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ICB launched amid lively debate Back  
Over 160 delegates attended the Finance/Finance Dublin Irish Covered Bond conference, which provided an unique opportunity to learn all aspects of the new instrument.
Speakers at the conference featured many of those who were involved in the drafting of the Asset Covered Securities Bill and it was chaired by Dr. Ronan O’Connor who was principal external consultant to the ICB project. Two round-tables were held - one in the morning to discuss issuance of the bond, while the afternoon session focused on investor concerns. Unsurprisingly there was a strong German representation at the conference, as the feeling is that it will be one of the German mortgage banks who are already located here such as DePfa-Bank Europe plc or RHEINHYP Bank Europe plc who will be the first to issue the bond.

The conference was held the day after the Bill was brought before the Dail. The level of enthusiasm at the conference, and the commitment to the project expressed by the Attorney General, Michael McDowell, and the Minister for Finance Charlie McCreevy should ensure that the Bill becomes law before Christmas.

Keynote address
The keynote address was given by Noel O’Gorman, Second Secretary General at the Department of Finance, who spoke on behalf of the Minister for Finance. Commenting on the success of the close co-operative effort between the Government and industry in drafting the Bill, O’Gorman said, ‘The State is committed to a continuation of this co-operative partnership approach and the Asset Covered Securities Bill is proof of our bone fides in this regard.’

‘The Bill is clearly in line with the strategy for the development of the international financial services industry which lists as a priority the introduction of legislation to facilitate the growth of securitisation.’

O’Gorman argued that the introduction of asset covered securities will remove the structural disadvantage which could otherwise affect Irish capital markets, through the undercutting by foreign financial intermediaries of the rates offered by their Irish counterparts. ‘This product is one which presents advantages to the industry, the State and the consumer. In short, it is a ‘win win’ situation and it is important that it is sold as such.’

Chairman Dr. Ronan O’Connor then opened proceedings with his guide to the Irish pfandbrief market, and touched on a controversial topic when he discussed the role of the Covered Asset Monitor. O’Connor feels the CAM has an investor protection role, rather than an auditing one, and was created as such under the auspices of the Asset Covered Securities Bill. He said that a corporate is the ideal candidate for this role.

Later in the morning, Cormac Murphy, a partner at Andersen, argued adamantly that it should be an auditor, and that no conflict of interest would arise, as the CAM would be independent. The external auditors of the company would not be the same auditing firm as that which exercises the role of the CAM.This debate continued in the morning round table, and the CAM role won’t be clarified until the Central Bank, as the regulating body for the CAM, issues a series of guidances. A draft of these should be made available by the end of November.

Morning round table
Another area that must be clarified is inclusion of mortgage backed securities in the asset pool and this topic generated a heated debate during the morning round table. Christian Ferchland, managing director of Rheinhyp Bank Europe spoke on the market potential of the ICB. With five to ten active issuers the Irish market should have an estimated issuance of between E10 to 15 billion per annum. Moreover, as the legislation is modern, and very much investor friendly, new issuers may be attracted to locate in Ireland. Ciaran Rogers a partner at A&L Goodbody expressed concern as to whether the legislation facilitates mortgage issuers. He said a loan-to-value of 60 per cent, irrespective of what credit enhancement you’ve put in place is not fair.

Responding to this from the floor, Jackie Gilroy, head of treasury, EBS pointed out that mortgage lenders accepted such restrictions in order to enhance the security. She said you could fund 60 per cent through the bond, and fund the balance through another mechanism. However, she highlighted the necessity of MBS being recognised as an asset class to enable domestic mortgage lenders to use the legislation. At the moment the current draft of legislation has no provision for the inclusion of MBSs and there is no guarantee that they will be eligible, Dara Breathanach of the Department of Finance told the audience.

Attorney General
Speaking at the lunch, the Attorney General Michael McDowell, said he was pleased with the speed with which the covered bond legislation has been dealt with and would like to see this applied to all international finance legislation. ‘Legislature must always be quick to respond and must provide an adequate response to market opportunities.’

This, he said will be vital if Ireland is not to fall behind other jurisdictions in this highly competitive field.

The afternoon looked at the Irish covered bond in a European context, and discussed its strengths and weaknesses in comparison with other countries’ bonds. Ted Packmohr, VP European covered bonds & agencies at DrKW said the Irish market would be successful as it has the commitment of issuers and market makers. Moreover, liquidity should be established relatively soon, as the large asset volumes of potential issuers will enable them to be active in the jumbo segment right from the start. However, he said that a small pick-up for ICBs will be required in the very beginning to attract new investors and make up for the efforts they have to take when switching into a new product. These pick-ups should quickly disappear.

Further advantages of the bond were pointed out by Ted Lord, director of Barclays Capital who said ICBs provide investors with a good spread with manageable downside risk, and are a very attractive product. He sees the fact that Ireland is a common law jurisdiction as a definite plus as it makes the bonds more investor friendly for investors worldwide, particularly in the US as they understand the legal system. Another plus is the higher yielding asset pool without higher risk public-sector assets.

On the downside, Alexandra Sleator, European mortgage bond coordinator at Moodys, highlighted various weaknesses of the covered bond, primarily those related to cashflow and substitution risk. She said a disadvantage of the draft legislation is that there is no formal recognition of over-collateralisation, and prepayment risk seems significant in Ireland. As for substitution risk, the problem lies in the fact that the NTMA, who along with the Central Bank will regulate the market, can neither substitute healthy assets for non-performing loans nor replenish the pool as assets mature and loans are repaid.

Looking at ICBs in a European context, Judith Hardt, secretary general of the European Mortgage Federation spoke on EU regulations and how they may pose a threat to an efficient European mortgage bond market. The proposed Directive on single prospectus may mean that issuers of covered bonds will be subject to new prospectus requirements, while the proposed Directive on market abuse may negatively impact on market making.

Afternoon round table
The afternoon round table focused on investor issues, and panelists predicted a huge investor appetite for ICBs. From the floor, Denis Holland, BNP Paribas, asked participants where they think the European pfandbrief market will be in five - seven years. Thomas Herbert, head of credit research at DZ Bank, predicts the different legislations currently in place in Europe will get more and more similar, and there will be 10-12 issuers who will dominate the sector. However, he doesn’t believe it will lead to a complete harmonisation of the EU covered bond market. ‘Over the medium term, due to merger trends, there will only be 10-12 issuers who will dominate the European market. I think establishing a strong brand will be more important than establishing a common pfandbrief law.’

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