Euro Covered Bonds Enjoy Lift

European investors of covered bonds, collateralized by prime residential housing, are looking to increase their exposure to the product, indicating a growing confidence in the securitization alternative. Unlike a securitization vehicle, covered bonds are guaranteed to perform by the issuer in the sense that the bank is on the hook for any loses. But that’s not the only difference: the traditional investor base is distinct from that of securitization. Covered bond investors tend to be larger institutions that are happy with the fixed bullet payment structure, as opposed to the securitization pass-through structure that carries added prepayment and refinancing risk. Additionally, the product is more fee-heavy, with the price of dual recourse to losses passed to the investor. Proponents, however, say the investor base may be changing as the securitization market remains stalled. The news of increased interest in the product comes from the European Covered Bond Investors Survey, conducted by the European Covered Bond Dealers Association (ECBDA), and it isn’t all rosy. Of the surveyed participants, just 64% of respondents wish to increase or maintain their investment in covered bonds for 2009. Nonetheless, covered bond trading in Europe is enjoying a rally. Last week was the busiest this year for covered bonds with five transactions priced for a total of $8.8bn. Total issuance year-to-date increased to more than $31bn according to research at Barclays Capital. “Covered bonds remains an important asset class for funding purposes as demonstrated by the increase in new issue activity we have seen this week,” said Torsten Elling, who heads covered bond syndicate and trading at Barclays Capital. In Europe, Crédit Agricole announced the first covered bond issue in January. Operated by its new subsidiary Crédit Agricole Covered Bonds, the issue is worth €1.25bn (US$1.62bn) with a seven-year maturity. The annual coupon is fixed at 4.5% equal to the swap rate for the same maturity at 135bp over Euribor. The deal is secured on residential housing in France, originated by local banks with a base of highly granular homes. Bank of America and Washington Mutual are the only two existing domestic issuers of covered bonds stateside. At any rate, there is still a US Covered Bonds Council (USCBC). JP Morgan is now handling the WaMu trades after the FDIC took control of operations there. At any rate, perhaps in an indication of where geographical interest remains in American covered bonds, JP Morgan head trader Alberto Basu works out of London. Write to Jacob Gaffney.

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