Section 2 - FTSE

OLD WINE IN NEW
WORLD GLASSES
In the United States, covered bonds were a long
time coming. The crème de la crème of private
sector bank credit in Old Europe since the days
of Frederick the Great did not reach the New
World until September 2006, when Washington
Mutual (WaMu) launched the first covered
bond programme for a US issuer. In the wake of
the credit crisis, however, American regulators
are pushing hard to develop a domestic market
for an instrument that has long provided an
inexpensive funding source for large banks in
Europe. Neil O’Hara reports on the outlook for
an old asset class in the New World.
INVESTORS ACCEPT A yield lower than for
conventional unsecured bonds because covered bonds
represent both a senior obligation of a major financial
institution and a priority claim against a segregated pool of
high quality assets if the issuer fails. Nevertheless, issuers
and underwriters face a challenge in educating US
investors who, although familiar with traditional bonds
and securitised debt, have no experience of a hybrid that
combines features of both.
F T S E G L O B A L M A R K E T S • J A N U A R Y / F E B R U A R Y 2 0 0 9
Although US regulators began to press for a local market
in covered bonds only after the credit crisis took hold, they
have made rapid progress, according to Florian Hillenbrand,
a vice president and senior analyst at Unicredito in Munich.
“The first time I heard US guys speak about covered bonds
as something that might be of interest for domestic banks
was in January,”he says,“Six months later they were saying
on balance sheet funding is good for asset quality and you
had co-ordinated statements from supervisory bodies. That
is impressive.” In July, the Federal Deposit Insurance
Corporation (FDIC) put out a Final Covered Bond Policy
Statement and two weeks later the Treasury followed up
with its Best Practices for Residential Covered Bonds.
Even so, it will take more than regulatory support to develop
a covered bond market in the US. Although Bank of America,
Citi, JPMorgan Chase and Wells Fargo have all expressed
interest in issuing covered bonds, investors are unlikely to
want to jump on the bandwagon until they see good two-way
flow. Dan Markaity, head of global public credit at Merrill
Lynch in New York outlines some of the requirements. He
thinks that covered bond issues need to be large—preferably
$2bn or more, so that dealers will not be afraid to sell them
short; a prerequisite for liquid secondary markets. Moreover,
Markaity believes covered bonds should be available to small
Photograph © Lazarx/Dreamstime.com,
supplied
November 2008.
COVERED BONDS: THE US OUTLOOK
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