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COVERED BONDS AFTER THE STORM 18/03/2010
Transcript of COVERED BONDS AFTER THE STORM - bcb.gov.br › pre › evento › arquivos › 2010_3...Finnish CB...
COVERED BONDS AFTER THE STORM 18/03/2010
18 March 20102
Summary
1. 2009: Revival of the covered bond market
2. Covered Bonds in the ECB’s collateral framework
3. Forecasts 2010
4. Key Themes
5. Conclusions
6. Annex
18 March 20103
12009: Revival of the covered bond market
18 March 20104
-50
0
50
100
150
200
250
300
350
400
450
Jan-07
Mar-07
May-07Jul-0
7
Sep-07
Nov-07
Jan-08
Mar-08
May-08Jul-0
8
Sep-08
Nov-08
Jan-09
Mar-09
May-09Jul-0
9
Sep-09
Nov-09
Jan-10
Pfande 5Y CH 5Y OF 5Y UK 5Y ACS 5Y
Covered Bond Spread Development
Sources: market data, Natixis
Covered bond spreads widened significantly…
Lehman collapse
Announcement of ECB purchase programme
18 March 20105
Sources: market data, Natixis
…although less than RMBS spreads
0
100
200
300
400
500
600
700
800
Jan-07
Jul-0
7
Jan-08
Jul-0
8
Jan-09
Jul-0
9
Jan-10
Spain UK NetherlandsItaly Portugal RMBS AAA
18 March 20106
Allocation of ECB Purchase Programme
Sources all charts : ECB, Natixis
ECB Purchase Programme
(€bn) % % (€bn)
ECB 8.0% 4.80
Nationale Bank van België / Banque Nationale de Belgique 0.14 3.5% 3.2% 1.92
Deutsche Bundesbank 1.09 27.1% 25.0% 14.98
Central Bank and Financial Services Authority of Ireland 0.06 1.6% 1.5% 0.88
Bank of Greece 0.11 2.8% 2.6% 1.55
Banco de España 0.48 11.9% 10.9% 6.57
Banque de France 0.82 20.4% 18.7% 11.25
Banca d'Italia 0.72 17.9% 16.5% 9.88
Central Bank of Cyprus 0.01 0.2% 0.2% 0.11
Banque centrale du Luxembourg 0.01 0.3% 0.2% 0.14
Central Bank of Malta 0.00 0.1% 0.1% 0.05
De Nederlandsche Bank 0.23 5.7% 5.3% 3.15
Oesterreichische Nationalbank 0.11 2.8% 2.6% 1.54
Banco de Portugal 0.10 2.5% 2.3% 1.38
Banka Slovenije 0.02 0.5% 0.4% 0.26
Národná banka Slovenska 0.04 1.0% 0.9% 0.55
Suomen Pankki - Finlands Bank 0.07 1.8% 1.7% 0.99
Total 4.02 100% 100% 60.00
Total allocated CB purchase ECB Paid-in capital
•€60bn CB programme for euro-denominated covered bonds across the euro area
•Minimum size of €500m
•Maturity range: 3-10Y
•Minimum rating: of double-A (but not below BBB)
•Allocation Key: ECB buys 8% directly; Eurosystemcentral banks 92%
•Purchases to be made in primary and secondary market
•Timing: 8th July 2009 – 30th
June 2010
18 March 20107
ECB Daily and Cumulative Volumes
Sources all charts : ECB, Natixis
30% of the ECB programme still pending
ECB monthly purchases
0
100
200
300
400
500
600
700
800
900
9-Ju
l
27-J
ul
12-A
ug
28-A
ug
15-S
ep
1-O
ct
19-O
ct
4-No
v
20-N
ov
8-De
c
22-D
ec
13-J
an
29-J
an
16-F
eb
Settlement date
Amou
nt (E
URm
)
0
5000
10000
15000
20000
25000
30000
35000
40000
45000
Amou
nt (E
URm
)
Daily purchases (LHS) Cumulative amount €m (RHS)
Theoretical target (LHS)
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
Total Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10
in E
UR
m
Primary Secondary
36.7%
63.3%94.5%
5.5%
78.6%
21.4% 31.0%
73.4%
26.6% 69%
12.5%
87.5%
39.3%
60.7%
24.6%75.4%
35.1%
64.9%
18 March 20108
Euro benchmark CB issuance before and after
*CRH inc.
