuers therefore hope that
that make it more prescriptive, without the Treasury’s and the FSA’s work on the
placing extra burdensome demands on is- legislation will give it more publicity.
suers, could win Regulated Covered Bonds “Only UK issuers appreciate how hard
(RCBs) more credit from investors, particu- it is to comply with the legislation, how
larly those elsewhere in Europe. tough and rigorous it is to qualify as an
HM Treasury published an amend- RCB issuer,” said Ranger.
ment to covered bond legislation along- the latter, the FSA subsequently released a Bernd Volk, head of covered bond re-
side the Chancellor’s Autumn Statement requirement for loan level data disclosure. search at Deutsche Bank, welcomed the
in November, while the Financial Services “There are no viable alternatives to reg- Treasury’s move as “overall, a step in the
Authority released a covered bond Policy ulations, since European law and investors right direction” by inserting more details
Statement on 9 December. favour regulated covered bonds,” said the in the legal framework instead of focuss-
The legislative amendment introduces Treasury. “These proposals will improve ing mainly on contractual enhancements.
an option for issuers to declare that their existing regulation to make sure it meets The Treasury said that its proposals
covered bonds are backed by only a single its policy objective.” are intended to reduce uncertainty among
type of asset; excludes securitisation as an Tom Ranger, head of secured funding at investors about the quality of UK covered
eligible asset; sets minimum overcollater- Santander UK, said that the Treasury’s an- bonds, and made what it described as a
alisation at 8%; creates a formal require- nouncement did not contain any surprises. conservative estimate of 5bp as its central
ment for UK covered bond programmes “What was in the consultation is large- assumption for a reduction in spreads that
to appoint an asset pool monitor; and ly what we ended up with,” he said. “The could be triggered by the measures.
clarifies the Financial Service Authority’s most important thing is that we have a Jörg Homey, head of covered bond re-
(FSA’s) powers to require issuers to publish fantastically strong legislation in the UK.” search at DZ Bank, said that the argument
information for investors. With respect to However, he said that the RCB frame- that any reduction in investor uncertainty
brought about by the changes would lead to
The Treasury said that its amendment will: lower spreads is a reasonable one, but that it is
very difficult to pin down a specific number
their bonds are backed by only a single type of asset. to capture such savings. In addition, the
Treasury appears to be making mandatory
what is in many ways already best practice, he
added, which means that there should not be
asset pool monitor. any changes to the way in which UK covered
bond programmes are set up.
The FSA’s introduction of a requirement
The FSA Policy Statement set out the following changes to its RCB Sourcebook: for loan level reporting will impose only min-
imal additional costs on most issuers, accord-
for investors and highlight the quality of underlying assets, while the use of common ing to the authorities, given that the reporting
standards will make it easier for investors to compare different programmes. This in- standards the FSA will propose are similar
cludes requiring issuers to provide loan level information on assets in the cover pool. to those developed by the Bank of England,
“with which almost all issuers have indicated
tice of independent, external scrutiny of an issuer’s regulated covered bond pro- they are already planning to comply”.
gramme. Issuers will be required to provide these reports to the FSA. However, in a summary of responses to
the joint consultation the Treasury said that
ing that the FSA requires when issuers apply to register with the FSA and on an ongo- most issuers opposed loan level disclosure
ing basis. This information is used to assess issuers’ applications and as part of the on the grounds of cost and confidentiality,
regular stress-testing the FSA conducts on regulated covered bond programmes. and because they believed investors did not
require such a level of detail.
Jan/Feb 2012 The Covered Bond Report 9

12. MONITOR: RATINGS
Ratings
INVESTOR SURVEY
Sovereign risk dominates, demand rises
Investors identified sovereign risk as
the main challenge facing the covered
bond market this year in response to
a Fitch survey, which also found in-
creased appetite for covered bonds.
One hundred investors participated
in the survey, which was conducted in
December and released in January, with
13% of the accounts managing more than
Eu20bn in covered bonds, 25% manag-
ing between Eu5bn and Eu20bn, and 62%
Beatrice Mezza: “Investors
having less than Eu5bn in their portfolios. have a growing appetite, but
The number of investors who put are selective”
sovereign risk as their top concern, at
59%, was up from 37% a year earlier. bonds, but are selective in what they pants. Investors’ rating limits were
The health of the banking sector was buy,” said Beatrice Mezza, senior di- evenly split between AA, A, BBB, and
the second main concern, at 21%, and rector for business and relationship no limit at all.
underlying collateral performance was management at Fitch. “They expect to Flexibility with regard to structure
selected as their top concern by 9% of increase exposure to Scandinavia, Aus- was also shown in the study, with 71%
investors, down from 21% last year. tralia, UK and the Netherlands, which is of investors prepared to buy covered
Of the respondents, 88% planned to where most of the supply has come from bonds with soft bullet maturities, com-
increase their current holdings of covered in the first weeks of 2012.” pared with 62% in 2010. The percent-
bonds or maintain them within the next 12 Only 10% of respondents said they age of participants that would only buy
months, up from 83% in December 2010. are only comfortable with pools exposed hard bullet covered bonds has decreased
Ten percent expected to increase their to AAA countries, while 24% said they from 34% to 29%.
