| Surge in activity in European covered bonds as new jurisdictions emerge |
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By: Mark Kennedy, Mark Kennedy
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| The European covered bonds market is getting more and more competitive for issuers. Mark Kennedy outlines the areas where competition will increase and explains the new legislation that will help attract more business to Ireland. |
The growth in the market for European covered bonds has been remarkable over the past number of years, both in terms of volumes issued and emergence of new issuers. At the end of 2005, outstandings in the sector stood at $1.8 trillion with significant activity in the sector during 2006 and early 2007 believed to have increased that amount to more than €2 trillion.
This activity is driven, in part at least, by a surge of jurisdictions providing a framework for issuers. 2006 saw the first issuers under new legislation in Sweden and Portugal, while Turkey has also recently issued covered bond legislation. It is expected that the UK legislation will be passed later this year, along with new legislation in Denmark, Norway and, perhaps, Italy. The recent past has also seen important revisions to the legislative framework in Ireland and Germany.
We have also seen a number of trends which seem set to continue through 2007 and into 2008. These include a tendency towards longer maturities, and increased issuance in foreign currencies, notably in US dollars as issuers seek to tap into the significant investor population in the United States.
Another possible development will be the increased use of mortgage bond pools made up of assets located in a number of different jurisdictions. While this offers attractive geographical diversification, a particular practical challenge in this regard will be the efficient management of valuation requirements in the different geographical zones. Perhaps the most significant trend is the significant increase in likely volumes as new legislation enables increased numbers of issuers to come to the market efficiently. In particular, we are likely to see a significant level of issue from the UK under the expected legislation.
As supply of covered bonds increases, to meet what continues to be a very strong appetite amongst investors, it seems likely that those investors will be in a position to exercise greater discretion when choosing between the alternate issuers and issuer jurisdiction. We may also see a tightening of spreads as the range and volume of issuers increases. In such an environment, investors will begin to look at the qualitative differences between the different issue frameworks, whether legislative or contractual, as well as the differences between the individual issuers and asset pools, as they seek value.
When considering the merits of a particular covered bond framework, investors will consider factors such as protection in case of default provided for under the legislative or contractual framework, by reference to features such as the segregation of assets and the provisions in place to ensure that the covered bond obligations are met even if the issuer is insolvent. They may also consider aspects such as compliance with UCITs and the Capital Requirements Directive, the valuation base for pool assets, the frequency of revaluation, the regulations governing over-collateralisation, and the management of risks relating to the asset pool.
In such a scenario, the domestic legislation of issuers is an important differentiator when talking to investors. From an Irish perspective, the amendments to the Asset Covered Securities Act passed in April 2007 play an important role in ensuring that issuers based in Ireland continue to have a competitive position in the market. The regime in Ireland has many features which make it an attractive location both for issuers and purchasers of mortgage credit and public credit securities - as demonstrated by the very significant success of both domestic Irish institutions such as AIB and Bank of Ireland, and international institutions such as Depfa Bank in issuing covered bonds under the Irish legislation.
The key changes made to the 2001 Irish Act by the 2007 legislation include amendments to ensure that Irish Covered Bonds are compliant with the Capital Requirements Directive and provision for the introduction of pools of commercial mortgage assets - this latter aspect providing a very interesting option for a number of prospective issuers which, in turn, should be attractive to investors. While many of the practical details of the new legislation are expected to be implemented by Statutory Instrument later in the summer or early autumn, the 2007 Act is a welcome update of an existing strong, practical regulatory framework. |
Mark Kennedy is a partner with Mazars. Mazars currently act as Covered Asset Monitor to a number of issuers of covered bonds under the Irish Asset Covered Securities Act.
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