Sources all charts : market data, Natixis
The ECB has given impetus to the CB market
Gross Issuance by month (€bn)
€105.21 bn
€15.07 bn
0
20
40
60
80
100
120
140
Before ECB'sannouncement
After ECB'sannouncement
OthersIrish ACSUK CBSwedish CBPortuguese CBCedulas Hip.FRCBOF*Pfandbriefe
0
5
10
15
20
25
30
35
40
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec€b
n
2006 2007 2008 2009 2010
18 March 20109
Covered Bond Spread Development
Sources: iBoxx, Natixis
… accompanied by a strong spread tightening
0
50
100
150
200
250
300
350
400
450
Jan-09
Feb-09
Mar-09
Apr-09
May-09
Jun-09Ju
l-09
Aug-09
Sep-09Oct-0
9
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
Obligations Foncières FRCBMortgage Pfandbriefe Irish ACSItalian CB Public PfandbriefePortugal Covered Span.CédulasSweden Covered UK Covered
0
50
100
150
200
250
300
350
2-Jan
-072-M
ar-07
2-May-0
72-J
ul-07
2-Sep-0
72-N
ov-07
2-Jan
-082-M
ar-08
2-May-0
82-J
ul-08
2-Sep-0
82-N
ov-08
2-Jan
-092-M
ar-09
2-May-0
92-J
ul-09
2-Sep-0
92-N
ov-09
2-Jan
-102-M
ar-10
Covered Financials Senior Other Sub-Sovereigns
18 March 201010
• The majority of covered bonds issued since May 2009 are in the 3-7Y range
Lengthening of maturities
Proportion of Issues by Maturity Maturity profile 2010 YTD issues
Sources all charts : market data, Natixis
0%
20%
40%
60%
80%
100%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
>10 Y
10 Y
6–9 Y
5 Y
3–4 Y
2 Y
< 2 Y
10 Y 14%
12 Y 6%
3 Y 20%
4 Y 4%
5 Y 20%7 Y
33%
8 Y2%
9 Y 1%
18 March 201011
Cédulas9%
Dutch CB8%
French CB18%
Pfandbriefe15%
Norway CB3%
OF*19%
Portuguese CB4%
Swedish CB8%
Italian CB2%
UK CB11%
Austrian CB1%
Irish CB2%
Portuguese CB5%
Swedish CB4%
UK CB3%
0%
Swiss CB2%
Dutch CB5%
OF*26%
Italian CB6%Norway CB
1%
Danish CB3%
Finnish CB1%
French CB8%
Greek CB1%
Cédulas15%
Pfandbriefe16%
2009 Gross issuance per segment
Sources all charts : market data, Natixis
2009: A more diversified market
• New mix on the primary market: France is dominating
2010 Gross issuance per segment
*Incl CRH
18 March 201012
Sources : market data, Natixis
More diversification in names and segments
• 2009: 18 new issuers from 11 different jurisdictions
• First public issue from GreeceInaugural issuers
43
2
9
67
15
13
18 18
3
0
2
4
6
8
10
12
14
16
18
20
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
18 March 201013
Total volume of CB issuance (€bn) Total volume of Pfandbrief issues (€bn)
CB issuance: Jumbo vs. Non-Jumbo German Pfandbriefe: Jumbo vs. Non-Jumbo
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2004 2005 2006 2007 2008 2009
Non Jumbo Jumbo
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2007 2008 2009
Non Jumbo Jumbo
Non-Jumbo segment still attractive
0
50
100
150
200
250
300
2004 2005 2006 2007 2008 2009
Md€
Jumbo Non Jumbo
0
20
40
60
80
100
120
2007 2008 2009
Md€
Jumbo Non Jumbo
Sources all charts : Dealogic, market data, Natixis
18 March 201014
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%Aus
tria C
BIris
h ACSCed
ulas H
ip.Swiss
CB
France
Dutch C
BDan
ish CB
Finnish
CBGree
k CB
Pfandb
riefe
Italia
n CB
Norway
CB
Portugu
ese C
BSwed
ish CB
United
Kingd
om C
B
Banks Funds/Asset management Insurers/pension funds Central banks/agencies/supras Others
Banks33%
Others5%
Central banks/agencies/
supras10%
Insurers/pension funds
13%
Funds/Asset management
39%
Benelux5% Nordics
5% Spain/Portugal9%
France18%
Others12%
Germany/Austria
44%
UK/Ireland7%
Increased investor selectivity
Breakdown by geography (2009 issues) Breakdown by investor type (2009 issues)
Geographic allocation 2009 Jumbo issues Distribution by investor type (2009 issues)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Obl. S
éc. A
utr.ACS Ir
l.Ced
ulas H
ip.
