Why these assets?

10 May 2016 | Richard Kemmish



Those of us who moderate panels regularly just love a good disagreement between our panellists. Whether it is a belief that the moderator’s role should be to seek out a synthesis between the thesis and the antithesis, or whether it is just to keep the audience awake, I wouldn’t like to say.

One of the biggest (ergo, best) disagreements on a panel at the recent CEE covered bond forum was on the topic of which assets should be eligible for inclusion in a cover pool? In one corner, representing the conservative traditions of the Pfandbrief issuers, Otmar Stocker of the VDP, in the more radical corner, representing EM covered bonds, Fatih Saglik of the Capital Markets Board of Turkey.

If I may paraphrase their arguments, the traditional definition of eligible assets was that they should be long-term, marketable and standardised. In doing so they appropriately back high quality, long term securities that can easily be transferred to a third party or operated on their own if the need ever arises.

Alternatively, covered bond assets could be defined according to whether they fulfil a need for society. If they do that they are more likely to attract the government’s support, whether that be for the drafting of a good law, a commitment to best supervisory practices or (and I’m extending the argument a bit here) are more likely to be supported /less likely to be undermined by government actions in a crisis.

These two approaches touch on many things, most obviously the credit-worthiness of the structure, although it is interesting that neither definition refers to credit quality. Perhaps that is appropriate –asset credit can deteriorate in a downturn, covered bond technology should be about protecting investors from that. 

But the difference also touches on the core definition of what a covered bond is, and more importantly, what covered bonds will be.
The venn diagram of these two criteria has a big overlap: mortgages and public sector loans. The non-overlapping parts of the diagram contain, on the one side mortgages on ships and aircraft – assets that are absolutely standardised, marketable and long term – and on the other side loans to SMEs – non-of the above but vitally important to the economy of many countries.
It wont surprise you to hear that I am not going to take sides in this debate other than to say that I have sympathy for both views and that the covered bond market is probably sophisticated and transparent enough to accommodate both – the choice of which criteria to apply is ‘OR’ not ‘XOR’.
 
But, what did strike me is that there should be no debate about loans to infrastructure projects. Typically these are appended to the debate about SME assets as an after-thought but without any real commitment. Surely though (if they are governed by sufficiently standardised documentation) they could satisfy both definitions. Should we separate the SME debate from the infrastructure debate?
Not quite a synthesis, but at least another thesis. 


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