holdings significantly, and 1% said they in- are not buying public sector covered The survey also showed that while
tended to reduce them significantly. bonds exposed to peripheral European new countries are planning to intro-
Fitch noted that some countries were countries, and 57% are making invest- duce covered bond legislation in 2012,
preferred as investment opportunities, ment decisions on a case by case basis. 52% of investors are active buyers of
and that investors were likely to decrease contractual programmes, with 29% of
their exposure to peripheral countries. Flexibility increases this majority requiring a higher spread
“Our survey shows that investors Non-AAA covered bonds could be than for regulated covered bonds.
have a growing appetite for covered bought by 83% of the study partici- Some 35% were comfortable buying
covered bonds secured by assets other
In the Next 12 Months, Your Covered Bond Exposure to the Following
than mortgages or public sector loans,
Areas is Likely to: and required a higher spread to do so.
Fitch added that when asked to list in
(%) Increase Decrease Remain stable
70 order of priority which research inves-
60 tors use when monitoring their covered
50
40 bond holdings, “investors said they con-
30 sider rating agency credit analysis and
20
10 performance reports the most relevant,
0
followed by the issuers’ own web sites
Netherlands
Scandinavia
Germany
Canada
Australia
Zealand
Portugal
Ireland
Greece
/Austria
France
Spain
Italy
UK
and investment banks’ credit research”.
New
The majority, at 68%, of investors re-
quired at least two rating agencies to feel
Source: Fitch comfortable buying a covered bond and
26% would buy a bond with one rating.
10 The Covered Bond Report Jan/Feb 2012

13. MONITOR: RATINGS
MOODY’S
Greeks capped on ‘remote’ euro exit risk
Moody’s said in late January that because of the banking system and the state would The rating agency noted that while such
of a “remote” risk of redenomination in be materially impaired, and the economy an event is not its central scenario, the prob-
Greece it was implementing a B1 ceiling would very likely experience a further sharp ability of a default occurring is rising. In that
on the rating of Greek covered bonds. contraction”. It would also increase the like- event, the ability of Greek borrowers to repay
At the same time, it downgraded lihood of Greece exiting the euro area, ac- their debts would weaken significantly, be-
five Greek covered bonds on 24 January companied by a return to a deeply devalued yond that already assumed. Moody’s has con-
because of an increased likelihood and national currency, according to Moody’s. cluded that no Greek covered bond could be
severity of Greece defaulting on its debt rated higher than B1 even taking into account
and the implications of such a default the low likelihood of this scenario.
for Greek covered bonds. Moody’s noted that Greek covered
Covered bonds issued by Alpha Bank bond documentation is governed by UK
under its direct issuance programme, mort- law and that in the “remote” event of a re-
gage bonds issued by EFG Eurobank Er- denomination in Greece, the underlying
gasias (EFG) off programme I, mortgage assets backing the covered bonds could
covered bonds issued under programme I be converted into a new national curren-
of National Bank of Greece (NBG), and cov- cy while the rated notes remain in euros.
ered bonds issued off NBG’s programme II “In this scenario, and for a given asset
were cut from Ba3 to B1. EFG’s programme performance level, notes will suffer different
II covered bonds were cut from B1 to B2. levels of losses arising from the redenomina-
Moody’s said that in the event of a dis- Exit Papandreou… followed by Greece? tion risk, depending on the credit enhance-
orderly default by Greece, “the functioning ment levels,” said the rating agency.
DENMARK
End to one year ARMs floated
A phasing out of one year bullet bonds used to finance adjustable The rating agency said that the elimination of the one year
rate mortgage loans proposed by the Danish Mortgage Banks’ covered bonds would be credit positive for the covered bonds
Federation (Realkreditforeningen) would be credit positive for because it would reduce their annual refinancing risk, and for
Danish covered bonds and Danish issuers, according to Moody’s. Danish banks and mortgage credit institutions that widely use
The Federation has called for such a move in response to covered bonds for funding, investment and liquidity purposes.
regulatory pressure from domestic and international bodies It noted that mortgage credit institutions have worked on sever-
— including the Danish central bank, European Commission al strategies to mitigate the refinancing risk, but said that these
and Moody’s — but the Association of were insufficient to change its opinion.