ObL. S
éc. S
uisse
France
Obl. S
éc. N
éerl.
Obl. S
éc. D
an.
Obl. S
éc. F
inl.
Obl. S
éc. G
rec.
Pfandbr
iefe
Obl. S
éc. It
al.Obl.
Séc
. Norv.
Obl. S
éc. P
ort.
Obl. S
éc. S
uéd.
Obl. S
éc. U
K
Allemagne/ Autriche UK/ Irlande France BeneluxNordiques Espagne/ Portugal Autres
Sources all charts : market data, Natixis
• Increased home bias among covered bond investors
18 March 201015
2Covered bonds in the ECB’s collateral framework
18 March 201016
Covered Bonds – Eligibility Criteria
The Eurosystem does not provide own definition of covered bonds:• Reference made to Art 22(4) of UCITS Directive • All types of covered bonds (UCITS and non-UCITS) are
potentially eligible • Minimum A- rating requirement (exception temporary
measures until 2010)• CB issued prior to 1 January 2008 are eligible without a
rating
UCITS compliant covered bonds have preferential treatment in terms of• Allocation to liquidity categories (lower haircuts)• No prohibition of ‘close links’
18 March 201017
ECB Eligible assets•Covered bonds currently comprise €285bn of collateral
•Stable 11% of total collateral in 2008
•Since autumn 2008, counterparties have made significant ‘own use’ of UCITS CB
0
2,000
4,000
6,000
8,000
10,000
12,000
2004 2005 2006 2007 2008
in E
UR
bnCentral government securities Regional government securities Uncovered bank bondsCovered bank bonds Corporate bonds Asset-backed securitiesOther-marketable securities Non-marketable assets
+17%
Sources all charts: ECB annual report, Natixis
18 March 201018
Eligible collateral: declining share of CB
0%
20%
40%
60%
80%
100%
2004 2005 2006 2007 2008
in E
UR
bnCentral government securities Regional government securities Uncovered bank bondsCovered bank bonds Corporate bonds Asset-backed securitiesOther-marketable securities Non-marketable assets
•The average share of asset-backed securities increased from 16% in 2007 to 28% in 2008, overtaking uncovered bank bonds as the largest class of assets put forward as collateral with the Eurosystem
Sources : ECB annual report, Natixis
18 March 201019
3Forecasts 2010
18 March 201020
2010 Issuance forecasts
2010 will be characterized by strong issuance volumes driven by:• Ongoing support from the ECB • Record volume of redemptions (€150bn)• Limited competition from GG market or ABS market
We forecast total Jumbo supply of €160bn, with issuance frontloaded• The usual market segments will dominate issuance
statistics (FR, DE, ES)• Important issuance from UK, IT, NL• Other countries: SE, NO and the return of Canadian CB
KEY QUESTION: WILL DEMAND BE ABLE TO KEEP UP WITH RESULTING SUPPLY?
18 March 201021
Vibrant outlook for the primary market….
