The July issue of The Covered Bond Report. Visit us at www.coveredbondreport.com

1. The Covered
Bond Report
www.coveredbondreport.com July 2011
Fall of
the sovereign
Will covered bonds rise amid the ruin?
CRD IV Canada ICMA
Everything to play for Rules and legislates Anti-whispering campaign

2. Covered
bonds?
Highly rated covered bonds backed by mortgages
Average LTV of 60.5%
Match-funded structure
Core capital ratio of 18.6%
Largest mortgage bond issuer in Europe
nykredit.com/ir
Figures as of 17 March 2011

3. The Covered
Bond Report CONTENTS
22
Cover Story
SOVEREIGNS VERSUS COVERED
22 Fall of the sovereign
Sue Rust reports.
FROM THE EDITOR
5
3 It’s all in the timing
MONITOR
5 Legislation & regulation
11 Ratings
15 Market
15 20 People
July 2011 The Covered Bond Report 1

4. The Covered
CONTENTS Bond Report
30
CRD IV: GAME ON
30 Everything to play for
Neil Day
CANADIAN MOMENTUM
36 Canada rules and legislates
36
Maiya Keidan
ANALYSE THIS: SOLVENCY II
42 It’s the end of the world
as they know it
FULL DISCLOSURE
49 From fairway to oche
42
2 The Covered Bond Report July 2011

5. FROM THE EDITOR
It’s all in the timing
W
ould the European Commission’s
CRD IV proposals have been more
definite in a less uncertain world?
Merely publishing a timely
and relevant magazine is fraught
enough without the fate of the
euro-zone changing on a daily basis. Producing an inter-
national framework that will see the financial system safely
through its ups and Lehmans is asking for trouble at any
time — even more so when a euro-zone sovereign is on the
verge of defaulting.
Small wonder that the EC passed on most of the big
decisions, leaving the European Banking Authority to
carry the can. Would Commissioner Barnier really have
stood up and declared sovereign debt to be the nec plus
ultra of liquid assets a day before haircuts for Greek
bondholders were revealed?
The Covered That said, leaked drafts of the EC proposals seen by
The Covered Bond Report suggest that the decision to
Bond Report leave open a final definition of liquid assets was not taken
at the last minute. However, this should only give en-
www.coveredbondreport.com couragement to covered bond supporters, some of whom
have already taken heart from being offered a second op-
Editorial
portunity to lobby for better treatment.
Managing Editor Neil Day
+44 20 7415 7185 What the Commission did lay down, though, was a
nday@coveredbondreport.com tough wish-list for the EBA to use when examining which
Deputy Editor Sue Rust asset classes are fit for liquidity buffers. To name but three: a
srust@coveredbondreport.com proven record of price stability; maximum bid/ask spreads;
Reporter Maiya Keidan and transparent pricing and post-trade information.
mkeidan@coveredbondreport.com While the list of criteria is welcome in that it gives
everyone a clearer idea of what needs to be done to win
Design & Production
Creative Director: Garrett Fallon
over the EBA, satisfying them will be no easy task. Is the
Senior Designer: Sheldon Pink covered bond industry up to the challenge?
Four years have now passed since the onset of the
Printing crisis and in many of these areas little progress has been
Wyndeham Grange Ltd made. Less time remains until implementation in 2015,
let alone until the EBA reports back to the Commission.
Advertising Sales The clock is ticking.
ads@coveredbondreport.com
Subscriber Services The Covered
subs@coveredbondreport.com Bond Report
www.coveredbondreport.com July 2011
Editorial
editorial@coveredbondreport.com
Fall of
The Covered Bond Report is a the sovereign
Newtype Media publication Will covered bonds rise amid the ruin?
25, Finsbury Business Centre
40 Bowling Green Lane
London EC1R 0NE
+44 20 7415 7185
CRD IV Canada ICMA
Everything to play for Rules and legislates Anti-whispering campaign
July 2011 The Covered Bond Report 3

6. The Covered
Bond Report
The Covered Bond Report is not only a magazine, but also a
website providing news, analysis and data on the market.
Did you know that The Covered Bond Report has its own database
of benchmarks?
Did you know that we link directly from bond data to relevant coverage?
Did you know that we include price guidance, book sizes and
distribution statistics?
Did you know that you can run league tables by country and currency?
To register for trial access to The Covered Bond Report, visit
news.coveredbondreport.com or contact Neil Day, Managing Editor, at
nday@coveredbondreport.com. And don’t forget: if you are an investor in
covered bonds you can qualify for free access to the website.

7. MONITOR: LEGISLATION & REGULATION
Legislation & Regulation
UNITED STATES
FDIC fight ahead after bill passes
Stark and potentially unbridgeable di-
visions between the FDIC and covered
bond proponents led by Republican Con-
gressman Scott Garrett were laid bare as
the House Financial Services Committee
passed the United States Covered Bonds
Act of 2011 on 22 June.
Garrett complained of a breakdown in
communications with the regulator while
former HFSC chairman Democrat Bar-
ney Frank tried to introduce two amend-
ments at the behest of the FDIC that the
Republican said would render the bill
ineffective.
And although FDIC chairman Sheila
Bair’s term of office ended in July, cov-
ered bond supporters already fear that
her expected successor, Martin Gruen- Will Martin Gruenberg take
over Sheila Bair’s position?
berg, will adopt a similar stance and
place obstacles in the way of the develop-
ment of a US market. that “both would have hurt the develop- that Frank had enjoyed “a positive work-
Garrett’s bill — co-sponsored by ment of the market”. ing relationship and dialogue with the
Democrat Carolyn Maloney — was ulti- “The repudiation power in the re- FDIC”, before saying:
mately passed by a comfortable 44 votes jected amendment was better for inves-
to seven, but the potential pitfalls facing tors than the FDIC’s current repudiation “The FDIC decided
the proposed legislation on its way to
being signed into law were laid bare by
power because the amendment required
the FDIC to pay off investors in full rather
to stop responding to
votes on Frank’s amendments. Although than up to the market value of the cover our staff’s e-mails”
Garrett warned that “you would no long- pool,” said the rating agency. “However,
er have a covered bond marketplace” if the amendment would have exposed in- “Would that it be the case that we had
the amendments were passed, they were vestors to an early pay-off, which existing continued to have that relationship with
only narrowly defeated, each by 28 ayes covered bond investors do not want. the FDIC as well. I thought we had it for a
to 26 nays. “Furthermore, a cap on the amount long period of time and members on the
Frank’s amendments would have giv- of overcollateralisation would reduce the other side of the aisle, their staff knows
en the FDIC more far-reaching powers resiliency of covered bonds, preventing that we engaged in numerous hours of
than those envisaged in Garrett’s legisla- issuers from adding collateral to main- staff to staff discussions on various por-
tion. Frank said that his first amendment tain the credit strength of the covered tions of the bill, but I will point out that
had been drafted in close co-operation bonds if the issuer deteriorates.” that for some reason or another, despite
with the FDIC, which he said was con- those ongoing discussions that we were
cerned not with the concept of covered Concerns addressed able to continue to have on a member to
bonds, but the extent to which it and the ‘time and time again’ member and staff to staff member level
Deposit Insurance Fund are protected. Garrett pointed out that an earlier ver- here in the House, the FDIC, for what-
The amendments would have al- sion of the bill that had contained less ever reason, decided to stop responding
lowed the FDIC to repudiate covered protection for the FDIC had been passed to our staff ’s e-mails.
bonds following a bank default and by the committee last year under the “So as of last week those aspects of
would have capped maximum overcol- chairmanship of Barney Frank with bi- discussions that we would want to have
lateralisation levels and after the hearing partisan support, including that of Frank. with the FDIC came to an abrupt halt.
Moody’s backed up Garrett by saying Garrett went on to say that he noted We were sending over e-mails as to what
July 2011 The Covered Bond Report 5

