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Waiting for Munich: 3 The Globalisation of covered bonds

21 August 2018
Richard Kemmish

Ahead of the Euromoney Covered Bond Forum in Munich in September, some thoughts on the topics that we will be discussing. A perennial discussion that has been given a new emphasis is the globalisation of our market.

Despite my evangelical zeal for the topic, I know that the ‘new countries’ panel at every covered bond conference is sometimes guilty of over-promising and under-delivering. The development time of a new covered bond jurisdiction is long compared to the annual cycle of conferences but those of us who work on those developments do want to keep you updated on our work. Why should you attend this panel this year? I think there are a handful of very important reasons.

The covered bond market develops in waves. One wave happened in the late 90s after the market became liquid and truly cross border on the back of the jumbo-pfandbrief and its associated market-making rules. The next was after contractual covered bonds were invented in 2003 in the UK. Another – mainly non-European – wave hit after the financial crisis when securitisations were in the doldrums and covered bonds were seen to be a crisis survival tool.

Are we on the verge of the next wave?

There are a lot of conversations about covered bonds in finance ministries of countries that you don’t hear rumoured on these panels, and who don’t send delegates to these conferences. The fact that they haven’t started the process of drafting a law doesn’t mean that they haven’t thought about it or that they haven’t been pitched to, whether by the World Bank, the EBRD or Luca. It is always a balance – are the resources best spent on covered bonds? Or, for example, developing local capital market infrastructure? The Basle committee’s first time recognition of the concept of covered bonds last year may have been light on detail but its signal effect in those finance ministry discussions can’t be overestimated.

They will embrace covered bonds one day, it is a matter of when. I believe that the driving forces – the vast need for capital inflows in emerging markets and the equal need for non-zero interest rate investments – make inflows into emerging markets a long term inevitability. The fact that the investments need to be better credits with lower volatility than traditional emerging market investments requires a safe, private sector fixed income tool.

I can confidently predict that the number of non-EU covered bonds will increase massively next year. Brexit might seem irrelevant for this debate – Britain won’t be covered by the globalisation panel – but it isn’t irrelevant. Both sides (investors and issuers in Britain and in the legacy EU) have too much to lose from anything other than a ‘mutual recognition’ outcome. This creates a great precedent for existing non-EU covered bonds and a great incentive for those contemplating the introduction of a market. Not only will they be able to access that vast traditional investor base on equal terms, but also they will need to provide reciprocal treatment – helping the development of their local currency investor base. 

But the most important reason why you should attend this panel is, for me, a very selfish one. We need your feedback. Would you buy in local currency? Is a local stock exchange listing sufficient? Do you need the bonds to be in EM indices? Or covered bond indices? Do the swaps need convertibility protection? What sovereign rating ceilings are a deal killer? We need to know these things from the investors.

Please come and bring your opinions with you.

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