May 30, 2012 / 2:22 PM / in 6 years

RPT-ECB to bring flexibility to covered programme

(Repeats to reach additional clients)

By Aimee Donnellan

FRANKFURT, May 30 (IFR) - The European Central Bank is set to be more flexible in its purchases of covered bonds at a time when Spanish, Italian, Irish, and Portuguese issuers continue to be blocked from accessing the public market, Benjamin Sahel, head of the market operations analysis division at the ECB said.

Speaking at the IFR Covered Bond Conference in Frankfurt on Wednesday, Sahel gave no indication that the programme will cease its buying of covered bonds despite being significantly behind its purchase target.

The total bought under the ECB’s year-long programme hit almost EUR12bn on Monday, which is only slightly above a quarter of the way towards the EUR40bn target.

Panelists expressed gratitude to the ECB for giving a glowing endorsement of the covered bond product back in October, but acknowledged that wider market developments including the failure of the LTRO to have a long-term impact on spreads has made the programme almost irrelevant.

“The market has split in two, the haves and have-nots,” said Mauricio Noe, head of covered bond origination at Deutsche Bank.

Spanish and Italian issuers, who have been bundled into the have-not camp, are edging closer to issuing through their sovereigns, he said, which would set a precedent in the covered bond market.

Italian issuers have avoided the covered bond market so far in 2012, instead favouring the senior unsecured market, while Spanish banks took advantage of a market window following the LTRO but are now facing prohibitive funding costs.

Richard Kemmish at Credit Suisse said France differs somewhat from Spain and Italy where the country’s covered bonds are also trading through governments but domestic investors would prefer to buy cheap government debt rather than covered bonds.

Issuance is expected to pick up in France following the Greek election in June and once the future of 3CIF is resolved. “The 3CIF situation is a storm in a teacup,” said Deutsche Bank’s Noe.

“French bank borrowing needs are significantly lower than they were this time last year as the financial sector has deleveraged and the country’s banks have made the most of the LTRO,” said Boudewijn Dierick, securitisation and covered bond structuring at BNP Paribas.


Creativity in funding plans will become more important in the coming months as issuers are likely to create programmes that are specifically focused towards the ECB or sell taps to avoid execution risk associated with selling a benchmark size, bankers said.

“No one is in panic mode at the moment and is looking to issue EUR1bn and is unable to do so. All issuers have contingency plans to deal with the worst,” said Ralf Grossmann, head of covered bond origination at Societe Generale.

“Where do you make your money, what are your business margins and how do you grow your investor base are some of the key questions being asked of issuers by investors who are not as concerned about regulations as some issuers think,” he said.

The issues of asset encumbrance and transparency were mentioned throughout the morning as bankers reported that investors are looking for more and more detail on cover pools, the replacing of non-performing assets as well as potential limits on overcollateralization.

“Limits on asset encumbrance could have a detrimental impact on covered bonds,” said Jerry Marlatt, counsel at Morrison & Foerster. “This would potentially block banks from accessing the public market when covered bonds are their only funding avenue.” (Reporting by Aimee Donnellan, Editing by Julian Baker)

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