8. MONITOR: LEGISLATION & REGULATION
we thought we could do to improve the Maloney said that the FDIC support- The end of Bair’s term as chairman
bill to make changes to address their ed the amendment, which she said was had held out the prospect of a change in
concerns, and those ended at that point designed to give the regulator as much the FDIC’s position, but there have al-
in time.” flexibility as possible and to protect the ready been signs that acting chairman
Garrett went on to say that while he Deposit Insurance Fund. The FDIC had Martin Gruenberg will adopt a similar
was pleased that member to member dis- argued that it is more difficult to sell off position to his predecessor. DBRS, for
cussions could continue, he could not sup- a covered bond programme than other example, suggested this might be the
port Frank’s amendment because of what banks’ assets and products, particularly if case in mid-July when discussing lob-
he said it would lead to: “There would not a number of institutions are failing. bying of the FDIC to relinquish its first
be any investors interested in the market- right to cover pool assets in the event of
place were this amendment to pass.” “The legislative an issuer default.
He said that Frank’s amendments
would introduce too much uncertainty
calendar has “Vice chairman of the FDIC Martin
Gruenberg, who some believe will be
into the instruments, such that investors become a serious President Obama’s choice to succeed
would either not be interested in them or
only at a price that would not make them
consideration” Chairman Bair, recently reiterated a
variation of this position stating that in
viable. He went on to point out several An amendment allowing a covered the event of a bank failure, the FDIC,
ways in which the different versions of bond issuer’s regulator to place a cap on and not investors, should have first
bills he has introduced had progressively covered bond issuance relative to total rights to any excess collateral included
included more and more concessions assets was approved. This was introduced in a covered-bond offering,” said the
to the FDIC over more than two years, by Republican John Campbell, who had rating agency.
“time and time again”. expressed disapproval of the bill in a sub- There are also fears that time could be
HFSC chairman, Republican Spen- committee markup in May but ultimately running out for legislation to be passed
cer Bachus, also said that the com- voted in favour of the bill. He said that in this Congress. While the HFSC vote
mittee had “tried very hard to accom- the possibility of including a number had and Republican control should smooth
modate the FDIC”, which had, he said, been discussed, but that this would be left the bill’s passage through the House of
only the day before indicated that it to regulators rather than legislated for. Representatives, observers are less cer-
had three problems with the bill that The FDIC has previously set a 4% limit. tain about the Senate.
were being addressed. “The length of the remaining legisla-
tive calendar has become a serious con-
Reconciliation impossible? sideration, particularly for Senate ac-
Frank responded by acknowledging that tion,” said Jerry Marlatt, senior of counsel
there was a clear difference of opinion at Morrison Foerster. “The Senate has not
between the FDIC and those pushing for previously considered a covered bond
covered bonds. He said that those sup- bill and, accordingly, there is much to be
porting the bill had “overestimated” the done for the Senate staff to be prepared
extent to which agreement with the FDIC to take informed positions on a bill. Per-
had been reached. haps the most important factor in mov-
Two amendments that offered con- ing a bill quickly through the Senate will
cessions to the FDIC were nevertheless be who sponsors the bill.
approved. “As previously reported, Senator
One, from Democrat Carolyn Charles Schumer (D-NY), who is a key
Maloney, co-sponsor of the bill, extends senator on the Senate Banking Com-
from 180 days to one year the period the mittee, has said that he would consider
FDIC has to find an institution to take introducing a covered bond statute.
over a covered bond programme in the Barney Frank: supporters of bill Sponsorship by Senator Schumer would
event it is appointed conservator or re- overestimated any agreement with FDIC
greatly enhance the prospects for the bill
ceiver of a failed issuer. moving quickly.”
6 The Covered Bond Report July 2011

