Interview: Michal Klestinec, National Bank of Slovakia

Nov 15th, 2012

Michal Klestinec, senior portfolio manager, National Bank of Slovakia, shared his views on Nordic covered bonds with Nordic FIs & Covered.

Nordic covered bonds have in general tightened this year. Has their performance been justified?

One of the major drivers behind the impressive performance of Nordic covered bonds this year has been the ECB’s activity through its LTROs. These operations have decreased the need for supply in the short term, which can be seen primarily in the short end of the curve where these bonds have benefited the most.

Moreover, Nordic covered bonds maintain their safe haven status and give asset managers the opportunity to diversify their portfolios into exposure outside the euro-zone. Finally, the strong support from local investors helps to keep spread volatility relatively low. These investors have limited opportunities to obtain exposure to local debt, as the amount of sovereign bonds issued is relatively small.

To what extent is the position of the Nordic countries being either outside the euro or among the strongest countries in the euro a factor in your opinion of their covered bonds?

It’s not only the non-euro-zone membership as an important diversification factor that supports Nordic countries in the time of sovereign crisis. It’s also, or mainly, the stable economic growth, strong fiscal stability and low government debt that results in triple-A ratings for these countries. All these components create a safe environment where you expect stability in the mortgage market, low NPLs, and low volatility in the spread development of your investments.

Do you have any concerns over the macro situation in any of the Nordic countries, with regard to house prices, for example?

Yes, in Norway. The Norwegian housing market is a little worrying. There seem to be risks due to the overvalued property market and a high level of private household debt. The ratio of house prices to rental prices is the highest in Europe and house prices to personal income is also very high.

Nevertheless, unemployment is still very low, at around 3%, and the public finances are in very good shape thanks partly to the country’s oil wealth. However, something to keep an eye on.

Do you see value in any of the Nordic names or sectors right now?

I consider short terms bonds maturing around the time the LTROs are repayable to be quite expensive and I think they don’t offer much room for further performance. Investors switched from Pfandbriefe to Nordic covered bonds when looking for a decent pick-up in bonds of the same quality and with only a little worse liquidity, which supported spread tightening. I still see selective opportunities to go long in some names in the middle to longer part of the curve, but compared with government bonds I think covered bonds are rather expensive.

Do you consider where Nordic credits trade in their local currency markets when looking at their relative value?

No, I don’t consider where bonds are trading in their local currency markets as our internal investment rules don’t allow me to be active in these markets.

How does liquidity compare across the Nordic jurisdictions and names?

In the last couple of weeks liquidity across Nordic jurisdictions has become worse as limited supply and high prices decreased demand for bonds shorter than two to three years. Holders of these bonds started taking profits and tried to release their credit lines for extension trades through expected supply or outright extension trades. For example, the market saw only sellers in 2014/2015 maturities in August, but this situation has stabilised a bit as the new supply did not come to market in September. However, liquidity across well known and frequent issuers is still good, but because traders’ inventories are low trading bigger sizes is relatively complicated.

Some of the smaller issuers sell deals of less than Eu1bn down to Eu500m — are these of interest to you?

Issue size is not a big constraint for me. If I am a holder of a higher share of an issue I can better control the price development in the market and smaller clips in the market cannot affect the spread development to a large extent. On the other side, a higher share in smaller deals decreases operational flexibility as the liquidity in sub-jumbo deals is much lower compared with jumbo issues.

The ICMA Covered Bond Investor Council has been promoting transparency among issuers while many Nordic issuers have applied for the European Covered Bond Council’s “Label”, which has a transparency element — are you interested in these initiatives and can you say how Nordic issuers might compare versus their peers when it comes to transparency?

As a member of the Label Advisory Committee I highly recommend to all issuers to join this transparency initiative. It took some time for the European Covered Bond Council and its 110 members from 25 countries, each with their own covered bond legislation, to reach an agreement about the current Label proposal. As of 5 November, the Label had received 78 cover pool applications from 64 issuers located in 14 different countries. Nordic issuers represent 28% of all applications and this interest came from seven banks from Denmark, six from Sweden, three from Finland and two from Norway.

I consider the transparency of Nordic issuers to be good, but in some aspects related to covered bond pool details they do not provide as deep an overview as, for example, French or UK issuers. It is mainly indexation of LTVs and the ownership structure of assets that is missing.

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