Section 2 - FTSE

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thoughts and expectations of relative value. Expect a debate in due course. DR. LOUIS HAGEN: The current crisis has clearly demonstrated that covered bonds have been able to withstand the earth quake when other funding markets especially structured products had already been destroyed. Within the covered bond family again we saw a substantial spread differentiation with some products showing more resilience than others. Since September we are in a situation in which it seems that almost only government products or government guaranteed products are able to attract a wider audience. But even within the government sector there is a wide range of differentiation. CARLOS STILIANOPOULOS: The strengths of the Covered Bond product has been highlighted by current market conditions. Even though spreads have widened substantially, demand has remained relatively strong during this period. There have been many private placements done in the Covered Bond market lately, and this shows there is still investor appetite for the product which cannot be said for other asset classes. The reason for this? Probably because of the strength of the product in itself. Given the depth of the current crisis, how might it impact on the covered bond market in the immediate term? TIM SKEET: The once homogeneous asset class has definitively splintered by geography, structure and issuer into a hitherto unanticipated pattern. Each jurisdiction makes claims about the robust nature of its domestic bonds, although investors do not always appear to be swayed by the arguments. Divergent nominal trading levels in the secondary markets illustrate this. Gone probably forever is the notion that this is a unified asset class. This realisation represents furthermore a challenge which will require more work on the part of investors. Let us hope that the market, with its cadre of analysts supported in future by credit and macroeconomic specialists, will rise to this. Better communication, greater transparency and attention to the mechanics of transactions will be required. The way that this will impact spreads and where the asset class trades relative to senior unsecured or agency debt is not clear. Nevertheless, the degree of government support, specific laws in many cases, and security on the back of prime bank credits should combine to preserve the premium quality status of most of the asset class. Market practitioners can still dream on. What does the issuance calendar look like for the rest of this year and for the first half of 2009? DR. LOUIS HAGEN: We do expect issuance to gain momentum in 2009 especially in maturities beyond the 3- 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 year tenor, although very gradually given the increased competition from agencies and guaranteed bank bonds. TED LORD: Many covered bond issuers are looking for the opportunity to come to the market should conditions improve. The stronger names with solid business models should lead the way in the tough markets for 2009. Investors want to purchase names that can keep doing a profitable business in the current climate and those firms that are not too highly leveraged. Why did registered covered bonds become more popular over the summer of 2008? Was it to avoid any mark to market adjustments? Or is that too simplistic and where other issues in play? DR. LOUIS HAGEN: Registered bonds are an important pillar of the Pfandbrief market. About one third of 840 billion Euro Pfandbrief outstanding comes in registered format. Registered Pfandbrief offer more flexibility to many institutional investors like insurance companies and other banks given they do not have to mark them to market. In times of severe dislocations like today institutional investors resort to registered bonds given the lack of any indication of fair values. In addition most registered Pfandbrief are tailor made at the request of the investor. Was the jumbo covered bond market more or less impacted by the crisis than other covered bonds? TIM SKEET: Trading had been one of the market’s key attractions. Jumbos offered a real sense of liquidity relative to other asset classes. The jumbo market-making conventions in force proved excellent for fair weather trading, but exacerbated the spiral when the winds turned. Now the market is wrecked, how best should the traders set about moving forward? Optimists point to the fact that members of the trading community are taking the initiative and moving towards more open and modern trading standards that suit variable market conditions better. It is likely that although Jumbo trading and that sector of the market will revive in due course, more flexible issue sizes may emerge into the mainstream, offering issuers greater control over maturities, and investors more choice on spread and other parameters. Rating agencies may encourage this in order to alleviate refinancing risks. It is therefore possible that issues of say €500m will be more frequently seen in future and more flexible taps (as seen recently in the Pfandbrief sector). DR. LOUIS HAGEN: One cannot compare the Jumbo market with the traditional market. The Jumbo model aims at providing liquidity to the investor whereas traditional Pfandbrief does not. The liquidity of the Jumbo Pfandbrief was impacted first having proven its resilience quite a long time after the crisis loomed in summer 2007 when spreads had remained almost unaffected as had volumes. 77