9. MONITOR: LEGISLATION & REGULATION
“Covered bonds could be observed
trading through government bonds” page 24
SOUTH KOREA
Korean rules raise solo supply hopes
The prospect of standalone covered bond with legally binding regulations on cov-
issuance from South Korean banks has Key features of ered bond issuances,” said the regulators.
increased following the release of covered Korea’s guidelines: Jerome Cheng, vice president, senior
bond guidelines by the country’s regula- credit officer at Moody’s, told The Covered
tors in late June. or greater Bond Report that the establishment of a
The Financial Services Commission covered bond framework has been under
(FSC) and Financial Supervisory Service of total liabilities discussion for quite some time.
(FSS) described the guidelines as part of “Market participants have been lobby-
measures to implement “Comprehensive ing government to enact a law or publish
Measures on Household Debt”. guidelines,” he said. “From market par-
“The guidelines are intended to pro- vehicles under the Act on Asset-Backed ticipants’ perspective, having guidelines
vide a framework for covered bond issu- Securitization. will allow originators to structure covered
ances, diversifying banks’ financing in- The cover pool may comprise: first bonds with a higher degree of certainty.
struments and encouraging banks to offer priority mortgage loans with maximum “The guidelines, which we have not yet
more long term and fixed rate mortgage secured amounts of 120% or more of the assessed, should give additional comfort
loans instead of short term and floating actual loan amount, a 70% loan-to-value to investors.”
rate ones,” said the FSC and the FSS. cap, and no delinquencies in excess of 60 Previously only one Korean bank has
The “best practice guidelines” run to a days; cash; ABS backed by such mortgage issued a covered bond on a standalone
mere two pages, but contain rules on key loans or cash; mortgage backed bonds is- basis — Kookmin Bank, with a $1bn is-
features of issuance — see box. sued by Korea Housing Finance Corpora- sue in 2009. State-run KHFC sold a sec-
Issuers permitted under the guidelines tion (KHFC); and mortgage backed secu- ond international covered bond issue — a
include banks, agricultural and fishery rities issued by KHFC. $500m five year — on 18 July, but its issu-
co-operatives, the Korean Development “After monitoring the issuances of cov- ance is under an act governing the insti-
Bank, Export-Import Bank of Korea, In- ered bonds in the future, we will have fur- tution and the bond is backed by pooled
dustrial Bank of Korea, and securitisation ther discussions on whether to come up collateral from its member banks.
AUSTRIA
Forum discusses steps to uniform law
Moves towards harmonising Austria’s would be the ultimate outcome of work Mortgage Banking Act, while Kommu-
covered bonds under a single law were to improve the Austrian framework. nalkredit Austria and Bawag PSK issue
discussed at the first conference of the “We are heading towards one law,” he Fundierte Bankschuldverschreibungen.
Österreichisches Pfandbrief und Cov- said. “But before that there will definitely The Österreichisches Pfandbrief und
ered Bond Forum at the end of May. be intermediary steps to further harmo- Covered Bond Forum was launched in
According to DZ Bank covered bond nise the existing ‘two-plus’ frameworks. January by Austria’s leading covered
analyst Michael Spies, representatives “There will be harmonisation in bond issuers, representing Bawag PSK,
of the Austrian central bank (Oesterrei- terms of transparency, in terms of fur- Erste Group, Kommunalkredit Austria,
chische Nationalbank) and the finance ther quality improvements.” Österreichische Volksbanken, Raiffeisen
ministry said that the harmonisation of Austrian covered bonds are either Bankengruppe, UniCredit Bank Austria,
laws governing Austrian covered bonds Pfandbriefe issued under the Mortgage and Hypoverband.
would be on their agenda. Banking Act, which in 2005 brought Schweitzer said that the forum
Martin Schweitzer, speaking on be- together the old Mortgage Banking would not only be working on legisla-
half of the Österreichisches Pfandbrief Act and the Pfandbrief Law, or Fundi- tive changes.
und Covered Bond Forum, told The erte Bankschuldverschreibungen. Er- “It’s about transparency in the market,
Covered Bond Report that a single cov- ste Group Bank and UniCredit Bank speaking with one voice, and being vis-
ered bond law was not imminent but Austria, for example, issue under the ible on the European stage,” he said.
July 2011 The Covered Bond Report 7

10. MONITOR: LEGISLATION & REGULATION
TRANSPARENCY
First CBIC responses favourable
The Association of Swedish Covered Bond However, the Austrian association initiative and would recommend its mem-
Issuers (ASCB) and the Pfandbrief & Cov- (Österreichisches Pfandbrief und Cov- bers have common cover pool information
ered Bond Forum Austria have welcomed ered Bond Forum), which got back to the set up “largely in line with your proposal”.
an ICMA Covered Bond Investor Council CBIC, said that it would need a couple The association disagreed on several
transparency initiative in responses to a more weeks to agree a common Austrian points it said were of a more “technical na-
consultation on the proposed standards, position, and other national associations ture”. For example, the ASCB took issue with
but several national groupings have said were not in a position to respond by the a suggestion that issuers should have to pro-
they need more time to consider them. deadline. The Italian Banking Associa- duce margin calculations, saying that these
Responses to the consultation were due tion (ABI) was due to meet to prepare a were not always available or appropriate. It
by 30 June and a spokesperson for the CBIC response as The Covered Bond Report also said that it did not see why breaking out
said that the consultation had in general was going to press, said an official at the covered bond funding into bearer and regis-
been received quite positively. The Euro- association. The Covered Bond Report tered formats was necessary.
pean Covered Bond Council — also speak- understands that the Association of Ger- The Swedes noted that some data fields
ing for some national associations — and man Pfandbrief Banks (vdp) had not yet suggested by the CBIC were not relevant
European Central Bank are understood to formally submitted a response. in their case as most Swedish issuers are
be among those parties that contributed to Sweden’s ASCB said in a submission specialised mortgage entities that do not
the consultation by the deadline. dated 27 June that it welcomed the CBIC conduct other business.
ECBC DATA
Issuance rises, ECB share falls
The volume of covered bonds outstand- do not accurately reflect the amounts They also looked at volumes in the
ing rose to Eu2.5tr in 2010, according backed by residential mortgages. two asset classes relative to their use as
to data published by the European Cov- Landesbank Baden-Württemberg European Central Bank collateral and
ered Bond Council, as their funding role analysts compared mortgage backed found that fewer than 18% of eligible
gained in prominence. covered bond volumes with mortgage covered bonds are being used for refi-
In 2009 outstanding covered lending volumes and ABS issuance. They nancing via the Eurosystem — less than
bond volumes were Eu2.4tr. Last year found that even in countries where se- in 2009 and compared with 38% of
Eu606.7bn of new covered bonds were curitisation has been increasingly used, available ABS.
issued, versus Eu529.8bn in 2009. such as Italy and Portugal, covered bond “In other words, considerably more
Denmark had the highest total issu- funding has increased its share of hous- covered bonds were placed in the mar-
ance last year, at Eu148.6bn, followed ing finance. In the UK the share of RMBS ket or not acquired with the immediate
by Germany (Eu87bn) and Sweden has fallen over the last two years, while intention of using them as collateral,”
(Eu80bn). covered bonds have held steady. they said.
Mortgage backed covered bonds’
share of the total increased, with public 16,000 32.0%
sector covered bonds standing at only 14,000 28.0%
24% of issuance in 2010, down from 12,000 24.0%
10,000 20.0%
29% in 2009 and 58% back in 2003.
8,000 16.0%
The ratio of mortgage backed covered Volume of assets
6,000 12.0%
bonds outstanding relative to outstanding considered eligible
4,000 8.0% and the share of
mortgage loans increased in all countries deposited covered
2,000 4.0%
aside from the UK and Germany, where bonds in the total
0 0.0% eligible volume of
the ratio remained the same — although 2004 2005 2006 2007 2008 2009 2010 covered bonds (rhs)
in Germany, and some other countries, total eliible collateral (€bn) eligible covered bonds (€bn)
Sources: ECB, LBBW
mortgage backed covered bond volumes covered bonds used as a % of eligible cb (rhs)
Credit Research
8 The Covered Bond Report July 2011

