France has extended its share of the European covered bond market to 17% in 2007 (year to date) from 11% in 2006.

Boosting volume is Credit Mutuel, which entered the field by launching a 15 billion ($20.15 billion) issuance program to refinance its residential loan profile. The deal received triple-A ratings from Fitch Ratings, Moody's Investors Service and Standard & Poor's and is structured by BNP Paribas.

The move comes in light of the recent development that the Spanish share of the market has dipped to 29% in 2007 from 37% in 2006, according to research from Dresdner Kleinwort. "Spanish jumbo covered bond issuance has been decreasing year on year as the local mortgage market seems to have finally cooled down somewhat and issuers are probably making more active use of MBS issuance ahead of Basel II implementation," said analyst Ted Packmohr at DKIB.

Packmohr added that France is on the up as the French mortgage market has developed quite strongly over the past few years, thereby providing issuers with ample cover volume. And, favorably, structured covered bond issues were created alongside the mortgage market and based on a similar legislative framework.

This means that "France, therefore, was the first country where legislative and structured covered bonds existed next to each other," Packmohr said, "and with Credit Mutuel about to become the second user of a structured program, the first being BNP Paribas, this trend is set to continue, helping issuance volumes to rise."

Soft Bullets Shoot Up

Soft-bullet covered bonds - those with an extendable repayment date of up to several years, as long as interest payment are maintained - are also on the increase. Soft-bullet structures currently make up nearly 30% of euro jumbo issuance, compared with just 10% four years ago. To be sure, the Credit Mutuel deal is currently hard bullet, however there are provisions in the issue that allow it to switch to a soft-bullet structure, if necessary, according to Fitch.

So far, the pricing effect of a soft-bullet structure tends to be negligible, and investors are not avoiding, or even concerned with, soft bullets, Packmohr said. At the same time, soft bullets offer various structural advantages to issuers, helping to save costs as they are viewed positively by the rating agencies. As a result, soft-bullet issuance is expected to increase.

Helene Heberlein, head of European covered bonds at Fitch, explained that similar mechanisms for ratings are applied to all forms of covered bonds and added that "maturity mismatches are mitigated in our analysis by the applicable prematurity test: if the short-term rating of BFCM, as ultimate debtor, falls below F1+', then it will have to post sufficient cash collateral to meet principal payments on the covered bonds becoming due in the next nine calendar months."

Soft-bullet maturities were originally introduced by Spanish joint issuers, but are now seen in the U.K., Denmark, Ireland and Portugal. Norway's largest financial services group, DnB NOR, also has "just closed our inaugural transaction," of a soft-bullet jumbo covered bond, according to senior trader Svein Ivar Mossige, a first for the Scandinavian country.

DnB NOR international bond salesman Morten Fornes said the first coupon on the deal, named Boligkreditt, was issued on July 3. The cover pool consisted of 55,615 performing loans secured on residential properties, both first and second homes, with a total outstanding balance of 5 billion. Seventy-six percent of the loans are amortizing and the other 24% are interest-only, and the deal is worth 15 billion, according to S&P, which rated Boligkreditt triple-A.

"The current loans are of extremely low risk, as they are granted to prime borrowers and have a weighted average (WA) original loan-to-value ratio (LTV) of 51.1% and an WA current LTV of 36.7%," said Fitch Ratings, which assigned Boligkreditt a triple-A rating. "Fitch has assigned a Discontinuity Factor (D-Factor) of 12.13% to DnB NOR Boligkreditt mortgage covered bonds, as a measure of the likelihood of interruption of payments on the covered bonds." The deal was listed on the Luxembourg Stock Exchange and Oslo Stock Exchange.

The month of June also saw the addition of two new deals in the burgeoning Portugese soft-bullet covered bond arena. Like the Boligkreditt transaction, the Portugese deals have extended legal maturity, according to a Dresdner Kleinwort report, which does not serve as a deterrent to some aspects of these new types of issues. "The risk of maturity potentially being extended has only a very small impact on the price of a new covered bond," the report concluded.

(c) 2007 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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