Euro Benchmark CB issuance (in €bn) Yearly CB redemptions
* Obligations Foncières segment includes CRH Sources all charts : market data, Natixis
0
20
40
60
80
100
120
140
160
2004 2005 2006 2007 2008 2009 2010
in E
URb
n
Pfandbrief French OF Spanish CH UK CB Irish ACS Swedish CB Other
* including CRH
0
20
40
60
80
100
120
140
160
180
200
200020012002200320042005200620072008200920102010
**
FRCB
Portuguese CB
Swedish CB
Other
UK CB
Irish ACS
Cédulas Hip.
Oblig.Foncières*
Pfandbriefe
18 March 201022
Spread Performance (iBoxx)
Spread Performance (IBoxx)
Positive Support Factors:•ECB sill has more than €30bn to spend, an average €234m every day•Investor base has broadened (new accounts)•Crowding out by GGs has vanished•High redemption volumes in 2010 – €150bn
Negative Support Factors:•Following strong tightening in 2009, limited outperformance potential in 2010•ECB support is largely priced in•New issue premiums are becoming less generous => outperformance potential more limited•Increasing differentiation in the market; secondary market liquidity still poor
Covered Bond Spread Drivers
Source: iBoxx, NATIXIS
Performance by Segment
-250 -200 -150 -100 -50 0 50 100 150 200
Ireland Covered
US CoveredNetherlands Covered
Portugal Covered
UK Covered
France Covered StructuredSpain Covered
France Covered Legal
Norway CoveredOther Covered
Sweden Covered
Public Pfandbriefe
Austria CoveredMortg. pfandbriefe
Performance vs. pre-Lehman Performance vs. pre-ECB announcement
2009: extraordinary recovery of CB spreads
For 2010, limited additional upside (German Pfandbriefe, Spanish single-CH very close to their pre-Lehman levels)
18 March 201023
Euro benchmark CB: Comparative Overview
Primary Secondary
market market
German Pfandbriefe €235.5bn (€69bn) 25 + oFrench Covered Bonds* €165.5bn (€25bn) 12 + +Spanish Cédulas** €254bn (€22.9bn) 22 o oUK Covered Bonds €58.8bn (€7.8bn) 8 + +Irish ACS €27bn (2bn) 4 + oDutch Covered Bonds €20.7bn (€1.3bn) 4 + +Italian Covered Bonds €8.5bn (-) 4 + +Swedish Covered Bonds €22.5bn (€6bn) 5 + oDanish Covered Bonds €6.3bn (€1.3bn) 1 + oFinnish Covered Bonds €5.3bn (€2bn) 2 o oNorwegian CB €11.5bn (€3bn) 2 + +Portuguese CB €18.2bn (€3.3bn) 6 + +Austrian Covered Bonds €8.0bn (€1.0bn) 3 o oGreek Covered Bonds €1.5bn (-) 1 o oCanadian Covered Bonds €6.3bn (€2bn) 3 + +US Covered Bonds €11.5bn (€1.5bn) 2 -Outperformance: Strong: +++ Medium: ++ Weak: + Underperformance: Strong: --- Medium: -- Weak. - Neutral: o
Sources: market data, Natixis* Obligations Foncières, CRH, Common Law based covered bonds. ** Cédulas Hipotecarias and Cédulas Territoriales,
Expected Performance vs. sector
Market segments Credit momentum Supply Outstanding vs
Redemptions 2010 (in €bn) No. Issuers
Sources all charts : market data, Natixis
18 March 201024
4Key Themes
18 March 201025
Key themes 2010• Covered bonds post ECB purchase programme: what happens next?
• ECB collateral Rules: tightening of criteria & labeling of covered bonds via a definition of clear quality standards?