11. MONITOR: LEGISLATION UK
“Sovereign investors are more vulnerable
to potential haircuts” page 25
RCB REVIEW
IMA cites weaknesses in UK consultation
The Investment Management Asso- the review was announced. However,
ciation believes UK Regulated Covered the IMA said that the introduction of Jane Lowe: “It might benefit
Bonds lack “the very high degree of bail-ins of senior debt might affect the from more significant change.”
certainty” that should be expected of a RCB regime and that to maintain inves-
regulated product, and that the frame- tor confidence the RCB should be clear-
work needs more significant changes ly carved out of bail-in requirements.
than those being proposed in a review. “This is particularly important as
In its response to a consultation on in contrast to many EU RCB regimes,
proposals announced in April by HM a UK RCB is a senior unsecured bond
Treasury and the Financial Services Au- and only becomes ‘secured’ by way of a
thority, which ended on 1 July, the IMA guarantee on ‘default’,” said the associa-
said that it was unfortunate that, as be- tion. “In a special resolution situation,
fore the UK framework’s introduction this means that the guarantee may not
in 2008, it was not pre-consulted on re- be triggered under the relevant contract
form proposals. because the issuer is not deemed to be
“This is unfortunate since it would ap- in default.”
pear that an assumption has been made
that the regime needs little change, where- Investor data demands conflict
as we would argue that it might benefit The IMA said that covered bonds have
from more significant change,” said Jane been increasingly taken up by its mem-
Lowe, the IMA’s director of markets. bers in the past year but that they have
not found the documentation “user-
“Key information is friendly”.
“Key information is frequently bur-
frequently buried” ied deep within detailed prospectuses
(400+ pages is not unusual),” said the
The association outlined several con- IMA. “Whilst they are able to manage
cerns relating to the transparency and this, we question why it should be nec-
structure of UK RCBs, and urged HM essary for a regulated product.”
Treasury to tackle these, even if such re- The association argues in favour of
form was not envisaged in the timetable disclosure of loan level data in line with
for the review of the framework. Bank of England requirements. “Covered bond pools need to be
“For investors, the RCB regime is “This is a much needed measure to monitored by investors but maybe not
lacking the very high degree of certainty improve investor confidence and trans- nearly as frequently as ABS pools as
that should be expected of a regulated parency for Regulated Covered Bonds,” long as the pool is fairly elitist from
product,” said the IMA. “For issuers, the it said. its creation onwards and substitution
regime runs the risk that over time it However, the Covered Bond Investor mechanisms are in place,” said the coun-
will fail to attract long term stable inves- Council said in a response to the con- cil, which has called for aggregated data
tors into the product. sultation that loan-by-loan disclosure it believes would be more useful. The
“If the impact of bank resolution and of cover pool assets, as required by the dynamic nature of cover pools makes
bail-in extends also to the RCB regime, Bank of England, “would contaminate regular loan-level disclosure superflu-
this is likely to lead to a gradual with- the reputation of high quality the cov- ous, it added.
drawal of long term investors from bank ered bonds product has in the market”. The level of transparency that inves-
funding, leaving banks with a different Asset backed securitisation (ABS) tors should be provided with was the
and probably less stable investor base.” products and covered bonds need to only point of contention raised in the
Some market participants had sug- be distinguished, it said, in particular CBIC’s submission, with the council say-
gested that such bail-in questions might with respect to the level of information ing that it is “generally positive” toward
have been sufficiently addressed when required. the changes proposed by the review.
July 2011 The Covered Bond Report 9

12. MONITOR: LEGISLATION & REGULATION
SPAIN
Full recourse withstands populist move
Recent amendments to Spain’s legal
framework for mortgage loans weaken
creditors’ recourse to low income borrow-
ers, but preserves full recourse mecha-
nisms in the Spanish market, according to
Fitch and Moody’s.
Spain’s parliament passed a resolu-
tion, Royal Decree 8/2011, on 30 June
that, among other changes, increases the
threshold of defaulted borrower income
that is ring-fenced from a claiming credi-
tor. The new law became effective on 7
July, and was put forward by the ruling So-
cialist party, the main opposition People’s
Party and Catalan group Convergencia i Source: Plataforma Afectados
por la Hipoteca
Union, demonstrating widespread sup-
port for the move. it continues to consider the Spanish debt tailing the rights of creditors to attach the
Alvaro Gil, director, covered bonds at market as one featuring full recourse. wages of borrowers who default on their
Fitch, said that a motivation behind ini- “Fitch recognises that there are many mortgage loans”.
tiatives to end or modify full recourse was disincentives that a sensible borrower will But it said that this measure will have
the large number of legal cases for repos- consider before defaulting on its mortgage a negligible impact on the Spanish RMBS
sessions since 2008. There have also been loan to take advantage of the newly-ap- market because most of a mortgage loan’s
recent protests in support of borrowers proved measures,” it said. recovery stems from the effective sale of
facing repossession. Such disincentives include the alterna- a property, and not from the personal li-
According to statistics from the Span- tive costs of occupancy such as property ability remaining against a mortgage bor-
ish judicial system cited by Moody’s, the rental or the potential loss of fiscal ben- rower if the foreclosure process ends with
number of foreclosures reached 93,000 in efits, according to Fitch. any debt outstanding.
2010, up 260% from 2007 levels. Fitch said The new framework also raises the
that legal cases for repossessions since “Incentives to repay minimum percentage of the property
2008 totalled 240,000. are still in force” value – from 50% to 60% – at which a
Under Spanish law mortgage borrow- bank can repossess a mortgaged property
ers remain personally liable for their debt “The full recourse mechanism over if the foreclosure process ends with no
after foreclosure, instead of being able, as borrower’s existing and future assets per- offers. Carlos Terre, director, structured
is the case in some countries, to discharge sists by law, and would disqualify default- credit at Fitch, said this will shift poten-
that debt in bankruptcy. ed borrowers from owning other assets or tial losses from the obligors’ side to the
“Full recourse to current and future as- from generating additional income in the banks’ side, but that the rating agency
sets and income of the obligor is system- future,” it said. considers the effect on recovery assump-
atically used by banks to ensure full re- In Fitch’s view the new law could trig- tions to be neutral.
covery on defaulted mortgages when the ger a tightening effect on mortgage under- Moody’s highlighted a third amend-
foreclosed property value at auction does writing policies, in particular with regards ment, which reduces the amount that a
not cover the outstanding debt,” said Car- to loan-to-value ratios for low income party has to deposit upfront to participate
los Masip, director, RMBS at Fitch. borrowers. at a property auction.
The rating agency said that although Moody’s said that the revised frame- “Lowering the liquidity require-
newly approved changes to Spain’s mort- work introduces three main changes. A ment may attract more bidders; the third
gage loan framework may reduce the first involves raising the threshold that full amendment may thus be considered cred-
strength of full recourse from a cashflow recourse to a defaulted borrower’s exist- it-positive, so long as it forms an incentive
perspective, in particular for low income ing and future income is applicable to, a for third parties to bid at mortgage auc-
borrowers in negative equity situations, change that Moody’s described as “cur- tions,” said Moody’s.
10 The Covered Bond Report July 2011