Danish Mortgage Banks (Realkreditrådet) “So far there is “These include spreading the covered
remains committed to the instrument. The bond auction dates over the year and re-
Federation’s members are Danske Bank
no market-wide stricting the leverage of loans backing the
subsidiary Realkredit Danmark, Nordea consensus” covered bonds, which reduces credit risk
Kredit and LR Realkredit, while the Asso- and thus mitigates refinancing risk,” said
ciation represents Nykredit, with its subsidiary Totalkredit, as Alexander Zeilder, senior analyst on covered bonds at Moody’s.
well as DLR Kredit and BRFkredit. “Several suggestions publicized so far to address refinancing risk
Moody’s said in a comment in January that “in the end, are credit positive but are not strong enough to change our key
the positive effect of these initiatives will depend on how credit assumptions because on their own these changes do not
market participants choose to implement them”. It noted fully remove the refinancing risk inherent in one year bonds.
that the Federation represents 43% of Danish mortgage “Removing refinancing risk would be achieved if one
lending and the Association 42%. year bonds were replaced by a revival of traditional Danish
“So far,” it said, “there is no market-wide consensus on bonds where loan and bond amortisation as well as maturity
which suggestions to implement.” dates are matched.”
Jan/Feb 2012 The Covered Bond Report 11

14. MONITOR: RATINGS
PERFORMANCE
Pressures rise in latest Moody’s data
Moody’s latest quarterly monitoring over- ings is increasing, as is their sensitivity to
view shows that the pressures facing cov- issuer rating downgrades.”
ered bonds, including those of top quality Moody’s report said 30% of pro-
issuers, are increasing, according to cov- grammes have no TPI leeway, meaning
ered bond analysts. that if the issuer rating were downgraded
The rating agency on 19 January pub- by one notch the covered bond rating
lished its monitoring overview for the would also be cut, all else remaining equal.
third quarter of 2011, covering more than NordLB’s Melms said this compares with Matthias Melms: “First class issuers
200 issuers and providing information 25% in Moody’s Q2 2011 overview, and are now also coming into focus”
about five key credit measures: Timely that the updated figure shows a clear in-
Payment Indicator (TPI) leeways, cover crease in the number of programmes that ending 30 September 2011 are higher
pool losses, collateral scores, surplus over- are directly under threat. Spanish (13), than a 23.2% figure from Moody’s preced-
collateralisation, and stressed scenarios. Italian (8), and German (8) programmes ing quarterly overview, and that the aver-
Moody’s said that information includ- are especially in danger, he added. age ratio for assumed cover pool losses
ed in the latest monitoring overview was for mortgage backed covered bonds in-
primarily based on Performance Over- Risks stressed creased slightly year-on-year, led by a 16%
views published for the reporting quarter DZ’s analysts noted that Moody’s is incor- increase in assumed market risk.
ending 30 September 2011. porating higher market risks into its stress Moody’s report also provided an over-
NordLB covered bond analyst Mat- tests, with risks for public sector covered view of how it assesses the quality of col-
thias Melms said that a worsening of bonds rising faster than those for mort- lateral in a cover pool, as captured in its
general conditions for covered bonds, in- gage-backed covered bonds. collateral score. DZ analysts noted that the
cluding systemic support, has direct con- “The biggest increases in Moody’s mar- average collateral score for mortgage cov-
sequences for the programmes monitored ket risk assumptions have affected Italian ered bonds (just over 12%) has stayed very
by Moody’s. and Spanish public sector covered bonds stable since the first quarter of 2010, but
“Rating migration in the covered bond and Portuguese and Danish mortgage pointed out that the assumed credit risk
market is continuing and claiming ever covered bonds,” they said. for Danish mortgage covered bonds has
more victims,” he said. “The data makes Market risk and collateral risk are the risen, but fallen for Irish mortgage issues.
clear that pressure is increasing and that two components of the cover pool losses The average collateral score for pub-
first class issuers are now also coming into that Moody’s models into its rating ap- lic sector covered bonds, meanwhile, has
focus for a possible downgrade.” proach in the event of an issuer default, risen, said the DZ analysts.
As of 30 September 2011, Moody’s as- which it says allows investors to take a “The recent months’ sovereign rating
signed its top rating to 58% of the covered view on Moody’s loss assumptions if the downgrades are likely to help this trend
bond programmes it rates, with Natixis an- issuer is removed from the rating analysis. continue,” they said. “The collateral scores
alysts noting that this compares with 65% Natixis analysts noted that average of Spanish public sector covered bonds
at the end of the second quarter of 2011. cover pool losses of 25.8% for the period have risen exceptionally.”
DZ Bank analysts said that Moody’s
Q3 2011 monitoring overview provides an Average historical cover pool losses: public sector backed covered bonds
Market Risk Collateral Risk
updated snapshot of a prevailing negative
20.0%
ratings trend. They identified as the main 17.2%
18.0%
points emerging from the rating agency’s 16.0% 13.9%
13.2% 13.8%
14.0% 12.2% 12.1%
report that rating buffers are shrinking, 11.7% 13.3%
12.0%
market risk assumptions are increasing, 10.0%
and credit risk assumptions for public sec- 8.0%
6.0% 5.1%
tor covered bonds are on the rise. 4.1% 4.0% 3.7% 3.9% 3.9% 4.2% 4.1%
4.0%
“The average rating buffer, expressed 2.0%
in rating steps by the TPI Leeway meas- 0.0%
2009 Q3 2009 Q4 2010 Q1 2010 Q2 2010 Q3 2011 Q12011 Q2 2011 Q3
ure, continues to reduce,” they said. “This
Source: Moody’s
means the pressure on covered bond rat-
12 The Covered Bond Report Jan/Feb 2012

15. MONITOR: RATINGS
“How viable is the business model of public
sector financing?” page 30
OUTLOOK
S&P sees ‘bumpy road’ for 2012
Standard & Poor’s expects new issuance “Given the current focus on public sec-
to be challenging in 2012 despite a good tor indebtedness in many countries,” said
start to the year, noting that a poor eco- the rating agency, “the picture for public
nomic backdrop may hurt peripheral sector covered bonds may be a little gloom-
covered bond prospects and that pricing ier, especially for programmes that are ex-
is significantly wider than 12 months ago. posed to peripheral European countries.
