Issuer panelists at today's gathering called Covered Bonds — The Americas said that the sector has provided them with a good source of funding diversity.
The conference, which was held today in New York, was sponsored by the Information Management Network.
Peter Walker, an associate vice president at Toronto-Dominion Bank (TD Bank), said that funding through mortgages is still an efficient alternative for the firm. Covered bonds, he said, offer geographic and investor diversification, which is not found in the senior unsecured market. The sector provides "good pricing diversifcation," Walker said.
TD Bank in July sold $2 billion in five-year covered bonds that were backed by loans insured by the Canada Mortgage and Housing Corp. (CMHC) and were bought by U.S. investors. The bonds were sold at 37 basis points over mid-swaps. Barclays Capital, Deutsche Bank Securities, Royal Bank of Scotland (RBS) and TD managed the offering.
Stephen Hynes, head of securitization at RBS, said that covered bond financing, which is backed by good quality assets, fits well with the bank's other sources of funding that include both unsecured and secured options.
He agreed that the cover pool provides funding diversification and exists side by side with RBS' RMBS program, although the covered bond alternative can support other assets aside from residential mortgages. There are existing capacity constraints in both markets, Hynes said, although between these two products RBS has significantly more RMBS.
Aside from the diversity factor, panelists said that in Europe at least, covered bond assets can get easier access to certain government programs. Karlo Fuchs, a director at Standard & Poor's, said that covered bonds, which attract the lowest haircuts, are usually accepted by the European Central Bank (ECB) for repo purposes.
"There's sufficient collateral that can be issued and placed with the ECB to get liquidity," Fuchs said. "The product allows for broader and cheaper funding." He also mentioned that the covered bond option also gives issuers the option to lengthen the maturity profile of their liabilities.
Market players, Fuchs said, should look into the possibility of non-triple-A covered bonds or view covered bonds as more of a credit product. Investors in cover pools might also buy sovereign bonds, Fuchs said, some of which are lower than triple-A. He added that investors have to carefully look at the credit of the issuers and the cover pool if they consider non-triple-A covered bonds.
Walker said that in TD's case, the Government of Canada through the CMHC effectively provided the backstop for the covered bonds that TD issued. "There's a dynamic for many assets," he said, addding that the key is the pick up from covered bonds versus unsecured funding.
In a separate presentation, Luca Bertalot, head of the European Covered Bond Council, enumerated the importance of the covered bond market, which includes playing a significant role in funding strategies, contributing to financial stability, reducing systemic risk in the macro sense, and providing housing finance for the private sector.
He also said that regulators view covered bonds and securitization differently. Covered bonds are seen by policymakers as a plain vanilla and long-term funding tool. Meanwhile, securitization is seen as a way to transfer risk from an issuer's balance sheet.
According to Bertalot, the countries that have covered bond legislation undergoing revisions are Austria, Denmark, Finland, France, Germany, Spain, Sweden and the U.K.
The countries that have forthcoming legislation are Australia, Belguim, Canada, Cyprus, Japan, Mexico, Russia, South Korea, and the U.S. He is hopeful that Belgium will have established covered bond legislation by next year.