13. MONITOR: RATINGS
Ratings
MOODY’S
‘Unprecedented’ move blocks BayernLB deal
Bayerische Landesbank put on hold a had the mandate for the transaction and
new covered bond issue on 6 July in re- a syndicate official at one of the leads said
sponse to Moody’s that morning plac- that preparations for the transaction had
ing its Pfandbrief ratings on review for gone very well, and that the decision to not
downgrade alongside those of three oth- proceed was taken solely on the basis of
er public sector banks. Moody’s action, which he described as “ab-
“Since announcing a 10 year Jumbo solutely unprecedented” and “ridiculous”.
Öffentliche Pfandbriefe transaction yes- “We had a good IoI book and were
terday, BayernLB has achieved a strong ready to go,” he said.
momentum in the shadow order book BayernLB’s mortgage and public sec-
process,” the issuer said in a statement. tor covered bonds are rated triple-A by
“However, the issuer has decided to delay Moody’s, but the ratings were placed on
marketing the transaction following the review for possible downgrade alongside
BayernLB: “Had a good IoI book
Moody’s announcement this morning. those of Pfandbriefe issued by HSH Nor- and was ready to go.”
“BayernLB would like to express their dbank, WestLB, and Deutsche Kredit-
thanks to those investors who have al- bank, after Moody’s placed the respective
ready shown their support. The decision issuer ratings on review for downgrade rating agency’s willingness “to go the edge”
was taken in the interest of protecting the previous week. given that the rating of the public sector
BayernLB’s investor base.” A covered bond analyst described covered bonds could sustain a three notch
Crédit Agricole, Credit Suisse, Deut- Moody’s action with respect to BayernLB’s issuer downgrade before being cut, accord-
sche Bank and Royal Bank of Scotland public sector Pfandbriefe as a sign of the ing to the rating agency’s methodology.
SOLVENCY II
Covered to keep shine despite low returns
Full implementation in 2013 of Sol- would occur as a result of insurers, the other corporates, “the charge is rela-
vency II rules in their latest iteration largest investor group in Europe, mak- tively punitive compared with the risk
could lower the appeal of covered bonds ing significant changes to their asset and returns currently available, making
on the basis of their capital-adjusted portfolios to optimise their capital posi- them less attractive than other bonds on
returns and thereby render them more tions, according to Fitch. a pure return-on-capital basis under the
expensive to issue, according to Fitch. In a summary introducing the re- (credit) spread module” (see chart).
However, the rating agency said in a port, the rating agency said that an in- With banks under pressure to in-
June report that the security the asset crease in the attractiveness of covered crease funding, a reduction in demand
class offers means they will remain at- bonds would be one of the main effects could increase covered bond pricing,
tractive to insurers. of insurers adjusting their asset portfo- the report added.
This dynamic would be one among lios to optimise capital positions. However, Fitch ended its assessment
many — such as a shift from long term However, in a section dedicated to of the impact on covered bonds on a
to shorter term debt, and an increase in covered bonds the rating agency said positive note, saying that the asset class
the attractiveness of higher rated corpo- that although triple-A rated covered is likely to remain attractive to insurers
rate debt and government bonds — that bonds have a lower capital charge than because of their “very safe nature”.
Comparison of Bond Returns under Solvency II (Taking into account cost of capital)
Issuer (Dated) Duration Rating Category Standalone capital charge* – Spread over Return on
standard formula (%) swap (bps) equity (%)
Tesco (2014) 2.5 ‘A’ 3.5% (2* , 1.4%) 50 14.0
BAA (2041) 14 ‘A’ 19.6% (14*, 1.4%) 200 10.2
Deutsche Bank covered bond (2018) 6 ‘AAA’ 3.6% (6*, 0.6%) 10 7.8
* assuming duration matching using swaps. Source: Bloomberg, Fitch
July 2011 The Covered Bond Report 11

14. MONITOR: RATINGS
DENMARK
Danes up in arms amid Moody’s fall-out
A revised approach to Danish covered overcollateralisation requirements as a
bonds from Moody’s resulting in nega- result of Moody’s announcement”.
tive rating actions has raised tensions
with Danish issuers, leading to Realkredit Surprised and confused
Danmark terminating its collaboration Realkredit Danmark will also establish a
with the rating agency and others seeking new capital centre for the financing of its
ways to escape the rating pressure. ARM loans, but in contrast to Nykredit
Moody’s on 10 June increased the refi- decided not to continue its collaboration
nancing margins and lowered the Timely with Moody’s.
Payment Indicator (TPI) from “very “The decision was taken because
high” to “high” for the covered bonds Moody’s, as a result of its model calcula-
of five Danish issuers, citing increased tions, demanded that Realkredit Danmark
refinancing risk due to a material rise in provide an additional excess cover of
adjustable-rate mortgage (ARM) loans, Dkr32.5bn (Eu4.36bn) if it wanted to keep
and reduced systemic support and cred- its current AAA rating,” said the issuer.
itworthiness. Realkredit Danmark said that it is in the
Among measures taken by Danish position to provide excess cover through
mortgage banks in response to Moody’s the issuance of junior covered bonds or
move was Realkredit Danmark’s decision through a loan from its parent, Danske
to drop the rating agency. Bank, but Moody’s on 14 July placed on re-
“Realkredit Danmark has discussed view for downgrade covered bonds issued
the fundamentals of the matter with out of the issuer’s Capital Centre S because
Moody’s in order to understand the ra- the collateral had not yet been added.
Moody’s offices in New York
tionale behind its rating model, but has Other rating agencies could gain from
concluded that the parties disagree about the fall-out, with Realkredit Danmark
the fundamentals,” it said on 23 June. Denmark’s mortgage financing system potentially turning from Moody’s to
Moody’s went on to cut three Danish by the country’s central bank, which has Fitch — Standard & Poor’s already rates
mortgage credit institutions’ issuer rat- highlighted a reduction in refinancing its covered bonds AAA.
ings on 1 July and lowered covered bonds risk linked to ARM loans and a reduc- BRFkredit is in talks with S&P about
issued out of BRFkredit Capital Centre E tion in risks surrounding continuous rating its capital centres after saying that
from Aa1 to Aa2. loan-to-value requirements as ways in it was “surprised and unable to under-
However, with the Danish commu- which financial stability needs to be stand” Moody’s actions. The move was
nity increasingly vocal in its criticism strengthened. announced on 6 July as one of a pack-
of the rating agency, Moody’s put out a age of measures from BRFkredit, which
special comment on the Danish covered “The parties disagree Moody’s cut to Baa3 on 1 July.
bond system in which its strengths were
highlighted.
about the The bank said that it will keep Moody’s
as a “co-operation partner” and establish
“Despite weakening issuer credit fundamentals” a new capital centre (H) that will prima-
strength and our assessment of increased rily refinance ARM loans, in line with
refinancing risk, the position of Den- These recommendations and Moody’s Nykredit Realkredit’s and Realkredit
mark as having one of the strongest cov- changes were among “future business Danmark’s plans.
ered bond frameworks in Europe has not conditions” cited by Nykredit Realkredit The issuer had made a commitment
changed,” said Moody’s, adding that the in an announcement from 21 June setting in the documentation of covered bonds
new refinancing margins are the lowest out a five point operational plan. This in- issued out of capital centre E to maintain
in Europe and that the TPIs are among cludes funding ARM loans with bonds is- a Aa1 rating by injecting capital if nec-
the highest in Europe. sued out of a special capital centre so that essary, but BRFkredit said that Moody’s
Moody’s methodological revisions these “may be given an independent, and methodology made achieving such a rat-
coincide with increased scrutiny of possibly lower, rating leading to lower ing impossible.
12 The Covered Bond Report July 2011