COVERED BONDS – VIRTUAL ROUNDTABLE 78 Ted Lord, managing director and head of covered bonds, Barclays Capital. According to Lord, throughout the credit crisis and liquidity problems facing many sectors of the capital markets, investors have maintained their faith in the covered bond asset class. Investors still purchase covered bonds in private placement format and in the secondary market. Du to the liquidity problems in the secondary market however, some investors are seeing covered bonds more as a credit product and not as much as a rates/government bond surrogate product. Photograph kindly supplied by Barclays Capital, December 2008. In 2008 we saw legislation passed which created legal frameworks for the issuance of covered bonds in the United Kingdom and the Netherlands. Current market conditions aside, what is the view of the possibilities offered by these markets? TED LORD: There is trend among many covered bond issuers to prefer those covered bonds covered by a legal versus solely on a contractual relationship. In this respect, the moves to have a legal framework for covered bonds in the United Kingdom and the Netherlands is a positive step. We see continued investor demand for UK and Dutch covered bonds, but for mainly the stronger names. How much was the European covered bond market impacted by the mark to market write-downs that impaired other structured products? How much was the mark down of asset backed securities elsewhere affecting new issue premiums and/or trigger price adjustments of new covered bonds? TED LORD: The mark-to-market principle has had an effect on the covered bond market - especially those covered bond markets where the spread widening has been the most significant. Firstly, the general spread widening has led to performance problems against certain indexes resulting in investor redemptions at the major fund managers. Since many of the securitised markets shut, the investors needed to sell what they could and sold the covered bonds. Typically, covered bonds have enjoyed the highest ratings. In the aftermath of this current credit crisis, what challenges will ratings agencies face in providing ratings for new covered bond issues? Are ratings consistent, for example, across different agencies in the covered bond segment? Should they be? TIM SKEET: We should not underestimate the impact of evolving rating agency attitudes. With stress in the cover pools, stress at the level of the parent banks and significant stress in refinancing capacity and liquidity, the AAA status of some parts of the market can no longer be taken for granted. This is something that will need to be addressed by the industry and investor expectations will need to be managed accordingly.Governments have consistently supported and sponsored the product, not just in Germany but elsewhere. Investors should take note. Nevertheless, with the ratings pressure and investor jitters, governments need to remain vigilant that the product will continue to benefit from their support. There are good political reasons for this in view of the role this product plays in housing finance in Europe. NICHOLAS LINDSTROM, MOODY’S INVESTOR SERVICES: The key challenge in the current market is in the approach to rating risks. Where ratings between the rating agencies differ, typically Moody’s has the lower covered bond ratings. We believe the primary reason for this may be that we are more focussed on refinancing risk than the other agencies. As already seen during the credit crunch, refinancing risk can be a very volatile risk, and this risk is arguably one of the cornerstones of the credit crunch. The vast majority of covered bonds are “bullet bonds” (i.e. exposed to refinancing risk). Refinancing risk arises following the default of the bank supporting a covered bond. When this happens, the covered bond must be repaid from the assets backing the covered bond. For J A N U A R Y / F E B R U A R Y 2 0 0 9 • F T S E G L O B A L M A R K E T S
Page 1 and 2: FUND ADMINISTRATION: GOING WITH THE
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Page 5 and 6: ASIAN INVESTOR SERVICES: CUSTODY SO
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Page 9 and 10: CORPORATE PROFILE: MANPOWER BUILDS
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Page 13 and 14: Jim wondered if there was an easier
Page 15 and 16: CORPORATE PROFILE: AIG 66 a handsom
Page 17 and 18: GOLD: SET FOR A REBOUND? 68 GOLD GE
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Page 21 and 22: COVERED BONDS: THE US OUTLOOK 72 Be
Page 23 and 24: 74 Talking Point THE OUTLOOK FOR EU
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Page 29 and 30: THE EXPANDING WORLD OF ETFS 80 The
Page 31 and 32: ETCs GAIN AS COMMODITIES REMAIN POP
Page 33 and 34: REAL ESTATE REPORT: THE IMPACT ON L
Page 35 and 36: EUROPEAN TRADING STATISTICS 86 THE
Page 37 and 38: EXCHANGE TRADED FUNDS: LISTING & DI
Page 39 and 40: EXCHANGE TRADED FUNDS: LISTING & DI
Page 41 and 42: MARKET DATA BY FTSE RESEARCH 92 Glo
Page 43 and 44: MARKET DATA BY FTSE RESEARCH 94 Eur
Page 45 and 46: CALENDAR 96 Index Reviews Jan - Apr
Page 47: MAYBE I SHOULD TALK TO THE LEADER I

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