• Liquidity and Transparency: – Redefinition of Jumbo concept and work towards more post-trade price
transparency– Increased transparency on cover pool assets and alignment of certain investor
reporting standards
• Regulatory support for covered bonds– CEBS: obligation to build up liquidity buffer could bolster demand for covered
bonds
• CRD: two key waivers expire end of 2010– LGD of 11.25% subject to certain underlying requirements– Possibility of including MBS in cover pool above 20% limit (AAA only)
18 March 201026
Regulatory Amendments
• Covered bond regulatory amendments– France: amendments to Obligations Foncières framework (obligations
à l’habitat?)– UK – supplementary rules for UK Regulatory Covered Bonds
(consultation 2010)– Sweden – proposed amendment to covered bond legal regime
(emphasis on liquidity)– Belgium – new CB legislation in the cards for 2010? – Canada – Government hopes to introduce CB legislation
• Rating Methodology adjustments: focus on liquidity– Moody’s considers (i) quality of cover pool (ii) liquidity); (iii) interest
rate and currency risks – Timely Payment Indicator Matrix– Fitch attributes CB rating based on PD and analyses the Discontinuity
Factor, which is based on:Segregation of assets (45%), liquidity gap (35%); alternative management (15%), oversight (5%)
18 March 201027
S&P: New rating methodology (1)
• Rating methodology addresses the likelihood of full and timely payment of interest and repayment of principal on CB
• The new rating methodology was introduced on 16.12.2009– 98 programmes CB placed on CreditWatch (so far 29 have been resolved)
• Rating analysis considers the following risks: asset risk, casflowrisk (ALMM), legal risk, operational & admin risk, counterparty risk
• New methodology is based on assessment of rating of issuer, itsALMM exposure, its jurisdiction, its range of refinancing options, available credit enhancement, and target price at which assets canbe liquidated under stressful conditions
• CB segmented into three distinct categories :– Category 1: DK, FR (OF), DE and ES (programmes are those with greatest
likelihood of external funding ->maximum potential uplift of 5-7 notches vs. ICR)
– Category 2: CA, FI, FR (FRCB), IRE, LUX, NL, NO, PT, SE, UK (maximum potential rating uplift of 4-6 notches )
– Category 3: GR, USA (maximum potential rating uplift of 3-5 notches)
18 March 201028
S&P: New rating methodology (2)
Sources : S&P, Natixis
18 March 201029
5Conclusions
18 March 201030
Conclusions
• 2010: very dynamic primary market (especially H1 2010)
• France will continue to dominate issuance statistics
• Increasing diversification: arrival of new issuers
• CB Regulatory amendments
• Continued focus on liquidity
18 March 201031
6Annex
18 March 201032
Covered Bonds vs. GDP Ratio
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
Denmar
kSwed
enSpa
inIre
land UK
Portug
alGer
many
Norway
Hungary
Fran
ceSlova
kia
Czech
Rep
ublic
Netherl
and
Finlan
dAus
tria
Italy
Sources : European Mortgage Federation’s Hypostat 2008, Natixis
18 March 201033
Covered Bonds Funding
Sources : European Mortgage Federation’s Hypostat 2008, Natixis
in €bn
Total residential loans outstanding
Total mortgage backed Covered Bonds
Share of Covered Bond Funding
France 700.8 119.1 17.0%Spain 674.4 307.5 45.6%Portugal 105.2 15.3 14.5%Sweden 199.1 126.4 63.5%
Outstanding mortgage backed Covered Bond volume of selected countries vs. residential mortgage volume
• For EU 27 countries, in 2008, covered bonds made up c. 21.2% of residential mortgage lending
18 March 201034
UCITS: the cornerstone for covered bondsArt. 22(4) UCITS of Directive 2001/108/EC defines the special character of covered bonds
Minimum Requirements for privileged treatment of covered bonds:• Bond must be issued by an EU credit institution;• Credit institution must be subject to special public supervision;• The investment of issuing proceeds may be effected in eligible assets until maturity,
which are set out by law;• Bondholders’ claims must be fully secured by eligible assts until maturity;• Bondholders must have a preferential claim on a subset of the issuer’s assets in
case of issuer default
CB that comply with Article 22(4) UCITS directive are considered to have an attractive risk profile, which justifies the easing of prudential investment limits. Therefore, investment funds (UCITS) can invest up to 25% (instead of maximum 5%) of their assets in covered bonds of a single issuer that meet the criteria of Article 22(4). Similar, the EU Directives on Life and Non-Life Insurance allow insurance companies to invest up to 40% (instead of max. 5%) in UCITS-compliant covered bonds of the same issuer.