In a report released in late January “Covered bond issuers have almost
the rating agency said that new issu- completely reduced their exposure to
ance could be “bumpy” in 2012, despite Greek assets in public sector cover pools,
a recent rush of supply. but some programmes remain exposed
“The bleak economic backdrop may to assets in Spain, Portugal, and Italy, as
hurt covered bond prospects,” said Sab- well as the issuers’ home markets.”
ine Daehn, credit analyst at S&P, “espe-
cially for countries such as Spain, Greece, Euro-zone cuts hit covered
Portugal, and Italy, where originators will Downgrades of France, Italy, Portugal
likely retain issuance for use as collateral and Spain by S&P on 13 January as part
in ECB refinancing.” Sabine Daehn: “Bleak economic back- of rating actions on 16 euro-zone sover-
The report was published ahead of the drop may hurt covered bond prospects” eigns led to cuts to two Portuguese cov-
reopening of the Spanish covered bond ered bond programmes, and one Italian
market after eight months by Santander might pick up the slack, adding that last and one Spanish programme.
at the beginning of February. year’s turbulence did not help new covered On 31 January, S&P cut the ratings
About Eu100bn in benchmark cov- bond jurisdictions establish themselves. of mortgage covered bonds issued by
ered bond issuance is set to redeem in The rating agency was also not opti- Banco Santander Totta (from A to A-),
2012, less than last year, according to mistic about the chances of the US market and mortgage and public sector covered
S&P. The rating agency said that even contributing significantly to new issuance bonds issued by Banco BPI. BPI’s mort-
if new covered bond issuance funds volumes in 2012 because preliminaries to gage covered bond (obrigações hipo-
all these redemptions, volumes may the upcoming presidential election mean tecárias) programme was downgraded
therefore decrease. It said overall out- US lawmakers may not establish a covered from A+ to A- and its public sector pro-
standing balances globally are likely to bond legal framework until 2013. gramme (obrigações sobre o sector pub-
remain broadly flat for 2012. lic) from BBB to BB+.
S&P said that it expects covered bond “The picture for The covered bond ratings were left on
markets in Germany, Scandinavia, the negative review, in line with the status of
UK, and France to be more resilient, but public sector covered the issuer ratings. S&P said that the rat-
that spreads are likely to be higher than bonds may be a little ing actions reflected Portugal’s revised
observed one year ago. sovereign rating and the impact of the
Germany has the largest covered bond gloomier” country risk exposure on the covered
market by outstanding balance, but 2012 bond programmes. Banco BPI in January
could be another year where net issuance is It considers changes in sovereign and launched a covered bond and S&P said
negative. S&P anticipates that the total out- bank credit ratings as more likely than that it would also take this into account.
standing balances will fall, particularly on the collateral performance to spur covered S&P downgraded public sector cov-
back of shrinking public sector programmes. bond rating changes in the near future. ered bonds issued by Spain’s Banco Bil-
“With some of the largest Pfandbrief S&P’s covered bond ratings are strongly bao Vizcaya Argentaria (BBVA), from
issuers downsizing and reshaping their linked to its issuer credit rating on the pro- AA to A+, on negative outlook. This
businesses and lending strategies, the gramme sponsor. The sponsor rating could followed a two notch downgrade of the
German covered bond market is likely to be affected in the short term by a recently sovereign on 13 January, from AA- to A.
shrink further,” it said. updated rating methodology for financial The rating agency downgraded mort-
The rating agency said it is difficult to institutions, as well as by the rating agency’s gage covered bonds issued by UniCredit,
predict whether other European countries recent changes in sovereign ratings. from AAA to AA+, on negative outlook.