15. MONITOR: RATINGS
“You look at the debt-to-GDP ratio in Canada,
it’s very impressive indeed” page 39
FITCH
Encumbrance a concern, but checks exist
Increased issuance of covered bonds and most assets on the company’s balance Fitch nevertheless noted the benefits
renewed repo activity raise asset encum- sheet, reducing overall financial flexibility. covered bonds can carry for issuers from
brance issues, according to Fitch, but the “In addition, a high concentration of a ratings perspective.
rating agency sees the trend easing, even secured financing increases the risk that “Most global trading banks did not
if bank funding costs remain elevated. unsecured creditors could be adversely af- have a covered bond programme prior
Regulatory reforms, increased risk aver- fected as secured creditors may have prior- to the crisis, but many have established
sion and other measures pushing the asset ity claims to higher-quality assets,” it said. such programmes in the past two years,”
class to the fore have led to greater use of “If the industry shifts to a significantly it said. “As such, the use of covered bonds
covered bonds, said the rating agency in a higher level of secured funding versus his- by these banks remains limited, but rep-
report in June, adding that the increased torical levels, Issuer Default Ratings (IDRs) resents a funding source offering poten-
take-up of the asset class will hit a peak. could come under pressure and unsecured tial diversification and maturity exten-
“Fitch believes that the limited supply debt ratings could fall below the IDR due to sion benefits. This potential has yet to be
of high quality cover pool assets and na- lower recovery expectations.” fully tapped by these banks.”
tional regulatory limits, if properly mon-
itored and enforced, serve as checks to New Issuance in Debt Markets (Euro Zone) Excludes issues <USD50m
the use of covered bonds, allaying some (USDbn) Covered bonds (not retained) Covered bonds (retained) Senior unsecured debt
700
investor concerns over high issuance vol- 600
500
umes in recent months,” it said. 400
300
The rating agency said that a high de- 200
100
pendence on secured funding could con- 0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
strain ratings and that an over-reliance
Source: Dealogic, Fitch
on this type of financing could encumber
COUNTERPARTY CRITERIA
S&P hears warnings about proposals’ effect
Standard & Poor’s proposals for assess- currently proposed, would have a dis-
ing counterparty risk in covered bonds proportionate effect on covered bond
would have a disproportionate effect ratings compared with asset-liability
on ratings compared with asset-liability mismatch risk, as assessed using the
mismatch (ALMM) risk, issuers and in- ‘2009 ALMM criteria’,” said S&P .
vestors have told the rating agency. DZ Bank analyst Jörg Homey drew at-
They consider counterparty risk to tention to S&P disclosing that many issuers
be mainly an issuer risk, with investors would consider the move to cap covered
pleased at the prospect of increased trans- bond ratings by reference to the rating
parency about derivative counterparty risks agency’s new counterparty criteria as —
in programmes, said S&P in an interim re- in Homey’s words — an “over-reaction”.
port published on 7 June. S&P said it will respond to feedback
However, the rating agency said that “by changing the criteria if we deem it Jörg Homey: Rating cap
the majority of investors and issuers ap- necessary, by explaining the original pro- seen as “over-reaction”
peared to view counterparty risk as sec- posals more clearly to remove ambiguity,
ondary to an issuer’s ability to pay its or by leaving the proposals unchanged”. is probably going to be whether S&P
covered bond obligations. Homey said that programmes where is satisfied by the precautions taken to
“Most investors and issuers consid- the issuer acts as a counterparty will be replace the bank as counterparty for
ered that counterparty risk, if assessed hit particularly hard. its own cover assets in the event of a
using the 2011 request for comment as “The decisive question in this case downgrade,” he said.
July 2011 The Covered Bond Report 13

