The new U.K. prime minister, Gordon Brown, said recently that the government will begin to draft new legislation to help regulate and promote covered bonds. Inevitably, the new regulations will boost covered bond issuance, sources say.
Brown's announcement came as a relief to market players, although some questioned the prime minister's motivations. "The [U.K.] Financial Services Authority has said it would do that from last year," said a covered bond analyst at a London-based investment bank. "The new regulations will do away with the contractual deal-by-deal model currently in place, in favor of one single regulatory method that will help boost the industry."
"Currently, U.K. covered bonds are contractual, which is less readily accepted from a Basel II market [perspective], and the new legislation should help increase appetite," said Christian Parker, capital markets partner at London based law firm Cadwalader, Wickersham & Taft. Although the new covered bond legislation should make U.K. covered bond issuance more attractive, it won't necessarily affect the RMBS market: Covered bonds are aimed specifically at the triple-A market, while RMBS targets the whole investor spectrum.
The change is part of Brown's larger plan to increase the availability of affordable housing, particularly in supply-strapped London, through building schemes and allowing banks to offer mortgages with greater flexibilities.
"Banks are the major investor group in covered bonds, and U.K. covered bonds are currently not as competitive as other European covered bonds in terms of risk weighting," said Sabine Winkler, a Merrill Lynch covered bond analyst, adding that the new FSA regulations will help in increasing the appeal of U.K. covered bonds to buyers as well as allow for better risk weightings.
"The U.K. covered bond market is set to benefit, when the FSA sets up new legislations," Winkler added. "Banks will potentially then use U.K. covered bonds more for liquidity management."
SIVs Show Staying Power
Meanwhile, the covered bonds sector is not the only European market set to grow. SIVs are bringing in volume as well.
"The hunger for [European] SIVs is growing. Eighteen months ago, there were 18 vehicles. Now there are 28 SIVs. With the eight SIV-lites or other hybrids, this number increases to 36, taking the assets under management across the SIV and hybrid SIV sectors to just under $400 billion," said Henry Tabe, managing director of the Moody's SIV team.
Aside from adding volume, SIVs are also looking relatively good from a credit perspective.
Moody's Investors Service recently proffered a poetic gem involving Structured Investment Vehicles titled: SIVs: An Oasis of Calm in the Subprime Maelstrom.
The European SIV sector has a 23% exposure to RMBS, which includes mortgages sourced globally, according to Tabe.
About half of this exposure is to U.S. RMBS, both prime and subprime, although the majority of vehicles have no direct exposure to U.S. subprime RMBS.
Some SIVs also take exposure to subprime mortgages through investments in CDOs of ABS, although here again, the majority of vehicles have historically shunned CDOs of ABS, Tabe said.
Overall, SIV exposure to CDOs stands at 11%. while RMBS and CDO exposures are typically taken at the triple-A and double-A levels. This balance is keeping SIVs safe and attractive, Tabe added.
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