Jan/Feb 2012 The Covered Bond Report 13

16. MONITOR: RATINGS
SPAIN
Cédulas redress seen unlikely in mergers
Holders of cédulas have, relative to other ju- and raising the legitimate question about
risdictions, few options to oppose anticipat- whether there is anything they can do.”
ed mergers between Spanish banks that may Moody’s said that investors in Spanish
affect their interests, according to Moody’s. covered bonds have few legal options to
The rating agency said at the end of oppose mergers under Spanish statutory
January that it expects Spanish banking law, which governs the terms and condi-
mergers to weaken the credit quality of tions of covered bonds.
the outstanding cédulas of stronger banks. “Spanish law for covered bonds, un-
José de Leon, senior vice president at like laws for other types of bonds or other
Moody’s, told The Covered Bond Report jurisdictions, does not treat the merger of
that Spanish economy minister Luis de a CH [cédulas hipotecarias] issuer as an Luis de Guindos: Spanish mergers
Guindos has made it clear that further con- early redemption event that would give favoured
solidation is ahead, and that stronger banks investors the option of receiving their
are likely to merge with weaker ones. original investment in lieu of accepting a such a case, the company cannot formalise
“The Spanish banking landscape has credit negative merger,” it said. the merger until the company presents se-
changed dramatically over the past two The rating agency noted that according curity satisfactory to the creditor.
years,” he said, “and consolidation may in- to Article 44 of Spanish Act 3/2009 on struc- However, Moody’s said that proving
tensify, with the difference between strong- tural changes in trading companies (such as that covered bondholders are insufficient-
er and weaker entities more substantial cédulas hipotecarias issuers) within a month ly secured as a result of the merger is dif-
than it has been in the past few years. of the merger announcement creditors that ficult because the entire mortgage book of
“Some covered bond investors are lack sufficient security can object if the the resulting entity acts as security for the
worried about the impact of the mergers, merger is detrimental to their interests. In investors in the cédulas hipotecarias.
MICH
Fitch calls for public OC promises
Spanish banks participating in multi-issuer cédulas hipote- 154% since the last version of this report in summer 2011.”
carias (MICH) must make public commitments to overcollat- Meanwhile, supporting overcollateralisation levels have
eralisation levels necessary to support ratings if most of the risen and Fitch said that the average distance between total
sector is not to face cuts to the single-A level, Fitch stressed in OC and supporting OC ratios has decreased from 96% in
its latest OC Tracker publication at the end of January. March 2011 to 55%, considering AAsf scenarios.
The rating agency will conclude a review of the sector at “The CH issuers need to decide whether they will limit the
the end of March. potential volatility by issuing OC state-
Fitch put the covered bonds on Rat- “No credit for ments to provide comfort that future fund-
ing Watch Negative (RWN) in December ing decisions will not reduce OC ratios be-
because of expected overcollateralisation private best-effort low a certain committed level,” said Fitch.
(OC) volatility in the absence of OC state- declarations” The rating agency said that there is no OC
ments by CH issuers with a low short term statement at present for 10 CH issuers rated
rating (F3 or lower), which feature in most MICH transac- below F2 or rated F2 and on RWN, and for six others OC state-
tions. Fitch does not give credit to total overcollateralisation ments may have become outdated.
for such issuers because it says actions to obtain liquidity “The agency clarifies that no credit is now given to private
would reduce OC. best-effort declarations,” added Fitch. “This follows the breach
“The agency anticipates that banks under tight liquidity of one such statement by Banco de Valencia in summer 2011,
may see their OC ratios reduced, as they will be under pres- which caused Fitch to place two MICH deals on RWN.”
sure to issue new CHs, mortgage bonds or securitisations in MICH rated by Fitch are in the AAsf category comprise 41
order to obtain discountable assets with the ECB,” said Fitch. transactions totalling Eu94bn backed by cédulas hipotecarias
“The weighted average OC has fallen to 144% down from issued by 24 Spanish financial institutions.
14 The Covered Bond Report Jan/Feb 2012

17. MONITOR: MARKET
Market
ECB
CBPP2 path reflects primary focus
photo pg danella
The second European Central Bank cov- Baum noted that issuance of covered
ered bond purchase programme is more bonds eligible for the programme had
focused on the primary market than the been very low between the launch of the
first programme was, according to Wil- programme at the start of November and
fried Baum, head of portfolios section at the end of 2011, but had picked up in
Deutsche Bundesbank. January. This was matched in January by a
Speaking at the Landesbank Baden- jump in reported purchases under CBPP2
Württemberg European Covered Bond and Baum said that the focus on the pri-
Forum in Mainz on 3 February, Baum said mary market of the programme “also il-
that there is “much more focus this time lustrates the buying activity you observe”.
on the primary market”. He said that the focus on the primary
During the first covered bond pur- market is “to allow for the desired cata-
chase programme the ECB released lysing function in the market”, which was
monthly reports giving, among other de- one of the aims of the ECB in launching
tails, a breakdown between primary and the second programme.
