ASF: U.S. Covered Bonds Wait for Their Chance
January 28, 2013
Covered bonds continue to gain ground in the U.S., but not among domestic issuers.
While there has been about $44 billion in greenback-denominated covered bonds, they are all from foreign banks.
On a panel at the ASF's 2013 conference, Yehudah Forster, a vice president at Moody's Investors Service, pointed out that not a U.S. single bank in the states has tapped this market since 2007.
Speakers agreed that a major stumbling block remains uncertainty about what would happen to covered bondholders in the event of a troubled issuing bank going into receivership.
Another hurdle is that the market does not have the vocal champions that other businesses do.
“While covered bond haven’t had any big detractors, they haven’t had any big supporters [either],” said Anna Pinedo, a partner at Morrison & Foerster.
For those that do want the market to happen, they need the FDIC to come on board. The regulatory agency is leery of having strong assets ring-fenced for the benefit of bondholders in the case of a bankruptcy. But Pinedo said that there was talk that the agency could be amenable to covered bond legislation that would set a cap on the volume of covered bonds issued by a bank as a percentage of its total assets.
Australia included this stipulation in its legislation, and only a little over a year since the first deal, banks there have issued over A$44 billion ($46 billion) in deals so far, according to Chris Dalton, the CEO of the Australian Securitisation Forum. An Australian bank cannot have an outstanding volume of covered bonds that exceeds 8% of its assets.
“The issuance of all the banks are well inside the cap,” Dalton said. He added that the country’s banks have tapped a variety of currencies, with about A$13 billion denominated in U.S. dollars.
In terms of the composition of the cover pool, the assets of choice for Australian issuers are mortgage loans, as these banks tend to have relatively large mortgage books.
Canadian banks have also tapped U.S. investors but legislation passed there only late last year could stall the market as players digest the implications. Housing agency the Canada Mortgage and Housing Corporation (CMHC) barred banks from using government-guaranteed loans in their cover pool, which had been part of deals before the regulation was passed. Ben Colice, head of covered bond origination at RBC Capital Markets, said players would eventually get accustomed to the idea of non-guaranteed loans in Canadian cover pools.