16. MONITOR: RATINGS
MOODY’S
Timelier quarterly report presages latest trends
Moody’s made good on a commitment Average cover pool losses by country: mortgage backed covered bonds
to deliver more timely covered bond Collateral risk Market risk
data by skipping Q4 2010 and moving 35%
29% 27%
30%
straight from Q3 2010 to Q1 2011 with 25%
21%
its latest quarterly monitoring report, 20% 16% 15% 16% 15%
released on 11 July. 15% 12%
11% 9% 11% 9% 10% 8%
10% 7%
The rating agency said that it has been 3% 4% 5% 3% 4% 5% 5% 5% 4%
5%
focusing on producing more up to date 0%
information since its last overview, which
ul m
y
d
ce
nd
y
s
l
n
en
m
ly
ga
nd
an
wa
ai
an
-b do
do
Ita
t)
an
ed
la
Sp
rtu
le
rla
m
nl
or
on ng
Ire
was released in April.
ng
Fr
Sw
er
Fi
Po
N
he
(n Ki
Ki
G
et
d
d
“The delay between the publication
N
te
te
ni
ni
U
U
date of this report and the date the in-
formation relates to [up to 31 March] has Average cover pool losses by country: public sector backed covered bonds
halved since the last monitoring report Collateral risk Market risk
30%
was published,” said Moody’s. “Going 24%
25%
forward, Moody’s aims to produce this
20% 19% 18%
report within three months of the date
the information relates to. 15%
11%
9%
“The production of timely data has 10% 7% 7% 7%
also extended to the production of 5% 3% 3% 3% 3%
the performance overviews, which are 0%
published for every covered bond pro- Austria France Ireland Italy Germany Spain
Source: Moody’s
gramme included in this report. Moody’s
aims to publish all performance over- notches in between the ends of Q3 2010 prescriptive order, but those are the three
views within six weeks from the date the and Q1 2011. tiers that they look to do analysis on, and
required information is received from their focus depends on the situation.
the covered bond issuer.” Three tiers for investors “For example, if an investor has ex-
Since the end of the last quarter The rating agency also launched a re- posure to a covered bond programme in
Moody’s has revised its assumptions search service in June packaging its Canada, the focus of their credit monitor-
with regard to Danish covered bonds covered bond research with analyses of ing right now may just be on the issuing
and taken action in relation to several sponsor banks and related sovereigns. bank, versus Spain where their current
programmes from the country. Data on focus may be on the sovereign, the bank,
Danish covered bond programmes in the “They represent and the cover pool detail.”
overview was therefore incomplete, with Kearns said that the launch of the serv-
the rating agency referring to recent re- credit investors ice also reflects developments in the cov-
leases. (See separate article for coverage much more than ered bond market and its investor base.
of Moody’s Danish actions.) “There’s an overwhelming sense that
Among the largest changes in aggre- rates investors” US investors are interested in the space,
gate country data given by Moody’s were but they represent credit investors much
figures relating to Portuguese covered “We’ve tried to complement the cov- more than rates investors, like the tradi-
bond programmes, even though the data ered bond research by adding in sovereign tional buyer-base,” she said. “This is all
relates to a period before the rating agen- research as well as the issuing banks’ re- the way from your typical high grade
cy cut Portugal to junk on 5 July. search,” said Arlene Kearns, senior product credit investor to your hedge funds that
The biggest fall in average surplus strategies in Moody’s structured finance are looking at more high risk exposure.
overcollateralisation for a country was group. “The feedback that we’ve gotten “Their expectations are definitely differ-
in Portugal, where the figure fell from from the marketplace is that they look at ent from the traditional rates investor. They
18% to 5%. All Portuguese covered bond the sovereign first, the issuer next, and the are looking for cover pool information and
programmes were cut by two or three programme third — not necessarily in that detail and looking to do that deep dive.”
14 The Covered Bond Report July 2011

17. MONITOR: MARKET
Market
ICMA
Anti-whispering campaign ‘counterproductive’
Syndicate bankers are awaiting the details mately priced at 18bp over on the back of starting to draw conclusions and move
of prospective ICMA best practice guide- a Eu750m order book. ahead with new practices,” he said.
lines to see if primary market practices “We hit it spot-on, but the proce- One practice being scrutinised is that
will have to change in ways that could in- dure could have been smoother,” he said. of price whispers, which Ewing character-
crease execution risk for covered bonds, “These kinds of guidelines are harming ised as an interim step after pre-sounding
resulting in issuers having to pay higher the proper evaluation process, but we had but before bookbuilding has begun on the
new issue premiums. to deal with that.” basis of official guidance. He said that the
The International Capital Market Asso- practice of price whispers had emerged in
ciation (ICMA) is working toward a set of Go the extra mile response to the financial and sovereign
best practice guidelines aimed at increas- Ruari Ewing, director, primary markets, debt crises.
ing transparency in new issues, through market practice and regulatory policy at “In an easy market you can go straight
changes to the way in which information the International Capital Market Associa- to guidance, but in volatile markets you’re
is communicated at various stages of the tion (ICMA), told The Covered Bond Re- dealing with a completely different kettle
new issue process. Any such guidelines port that the association had in October of fish,” he said.
could affect the practice of price whisper- 2010 added an explanatory memorandum Although price whispers can be shared
ing, with the release of updates on order on pre-sounding, bookbuilding and allo- with many market participants, some are
book sizes also under scrutiny. cations to its handbook, and that several arguing that the information needs to be
Banks’ efforts to get in line with the roundtables with investors had been con- communicated to a larger audience, ac-
impending guidelines have already had an ducted over the past couple of years, most cording to Ewing.
impact on the primary market. recently in May. “The aim is to go out much wider with
When Landesbank Baden-Württem- “Banks are now continuing their dis- a whisper than before,” he said. “With in-
berg sold a debut benchmark mortgage cussions internally, with some already creasing volatility there is a feeling that it is
Pfandbrief on 4 July, a Eu500m six year important to go the extra mile. Under the
deal, leads Natixis, LBBW, Royal Bank old system you could always miss a hand-
of Scotland and UniCredit launched the ful of accounts, and this new approach is
deal without having gone out with a price trying to wrap up that residual end.”
whisper, despite market conditions being In practice this means that banks are
fragile, if stable. looking at ways to modify their commu-
Jörg Huber, head of funding and investor nication to better reach transactions’ tar-
relations, treasury at LBBW, said that initial get audiences, said Ewing, which could
feedback was positive, but non-committal in involve sending information as they have
the absence of a pricing indication. been doing but also potentially dissemi-
“Unfortunately there was recently an nating it by way of news-feeds, among
ICMA announcement recommending not other options.
to use price whispers,” he told The Cov- The Covered Bond Report under-
ered Bond Report, “which makes it quite stands that ICMA has been seeking to
difficult to find the right clearing level. release a formal publication that would
“This meant that we couldn’t inform most likely be in the form of an addition
the sales teams what our initial pricing to the association’s primary market hand-
ideas were to get relevant feedback, so book. However, it is not clear how detailed
it took a bit longer to establish what the or prescriptive this might be.
right level was.”
This was deemed to be represented Broadbrush adoption
by the 18bp-19bp over mid-swaps range, Although final guidelines have not been
with the leads taking indications of inter- Jörg Huber: “These kinds of drawn up, syndicate officials said that
est at that level and order books growing guidelines are harming the proper market participants have already been im-
evaluation process.”
quickly once they were officially opened, plementing what one banker described as
according to Huber. The deal was ulti- “broadbrush” changes to new issue prac-
July 2011 The Covered Bond Report 15