secondary market purchases, but it is not However, Baum gave little colour
releasing such reports for CBPP2. Accord- on how the ECB might — if at all — be
ing to final ECB data on CBPP1, only 27% weighting purchases towards peripheral
of purchases under that programme were countries, but did say that “we try to be as
in the primary market, against 73% in the fair as possible”. He said that factors that
secondary market. could influence the operation could be Wilfried Baum: “We try to be as
The ECB had by 9 February reported “where the need might be big” and at the fair as possible”
total settled purchases under CBPP2 of same time “where the risk is within our
Eu5.762bn. According to Royal Bank considerations”, with the “economic im- Giving an insight into the practical op-
of Scotland analysts, this represented a portance” of countries and size of covered eration of CBPP2, Baum said that when
Eu5.278bn lag on a theoretical run-rate bond markets coming into play. they are launching a new issue, issuers and
necessary for the ECB to hit its Eu40bn Baum had earlier noted that the “simi- lead managers can inform the national
target by the time the programme finishes larities are not very big” between CBPP2 central bank (NCB) in the country of is-
at the end of October. and the Securities Markets Programme. sue, and that this NCB will inform other
Eurosystem members. The Eurosystem
will then hold a conference call to agree
ECB Covered Bond Purchases under CBPP2
how much interest there is, subject to sys-
800 12.0
tem limits, and will enter a bid for the new
700 issue or tap with the institution that first
10.0
600
approached them. However, he noted that
8.0 although they had been approached about
500
new issues ahead of bookbuilding, Eu-
EUR bn
400 6.0 rosystem members will only place orders
EUR mln
300
once books are open.
4.0 Baum said that in the secondary
200
market the Bundesbank’s approach is
2.0
100 to accept on a daily basis via e-mail lists
where partners can offer excess paper.
0 0.0
11 Nov 25 Nov 09 Dec 26 Dec 09 Jan 23 Jan 06 Feb The Bundesbank will then decide where
Outstanding Volume (RHS) Daily Difference there is a need to purchase paper, and
Daily Average Theoretical Run-rate (RHS) then engage in a process whereby it will
Source: ECB, RBS ask for prices from a range of counter-
parties before buying.
Jan/Feb 2012 The Covered Bond Report 15

18. MONITOR: MARKET
CÉDULAS
Santander leads Eu4.7bn Spain comeback
Spanish issuers were able to take advan- a smaller bank like Sabadell to be brave
tage of the risk-on mode of the capital enough and be the first to follow on.”
markets to issue the first cédulas in eight The three year deal was priced at 250bp
months, with Santander leading the way over mid-swaps, with Santander’s issue
by launching a Eu2bn three year deal on having already tightened in the secondary
1 February that generated Eu8.5bn of market.
demand. Santander subsidiary Banco Español
Banco de Sabadell followed with a de Crédito (Banesto) the following day
Eu1.2bn three year deal before Banesto extended the refreshed cédulas curve out
and CaixaBank extended the reopening to June 2016 with its Eu500m deal. Banes-
along the curve with Eu500m long four to, Citi, Crédit Agricole, Deutsche and
year and Eu1bn five year transactions, re- JP Morgan took Eu1.8bn of orders and
spectively. Santander’s covered bond was priced the issue at 235bp over mid-swaps.
also only the second peripheral bond is- CaixaBank then made it three deals
sue in the public markets of the year, after in as many days and took Spanish supply
an 18 month Intesa Sanpaolo senior unse- to Eu4.7bn with a Eu1bn five year priced
cured issue a day earlier. at 248bp over mid-swaps on the back of
Antonio Torío, director, capital mar- Eu2.7bn of demand from 121 investors.
kets funding at Banco Santander, told The Bruce Cairnduff: CaixaBank The pricing represented a spread of 8bp
Covered Bond Report that the issuer felt it execution demonstrated strength over Bonos, according to the issuer.
of name
was important for it to reopen the Spanish Demand exceeded expectations, with
market after a long period without bench- very strong support from domestic and
mark cédulas supply. erally being less than anticipated. international accounts, according to
“We thought that a covered bond was “So there are fewer offerings, but ac- Bruce Cairnduff, head of financial insti-
the right product,” he added. “It is a safe counts are still keen to participate in tutions and covered bond syndicate at
product that came with an appealing covered bonds, and all this adds up to de- Crédit Agricole, which was joint lead with
spread for investors.” mand for fairly priced transactions.” Barclays, CaixaBank, JP Morgan and UBS.
Barclays Capital, Citigroup, Natixis “This demonstrates the strength of the
and Santander priced the issue at 210bp Second tier ahead of schedule name, extending the maturity parameters
over mid-swaps, 20bp tighter than initial Banco Sabadell followed three days after for cédulas transactions in the current li-
guidance of the 230bp over area. Some Santander, with its deal attracting Eu2bn quidity window and issuing at such a tight
270 accounts participated in the deal, with of demand and showing that the market spread relative to the underlying govern-
73% sold outside Spain. was open to second tier Spanish names ment curve,” he said.
