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How busy will we be next year?

24 November 2014
Richard Kemmish

About this time of year covered bond analysts start their traditional game of guessing next year’s new issue volume. Why they do this is unclear, investors would prefer them to guess spread moves or credit downgrades, but they do it all the same. Whatever the motivation – vanity, competitive spirit, or an attempt to attract mates – it’s been an increasingly difficult game to play recently. This year will be the toughest yet.

Predicting total bank funding needs is the easy part. Extrapolate last year’s change (shrinkage) in balance sheet of the major issuers, adjust for next year’s redemptions and hey presto! You can adjust for macro economic developments if you really want to but looking at the sluggish behaviour of the euro-zone economy there doesn’t seem to be a lot of point.

The tricky bit is the funding mix. How much will be in other funding tools and how much will be in jumbo format (the rules of the game inexplicably only refer to benchmark deals)?

The proportion of senior unsecured debt in next year’s funding plan should be driven entirely by a bank’s target TLAC (total loss absorbency capacity, which seems to have just replaced MREL in the lexicon of bank capital structurers. Sometimes I think they do it deliberately to confuse us).

Is there a point to unsecured debt other than to hit this new target (up to 20%!)? Seemingly not as the covered/unsecured rating differential (therefore rationally, price) increases and the securitisation market comes back into economic viability (for the non cover pool eligible assets).

Then there is central bank funding? Will TLTRO increase the total public sector funding of the banking system? Or will it simply replace shorter dated and maturing facilities? Almost impossible to say but presumably it’s largely a matter or pricing, which is largely a matter of how much the ECB wants it to increase.

What of the funding mix within the covered bond sector? Previously analysts only attempted to forecast jumbo (€1bn+) issuance, until they were all caught out in the crisis by a sudden shift towards jumbolino issuance (€500mn+).  Generally speaking as newer markets develop, the proportion of their issuance in jumbo/jumbolino format declines until it reaches German proportions – roughly one third of the total. The attractions of private placements, namenspfandbrief and non € issuance are increasingly appealing as a market reaches maturity. 

Then there is the traditional wild card in forecasts – the new markets. Recently this has been Australia and Canada driving the volumes with a few interesting, but numerically unimportant, developments elsewhere.  Is there any possibility of a new source of significant volumes of bonds in 2015? Probably not, but Turkey, Brazil and – dare to whisper it – the USA are all large countries that might start to issue jumbos next year and go large by 2016.
So? You don’t honestly expect me to guess a number with everything I’ve just said, do you? I’ll leave it to the experts, they enjoy that sort of thing.

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