18. MONITOR: MARKET
tices in line with where discussions have to the practice of building shadow order
been heading. books based on price whispers.
Syndicate bankers described ICMA’s A leading covered bond investor told
position as aiming to ensure that everyone The Covered Bond Report that his posi-
who could be involved in a transaction has tion remained unchanged today and that
access to public information, with inves- he is still dissatisfied with what he called
tors pushing to do away with whispers and pre-sounding. It was unfair for only a
other practices that could involve them handful of investors to be given prelimi-
being made privy to inside information nary pricing thoughts, while others only
and/or wall-crossed. ICMA explains wall- belatedly received this information and
crossing as being sounded for a potential had little time to place orders given short
transaction on the basis of information bookbuilding periods, he said.
that may amount to inside information While issuers are eager to avoid execu-
and that could make investors subject to tion risk, the portfolio manager said that
legal restrictions, such as restrictions on he did not consider there to be any stigma
trading in related securities. attached to not completing a deal or hav-
A syndicate official said that one out- ing to widen pricing, and that this could in
come of discussions taking place could be any case also happen if a new issue project
that the term “whisper” is no longer used, had been pre-sounded.
partly on account of its connotations of He urged a return to traditional deal
secrecy. execution methods, citing high issuance
Terminology is not likely to be the volumes this year and the lack of failed
only feature of primary market activity transactions
set to change, however, with a syndicate “The crisis mode for covered bonds
Ruari Ewing: “The aim is to go out
banker saying that the ideas under dis- doesn’t make sense,” he said.
much wider with a whisper.”
cussion will also change the dynamics of
pre-sounding. Less fear of failure?
“Pre-sounding will be on a more public Making it more difficult to arrive at the ap- could in future be less stigmatised for
basis,” he said. “The process will be slightly propriate initial guidance for a transaction doing so. One syndicate banker said that
different, designed to make it more trans- by prohibiting discreet discussions with a market participants’ judgements of pulled
parent.” small number of key investors would in- deals had already eased over the past three
crease execution risk or the risk of an issu- years, and that such occurrences were less
“The crisis mode er finding itself in a position where it has conversational.
for covered bonds to pull a deal. This could result in issuers
having to pay higher new issue premiums
He identified the return of retention
deals as a possible outcome of any new
doesn’t make sense.” to reduce such risks. guidelines on the communication of up-
But some bankers questioned whether, dates on order book sizes — something
Another syndicate official said that IC- or the degree to which, any new measures that bankers said is also being debated. The
MA’s guidelines had left him unimpressed would affect new issues, saying that price Covered Bond Report understands that
because of the increased execution risk whispers already spread quickly and wide- lead manager and trading orders being in-
they would involve for borrowers. Inves- ly, perhaps reaching more market partici- cluded in order books that may otherwise
tors, on the other hand, deemed infor- pants and journalists than was intended. not be fully covered is a focus of scrutiny.
mation such as price whispers and order “To all intents and purposes, how The syndicate official said that a po-
book updates to be relevant. many deals have been out where you tential clampdown on including lead
The guidelines were “slightly confusing haven’t heard a price whisper?” asked one manager orders in order book sizes and/
and counterproductive”, said the syndicate syndicate official. “A cynic would argue or potentially requiring such orders to be
official. that if it is not in writing then it is easier to identified separately could lead to the re-
The debate in part echoes that that took more elegantly step back or adjust levels, turn of retention deals because such rules
place in the covered bond market last year but I’m not 100% convinced by that. would make it more difficult for banks to
when the Covered Bond Investor Council “When it’s announced, it’s announced.” give the impressions that deals are being
(CBIC) in January 2010 called for an end Others said that those pulling deals successfully handled in pot format.
16 The Covered Bond Report July 2011

19. MONITOR: MARKET
“The legislation is being
perceived positively by investors” page 40
SUPPLY
Wildcards undermine H2 forecasts
Moving into the second half of the year a sustainable solution for Greece, who (the UK, Norway, and Denmark), we
after an increasingly fraught first six knows what will happen? have seen active US dollar issuance.
months, covered bond analysts were con- “But if they do, we might even see “This is something that will poten-
sidering the prospect that covered bond more issuance than we have forecast, tially drag euro issuers toward the dollar
issuance might not meet the projections driven by the peripheral countries.” market.”
they made at the turn of the year. Covered bond analysts say that sup- New Zealand and Australia are con-
“Everything is stuck on the topic of ply in different currencies could affect sidered minor players, with market par-
the euro-zone,” says Bernd Volk, head of what should be expected from each ju- ticipants undecided as to whether Aus-
covered bond research at Deutsche Bank. risdiction. tralian issuers will even come to market
“The covered bond market will continue “The UK is a little bit behind what we this year.
on a slower pace even though a resolu- had expected,” says Riemann-Andersen, “For Australia, we have a cautious
tion is found for Greece, also due to pre- “but we stick to the forecast as most UK estimate of Eu2bn, but there also might
funding and the declining funding needs banks have large refinancing needs. be nothing if the upcoming law gets de-
of numerous issuers.” “The joker that could take euro sup- layed” says Danske’s Riemann-Andersen.
ply lower than projected is of course di- Other jurisdictions have meanwhile
Diversification into versification into US dollars or British surprised to the upside.
dollars or pounds pounds.”
UK banks issued some Eu10bn in
“Italy has done pretty well as they
benefitted from the relief in the sovereign
“the joker” the first of the year in euros, according market earlier this year,” adds Riemann-
to Danske, when the bank had forecast Andersen.
Deutsche Bank had estimated Eu22bn for the year. Italian banks sold some Eu14bn of
Eu250bn in euro benchmark issuance for Florian Hillenbrand, senior credit benchmark euro covered bonds, com-
the year, a number Volk now considers analyst at UniCredit, attributed the UK pared with Eu20bn forecast by Danske.
impossible. shortfall to a greater trend towards US UniCredit’s Hillenbrand foresees
“Due to all this rating action and dollars. heavy issuance in September.
market concern I think the market will “There is one respect that weighs “Last year we had Eu27bn in in Sep-
be happy if we do another Eu60bn and heavy on euro issuance,” he says. “That’s tember,” he says. “I would be quite sur-
hit Eu200bn, but I think everyone will the US. What we see right now is in prised to see anything less than this
probably struggle with market issuance,” countries where they have to swap their number after we saw record issuance in
he says. issuance back into their home currency September through March.”
“France will be crucial in reaching
Eu200bn,” he adds, “which is the best we UniCredit H2 supply forecasts
can hope for. If they issue a lot, we’ll have
60
a lot more volume.”
2010 2011 ytd 2011e
French issuers sold some Eu37bn of 50
benchmarks, including taps, in the first
half of the year. 40
Danske Bank had forecast Eu226bn
30
in gross supply for 2011, and some 62%
of that volume was issued in the first 20
six months of 2011. By comparison,
10
Eu185bn hit the market in 2010, accord-
ing to the Danish bank. 0
“There’s still a lot of uncertainty be-
g
n
s
Po en
Fi a
ce
y
N da
et Italy
xe and
De ay
d
Ze d
d
G rk
Ca al
UK
Sw US
nd
itz e
an
ai
ur
i
an
ew rlan
an
str
Sw ec
an
ed
a
g
w
na
cause market access is very much linked
Sp
bo
rla
m
nm
rtu
l
or
Au
nl
al
re
Ire
Fr
er
e
m
he
G
to the sovereign debt crisis,” says Chris-
Lu
N
N
e
Th
tian Riemann-Andersen, senior analyst
Source: UniCredit Research
at Danske. “If they don’t come up with
July 2011 The Covered Bond Report 17