Tim Michael, FIG syndicate at Citi, more quickly than some market partici- A funding official at CaixaBank told
said that the level of demand exceeded The Covered Bond Report that the trans-
expectations. He attributed the strong “Nobody really ex- action demonstrates the bank’s ability to
demand to a combination of factors in-
cluding a fundamental appreciation of
pected a smaller bank access the public capital markets, with
covered bonds representing the best prod-
the credit, the lack of cédulas supply, the like Sabadell” uct available to the issuer to do so.
appeal of the spread and less than antici- “The transaction was a big success, and
pated benchmark covered bond issuance pants might have imagined. we are really happy to have achieved our
in general this year. “Expectations were that another objectives,” he said. “Our objective was to
“At the sovereign level, the peripheral top tier name would follow Santander, make a five year deal at the right time with
region has benefitted strongly from the like BBVA or CaixaBank,” said Marko the right price, rather than big volume.
recent uptick in risk appetite and the posi- Nikolic, head of covered bond origina- “The idea was to create momentum
tive implications of the LTRO has been tion at Nomura, joint lead with Bank of and gain traction by starting with the
evident in the bank space,” he added. “The America Merrill Lynch, Deutsche, Natixis 260bp over area and go tighter if possible.
LTRO is partly responsible for supply gen- and Sabadell. “Nobody really expected We hit this target.”
16 The Covered Bond Report Jan/Feb 2012

19. MONITOR: MARKET
“They wanted to make sure that the average
deposit-holder wasn’t disadvantaged” page 38
BUYBACKS
Peripheral banks go for covered buybacks
Three deeply discounted cash for covered A covered bond market participant
bond tender offers were launched by pe- CatalunyaCaixa joined National said that he found the premium “a touch
ripheral covered bond issuers in the first Bank of Greece, Banco BPI in on the low side”. He put the premium of-
tendering
weeks of the year, illustrating the attrac- fered in a tender offer for National Bank of
tiveness of such liability management Greece at around 20%.
(LM) exercises for those seeking to bolster Some 42% of a Eu1.5bn 2016 covered
capital ratios and free up collateral. bond targeted for buyback by NBG was ten-
A fourth buyback, for Italy’s CDP, had dered by investors, with participation in the
a different rationale, while Austria’s Bawag liability management exercise by holders of
PSK was the first non-peripheral issuer to NBG hybrid securities helping to generate
engage in a buyback (see box). an overall Eu302m of core tier one capital
A tender offer from National Bank for some issuers,” he said. “The funding for the bank. The buyback was for an aggre-
of Greece on 3 January is believed to be argument ‘pro’ covered has been eliminat- gate nominal amount of Eu1.88bn equiva-
the first to target the repurchase of cov- ed at least for covered bonds with a matu- lent, with the purchase price for the covered
ered bonds for cash since 2007, and was rity of up to three years as these tendered bonds having been set at 70% of par value,
followed by cash for covered bonds of- covered bonds can be replaced with ECB and 45% for the hybrid securities. Credit
fers from Portugal’s Banco BPI and then funding of the same maturity.” Suisse, Deutsche Bank, Merrill Lynch and
Spain’s CatalunyaCaixa. He said that the ideal candidate bonds Morgan Stanley were the dealers.
Bernd Volk, head of covered bond re- A covered bond analyst said that holding
search at Deutsche Bank, said that covered “Tendered covered on to the NBG covered bonds at a time when
bond cash tenders are a good solution to
achieve “the perfect combination” of reduc-
bonds can be Greek 2016 sovereign bonds are quoted at
24 cash “suggests a pretty strong belief in the
ing issuer debt and freeing up collateral, while replaced with ECB euro as the ongoing currency in Greece”.
providing for truly voluntary burden-sharing
and giving investors an opportunity to sell at
funding” A banker on the tender offer said it was
launched to generate core tier one capital
higher prices and in size, especially in the case for a tender offer in the prevailing market for NBG and strengthen the quality of its
of covered bonds from weaker issuers. situation would come with the four fol- capital base ahead of EU implementa-
“A high take-up of deeply discounted lowing features: a maturity of up to three tion of Basel III and in accordance with a
covered bond tenders would also confirm years to slightly longer; a low cash price; Bank of Greece guideline for the country’s
the macro-dimension of covered bonds,” a high coupon; and a low rating, ideally banks to increase core tier one ratios.
he said. “In case macro concerns domi- close to non-investment grade status. “The transaction offered several im-
nate (and even foreign exchange concerns Banco BPI’s buyback targeted a Eu1bn portant benefits to investors, including
come into play), typical covered bond val- 3.25% January 2015 mortgage-backed but not limited to a cash exit out of ef-
uation models may no longer be crucial.” issue, which was one of six bonds that fectively illiquid instruments and a rea-
Florian Eichert, senior covered bond Eichert had previously identified as meet- sonable premium to current mid-market
analyst at Crédit Agricole CIB, said that ing the aforementioned criteria and there- levels,” he added.
three year long term repo operations fore “especially attractive” for a tender offer. Another banker said that a core tier
(LTRO) by the European Central Bank one increase of Eu300m was a good re-
make buybacks of covered bonds for cash BPI follows NBG starter sult for the tender offer given that there
attractive for certain issuers. In the ab- The Portuguese bank launched its liability are few alternative ways in which a Greek
sence of such LTROs, he said, tendering management exercise on 26 January, offer- bank could raise such an amount.
