The Securities Industry and Financial Markets Association (SIFMA) and the American Securitization Forum (ASF) last week created a U.S. Covered Bonds Council.
The new Council will serve as a collaborative forum through which different groups of market players will promote the sector in the U.S.
This newly formed group will focus on the development of market policies and practices that uphold public confidence in covered bonds. The council will also represent the industry's interests by engaging in dialogue with legislative, regulatory and other policymaking bodies.
Tim Skeet, head of covered bonds at Merrill Lynch, said that the potential for growth in the U.S. covered bond market is something that's "likely to occur in the second half of 2009."
He added that the role of the Council is to redefine the role of U.S. covered bonds so that people in the industry recognize "why it's a good asset to buy." Skeet stressed the fact that covered bonds involve private sector money and that they provide asset diversification for investors. They also provide, "investor diversification to issuers, besides also offering longer maturity funding," he said. "Investors should note that this asset class offers a very high-quality bank issued security where collateral is held on the balance sheet of banks, rather than off balance sheet."
The Federal Deposit Insurance Corp. (FDIC) released a covered bond policy statement and Treasury Secretary Henry Paulson expressed public support for the creation of a U.S. covered bond market in the beginning of last year, giving a boost to the sector. However, since then, there has been a lapse, and currently, "it's a wait-and-see as to what the new administration wants," Skeet said.
The Council, he said, is a way to regroup and recalibrate the industry's thoughts to present to the government. "We are hoping to engage the government and other authorities," Skeet said. "We would hope that the new administration will hold a similar view to the current one."
He added that the industry has to recreate a consensus. "The Council represents a tremendous cross section of the community drawing upon their expertise," Skeet said. "It will take into account everyone's requirements. We are meeting the challenge of launching something new by conducting road shows, investing in education, and learning about the regulatory issues as well as other parts of the establishment."
One of the components of educating market players is presenting covered bonds as a quasi-agency product, as opposed to a credit market one. "It's a high quality product, it's not that it doesn't have any credit elements, but its not at the intensive end of the credit spectrum," Skeet said. He hopes that the U.S. market, which has only seen two covered bond deals thus far, will start to see some activity by the early part of next year.
One of the council's important moves is the creation of a traders' committee. "We are going to come up with recommendations for traded screens and systems that are important initiatives, so that the market will have access to these bonds," Skeet said. "The biggest goal is to establish as a premium, high-quality product with liquidity, and to communicate that to the investment community."
Sean Davy, a managing director at SIFMA, said that the primary objective of the Council was to "build an inclusive organizational structure and one industry-wide voice from the various constituencies within the industry." He said that with the U.S. government's covered bonds initiatives earlier this year, the covered bond market was set to emerge this past fall, but "the financial crisis closed the window of opportunity for that until next year, although the timing really remains to be seen."
Davy said that there are several factors that would impact the growth of the covered bond sector. The window for the FDIC guarantee for financial institutions' debt, for one, will only be open for debt issued through June 2009. Beyond that timeframe, these firms will be looking for alternative sources of funding. "Covered bonds is another tool that could be deployed for financial institutions to fund consumer assets, specifically mortgages," Davy said.
Davy said that the industry is doing its best to restore the securitization market, but progress is slow. "The covered bond market could serve as a segue back to securitization, as it secures the assets and puts the underlying institutions on the hook."
He added that another factor that will impact U.S. covered bond growth is how big a role the GSEs will play, and whether these agencies will have a smaller mandate or portfolio limits. Without the GSEs' wide reach, covered bonds could replace that financing capacity. "In Europe, covered bonds were more readily in use because they didn't have the same concept of the GSE," Davy said. "Covered bonds could become a useful tool in the U.S., depending in part on how significant the role of the GSEs in the future will be."
In terms of the sector's reach, Davy said that aside from institutions with large-scale operations such as Citigroup , Bank of America and JPMorgan Chase, mid-size and smaller institutions could likely avail themselves of the covered bond technology through a potential consolidation of assets issued through a single transaction. However, this might be at a later stage of the development of this market.
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