2013 fall in covered outstandings ‘reflects status’, end seen in 2016

Aug 14th, 2014

The covered bond market shrank last year for the first time since the European Covered Bond Council began collating statistics, according to figures released by the industry body last week, although ECBC representatives said this could be interpreted positively, while some Nordic markets are rising in prominence.

EMF ECBC APPThe ECBC has been compiling the figures since 2003. The 2013 numbers — which an analyst noted are the most complete dataset available, even if they come with a delay — show a decline from 2012’s total of Eu213bn, or 8%, to Eu2.6tr ($3.5tr).

“Looking at issuance, the trends mentioned above for the evolution of outstanding covered bond volumes become even more pronounced,” said Florian Eichert, senior covered bond analyst at Crédit Agricole CIB and chairman of the ECBC statistics and data working group, in a piece accompanying the data. “Total covered bond issuance fell by 39% to Eu429bn after Eu707bn [in 2012].”

Almost all of the decline in outstandings can be accounted for by falls in three markets highlighted by the ECBC: Spanish outstandings fell by Eu75bn (or by 18%), German by Eu72bn (14%), and the UK by Eu55bn (almost one-third) — coming to an aggregate of Eu202bn. In contrast, Belgium and Australia grew by Eu6bn and Eu11bn, respectively.

Germany meanwhile retained its position as the largest market, with Eu452bn of outstandings, although Denmark, with Eu365bn (Dkr2,720tr), overtook Spain, albeit by just Eu200m. France retained its fourth position, on Eu344bn.

Denmark remained the biggest market for mortgage-backed issuance. Overall, mortgage-backed covered bonds accounted for 81.5% of the market in 2013, up from 80.2%, although according to the ECBC this reflected a slower shift from public sector to mortgage issuance than in 2012.

Florian Eichert

Florian Eichert
Senior Covered Bond Analyst, Crédit Agricole CIB

Eichert noted that net issuance is on track to contract again this year — with markets such as France shrinking alongside previous laggards — and he expects the trend to continue next year.

“2015 will most likely be a fairly similar story — covered bond funding plans are being pushed back for the sake of alternative funding sources,” he said. “The main difference to 2014 could however be that a large number of banks resort back to central bank money again rather than more complex wholesale funding products.

“The Eurosystem’s announcement of the TLTROs could be a drag on covered bond issuance.”

Australian and Canadian activity is likely to skew the market towards non-European countries, noted Eichert, with stable volumes in Sweden and Denmark likely to increase their weighting given shrinking supply elsewhere in Europe.

He also predicted an end to the market’s contraction in 2016-2017.

“2015 will be the last year for the German public sector backed covered bond market to contract significantly, which has played a big role in recent years,” he said. “And 2017 is the first year when, at least in the euro benchmark covered bond space, redemptions start to drop from the plateau that was created by having the long dated issuance from the pre-crisis years falling due together with the shorter dated bonds from the crisis years.”

The ECBC statistics include retained issuance (except for Sweden’s, where transactions retained for the purpose of accessing central bank liquidity are excluded) and 2013’s figures suggest that a decline in such covered bonds contributed to the fall in outstandings.

“Having seen a big surge in volumes as banks in a number of countries used retained covered bonds as repo collateral during the crisis, the private placement category saw the biggest drop in 2013 (Eu85bn or 11%),” said Eichert. “European lenders paid back part of their LTRO money and consequently cancelled out retained covered bonds.”

He noted that the biggest drops in issuance volumes could be witnessed in both privately placed covered bonds — down 66% to Eu84bn — as well as those issued with floating rate coupons – down 78% to Eu91bn.

“Many issuers simply cancelled and did not replace retained deals, which fall into the private placement category and are usually issued with floating rate coupons,” added Eichert.

Luca Bertalot, secretary general of the EMF-ECBC, said that the decline in issuance reflected covered bonds’ status amid wider trends as the financial system emerges from the crisis.

“The volume of outstandings is falling due to the fact that banks have more options on the table,” he said, “so the drop is not a bad sign, but a good sign. There is also a lack of supply of good mortgages and covered bonds of course require high quality collateral.

“Overall, the trend confirms the role of covered bonds as being a crisis management tool due to the essential access to the capital markets they offer — which matches the role they are expected to be given in LCRs.”

Photo: EMF-ECBC offices, Brussels

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