covered bonds does not make much sense ing to buy back all or any of the issue for Richard Kemmish, head of covered bond
for many issuers given fairly high cash 85% of the par value, plus accrued interest origination at Credit Suisse, said that the lev-
trading prices and reliance on covered in gross amount. A banker at one of the el of participation by covered bond investors
bonds for funding. joint dealers — Banco BPI, Citigroup, and was not out of line with that for other liabil-
“With the three year LTRO operations Deutsche Bank — said that the tender pre- ity management exercises involving covered
from the ECB entering the scene, the situ- mium incorporated in the 85% cash price bonds, although NBG’s was very different in
ation might, however, have changed a bit was 2.5% or 3.7%, depending on the quote. that it was the first since 2007 to tender cash
Jan/Feb 2012 The Covered Bond Report 17

20. MONITOR: MARKET
for covered bonds, the first non-extension alunya Banc. The purchase price was set
Crédit Agricole in January asked
structure and the first to offer a deep dis- investors: do tender offers from at 94% for the June 2017 issue and 93%
count to par value. very distressed covered bond for the larger, March 2016 bond. Bankers
issuers make sense?
“The vast majority of those investors working on CatalunyaCaixa’s tender offer
who could participate did so,” he said. put the market premium incorporated in
31% 28% the purchase price at between 3% and 4%.
Cédulas in LM mix Italy’s Cassa Depositi e Prestiti was
Catalunya Banc followed NBG’s and Ban- seeking to buy back for cash its remaining
co BPI’s moves by launching a tender offer outstanding covered bonds, Eu3bn Janu-
41%
on 2 February, targeting a Eu900m buy- ary 2013 and ¥10bn (Eu99.7m) January
back across two covered bond issues and 2017 issues, after having voluntarily ter-
34 ABS tranches of an aggregate face value No, we don't think covered bonds are the minated its covered bond programme in
correct product for tender offers.
of Eu7.01bn. It is the first capped covered November.
Yes, if the tender price is correct,
bond tender offer this year. The covered all parties can benefit from this. The re-offer price is 99.9% plus accrued
bonds targeted by the bank, which is also n/a interest, with an additional 0.1% due to in-
known as CatalunyaCaixa, are a Eu1.5bn Source: Crédit Agricole CIB vestors who tender their bonds by an early
4.875% June 2017 cédulas hipotecarias is- deadline of 10 February. Banca IMI, BNP
sue and a Eu1.75bn 3.5% March 2016 is- Deutsche Bank, JP Morgan, and Natix- Paribas, Deutsche Bank, Nomura and
sue, also mortgage-backed. is are joint dealer managers alongside Cat- UniCredit were joint dealers.
AUSTRIA
Bawag’s above par tender contrasts
Austria’s Bawag PSK launched a tender offer to buy back up to profit could also be achieved via the cancellation of swaps
Eu500m of a Eu1bn 4.25% 2014 covered bond on 7 Febru- entered into upon issuance of the bonds.
ary, the first cash for covered bonds buyback this year to offer “Their unwinding can create some profit to offset the 105
a fixed spread rather than a cash purchase price and the first purchase price,” he said.
from a non-peripheral issuer. A banker involved in the transaction said that the premium was
The tender offer came after similar moves by National in the high teens. A covered bond analyst saw the purchase price
Bank of Greece, Portugal’s Banco BPI, Spain’s CaixaCatalun- as offering a premium of around 20bp over secondary levels.
ya, and Italy’s CDP .
Bawag PSK, Commerzbank and Natixis were joint dealers “It is hardly attractive to tender
on Bawag’s buyback, which was billed as intending to opti- Bawag covered bonds”
mise the maturity structure of the bank’s external debt securi-
ties. Investors holding the targeted covered bond were being He said that the buy-back will generate only a small profit and
invited to sell it to the issuer for a fixed spread of 55bp over that the motivation therefore seems to mainly be about balancing the
mid-swaps, with the buyback capped at Eu500m. issuer’s maturity profile and using some of the recouped collateral
The fixed spread contrasted with a cash price on the table for repo with the European Central Bank or for private placements
in the other tender offers, which, except for CDP’s, came at a beyond the ECB’s three year long term repo operation (LTRO).
deep discount to par value. He said a high participation rate would be surprising given
A banker away from Bawag’s transaction said that the pre- the collateral backing Bawag’s covered bonds.
mium on offer was “pretty minimal” and that it was surprising “We argue that given the strong demand for short dated
that the purchase price is so close to par. A swap spread of 55bp covered bonds currently and the lack of new issuance in this
over equated to a cash price of around 105% on the morning maturity bracket, it is hardly attractive to tender Bawag cov-
the tender offer was announced ered bonds 2014 at 55bp over mid-swaps,” he said, adding
He suggested that this meant the tender offer was not that the purchase price level is considerably wider than Aus-
aimed at generating core tier one capital, but said that a trian sovereign spreads.
18 The Covered Bond Report Jan/Feb 2012