Europe opens up
The geographical spread of covered bonds across Europe is still widening, as more countries implement the necessary legislative frameworks permitting the issuance of covered bonds or, as in the UK or the Netherlands, products are structured to mimic the essential features of covered bonds.
Within this growth are other developments. Christoph Anhamm, head of asset-backed securitisation and covered bond research at ABN AMRO in Frankfurt, says: “The composition of collateral assets for jumbo covered bonds is moving towards mortgages, away from public debt. There are a number of forces behind this trend.
“These include the recent change in status of the German Landesbank, leaving them without a state guarantee. This will mean that around 30% of the collateral of public Pfanbriefe will be run down over time and will be very hard to replace. At the same time disintermediation of the banks by sub-sovereign authorities is ongoing and public states will increasingly by-pass them and access the capital markets directly.
“Another factor in favour of mortgage asset pools concerns the implementation of Basel II Accord. In Basel II, residential mortgages are assigned as less risk and therefore the pressure to remove assets off balance sheet via a Residential Mortgage Backed Security transaction, for example, is markedly reduced.”
Anhamm suggests that trends towards improved asset liability matching are also supportive for mortgage covered bonds. “In the last two years we have seen issuers funding across the entire curve, out to 10, 15 and 20 years and we’ll maybe see 25-year issues soon. It is thus much easier to liability match when there is a full maturity curve available. And covered bond instruments offer very favourable funding rates.”