Investors Back Away from European Covered Bonds--Update #5

A premise for developing covered bonds as a financing vehicle in the U.S. is that their structure (with originators keeping them on their balance sheets) will tend to make them more sound.  Our biggest interest in European covered bonds during this period of extraordinary financial turmoil is to see how well (or badly) they are holding up under the pressure.   In general, our impression has been that they have been hurt significantly—but not nearly to the same extent as the ABS market.

The latest overview of how covered bonds are doing in Europe comes from Financial News—a British-based publication owned by Dow Jones.   In a story titled “Pipeline for covered bonds runs dry," Radi Khasawneh observes that “in the wake of the bank bailouts, which in some [European] markets include government guarantees on bank debt, and with the collapse of Lehman Brothers, a major counterparty, investors have deserted the sector in favour of more secure debt instruments.”   (The same story was later recycled into the Nov. 27 European edition of  the Wall Street Journal.) 

According to sources quoted by Khasawneh, there will be no new issues of “jumbo” covered bonds (i.e., at least €1 billion, which are considered the most liquid) until at least mid-2009.  There may be a small quantity of smaller issues during the first quarter.  Meanwhile, Barclay’s Capital is cited as predicting that the lack of new issuance will cause the value of currently outstanding covered bonds to decline by 7.6%.

The gloomy picture presented in Khasawneh’s article certainly fits the tone of a subsequent speech by the Director General of  Britain’s Council of Mortgage Lenders (CML), as published by Mortgage Introducer.  At CML's annual conference in London Dec. 2, Michael Coogan told his audience: “You are well aware that the capital markets which support securitisation and covered bond issuance remain closed in the UK….”   (You can read Coogan’s speech, which talks quite a bit about the UK's mortgage finance situation and what Coogan thinks should be done, by clicking here.)

Still, current conditions did not prevent Greece’s national bank from announcing a jumbo issuance.  The Greek bank issued €2 billion in covered bonds on Nov. 28, with plans to issue another €2 billion by the end of 2008. (Read a short Reuters story on this here.) It will be interesting to see how this works out. 

Meanwhile, according to Statistics Norway, covered bond issues inside Norway rose sharply in October over the same month in 2007, although issues by Norwegians abroad were way down.  (Read the announcement here.)

Perhaps the strongest recent journalistic contrast to the Financial News and Wall Street Journal story came in a Nov. 21 Euroweek article titled “Undeterred, quartet turn to covered bonds.”  The story reported on four European financial institutions that have been completing preparations for new covered bond programs (including Greece's national bank as noted above), “showing that the instrument continues to win converts despite the paralysis in the public markets and its travails during the crisis.”

If you are logged in as a subscriber to Factiva, you can pay to download “Pipeline for covered bonds runs dry" by clicking here and "Undeterred, quartet turn to covered bonds" by clicking here.   If you subscribe (and are logged in) to the electronic edition of the Wall Street Journal, you can read "Covered bonds lose their appeal as havens" here.