18 March 201035
CRD: a new definition for covered bondsSince January 2007, compliance with Art. 22(4) UCITS is necessary but not sufficient for new issuers in order to obtain the preferential treatment in risk-weighting termsIn addition the requirements of Directive 2006/48/EC have to be met in order to obtain a preferential risk-weighting
Requirements:• Compliance with the UCITS directive (All UCITS Items)• Compliance with the eligible assets list:
– Exposures to or guaranteed by central governments, central banks, public sector entities, regional governments and local authorities in the EU
– Exposures to or guaranteed by non-EU central governments, non-EU central banks, multilateral development banks, international organizations that qualify for the credit quality step 1 or with a risk-weighting not higher than 20%
– Exposures to credit institutions that qualify for the credit quality step 1 (max. 15%)
– Loans secured by residential real estate (max. LTV 80%) and loans secured by commercial real estate (max. LTV 60%) as well as certain senior securitization tranches provided that at least 90% of the assets backing the tranches are eligible originally, the notes are rated at least AA- and do not exceed 20% of the nominal amount of the outstanding issue
N.B. Until 31 December 2010, the 20% limit for RMBS/CMBS notes does not apply, provided the securitisation tranches are rated AAA.
18 March 201036
The Internal Ratings Based ApproachThe input parameters for calculation of the credit risk-weights for covered bonds under the IRB approach are:
– The probability of default (PD) of the covered bond issuer (Credit institutions shall estimate the PDs by obligor grade from long-run averages of one-year default rates (Annex VII, Part 4, § 59). The PD of an exposure to a bank shall be at least 0.03% (Annex VII, Part 2, § 2)).
– The loss given default (LGD) of covered bond exposure: in the Foundation IRB approach, the LGD for covered bonds is set at 12.5%. The LGD can be reduced to 11.25% (until 31 December 2010) for covered bonds provided that:
The cover pool exposure to the public sector and to credit institutions qualifies for creditquality assessment step 1 (i.e. minimum rating AA-).
The share of MBS does not exceed 10% in mortgage loan cover poolsLoans secured by ships are not used as collateral
• ORThe covered bonds are Triple-A rated
• Otherwise an LGD of 12.5% will have to be applied.• The maturity factor (m): According to the CAD 3 (Annex VII, Part 2,
§ 14-16) the maturity factor could vary between 1 day and 5 years. However, regulators may opt to set the maturity factor to 2.5Y (e.g. like it was done by the German regulator: SolvRI § 98).
• In the advanced IRB approach, credit institutions may get the permission to use own estimates for LGD and m.
18 March 201037
ContactsCredit Research
Strategy Thibaut Cuillière +33 (0)1 58 55 80 56 [email protected]
Badr El Moutawakil +33 (0)1 58 55 80 86 [email protected]
Autos Ludovic Fava (Head of credit research) +33 (0)1 58 55 07 06 [email protected]
Retail/Consumers
Sandra Soyer +33 (0)1 58 55 82 19 [email protected]
Financial Institutions
Antoine Houssin +33 (0)1 58 55 05 72 [email protected]
Industrials
Sandra Pereira +33 (0)1 58 55 98 66 [email protected]
Utilities Ivan Pavlovic +33 (0)1 58 55 82 86 [email protected]
Covered Bonds
Cristina Costa +33 (0)1 58 55 17 32 [email protected] ABS & CDO Sonia Benarouch +33 (0)1 58 55 80 21 [email protected]
Credit sales team France
Institutional investors +33 (0) 1 58 55 34 92Corporates / BPCE retail network +33 (0)1 58 55 81 80
Credit sales team International Austria +33 (0)1 58 55 81 00 BelSwiLux +33 (0)1 58 55 15 97Central Banks +33 (0)1 58 55 08 46 Italy +39 02 85 91 32 44Germany +49 69 91507 7300 Netherlands +33 (0)1 58 55 08 43Nordic Countries + 44 (0) 207 648 0144 Singapore +65 6228 5629Spain/Portugal +34 91 791 75 00 Tokyo +81 3 3592 7550UK & Ireland +44 (0) 203 216 9352
