The publication of the Asset Covered Securities Bill, 2001, on July 19th, enables the introduction of new financial instruments in the Irish market. Similar to the German Pfandbriefe, these instruments are mortgage and public credit covered securities. Unlike conventional securitisations however, the assets remain the property of the institution issuing the securities and remain on that institution’s balance sheet.
As its the single largest bond type in Europe, there is enormous market potential. Regulated by the Central Bank, the Irish market could stand to get a large slice of this covered bond market.
The Irish bill contains features which will make Irish covered bonds a very competitive product, even in the face of the market leader Germany, and the newcomers, Luxembourg, France and Spain.
Germany as the incumbent pfandbriefe leader will not be overcome in the near future. It is too efficient, offering sufficient liquidity in all important maturities. German pfandbriefe also dominate the EuroCreditMTS, the pan-European electronic trading system for benchmark securities. This offers increased liquidity and tradeability of covered bonds. Strict criteria define the eligiblilty of covered bonds into EuroCreditMTS, including a AAA rating from Moodys, S&P or Fitch IBCA, and individual bonds must have a minimum size outstanding of E3 billion.
Complex hedging, trading and investment strategies are feasible in the German pfandbrief market, however this is also a feature of the new Irish pfandbrief. In addition, the Irish legislation allows assets to be drawn from a wider geographical area than Germany. Presently, the Association of the German Mortgage Banks considers it a matter of urgency that the geographical area of their asset pools be expanded. When equated with the common law factor, Ireland could pose a threat to Germany - not to overcome it, but to diminish its market share.
According to DePfa research, at the beginning of 1999, the outstanding volume in the European pfandbrief market equated to E1256 billion. This equates to 22 per cent of the entire euro bond market. Moreover, the volume of pfandbriefe outstanding is expected to increase significantly over the next few years. To date, only 13 per cent of mortgage loans have been financed via Pfandbriefe in Euroland, and there still exists a large market potential for public sector pfandbriefe. So in a post-IFSC Ireland, the introduction of a developed pfandbriefe market could provide attraction for existing European banks to expand their activities in Ireland, and for others to follow.
Many of the big players in the European pfandbrief market are already located in Ireland. Book-runners such as Commerzbank, Deutsche, Dresdner and ABN AMRO. Issuers like DePfa, Rheinhyp Dexia and Europäische Hypothekenbank.
If the bill is passed as expected when the Dail recommences, the establishment of an active market should not be too far behind.
If the Bill is passed as expected when the Dail recommences, the establishment of an active market should not be too far behind.
At the one-day Finance/ Finance Dublin conference on the Irish Covered Bond to be held in October, all aspects of the new legislation will be discussed. It should be of particular interest to potential book-runners, issuers and professional advisors of the new covered bond.
Full details of the conference will be published in the next issue of Finance. |
