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Waiting for Munich: 6 This time next year

29 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. The final session of the conference is forward looking. It asks what the market will look like this time next year. Here are some predictions.

1: Spreads will be wider
But not too much. With the end of the ECB’s buying programme (strictly speaking, an end to increases in it’s buying programme. Bonds will still be purchased to replace maturating ones), the increase in net issuance predicted and the diminution of the investor base over recent years, it is reasonably clear which way spreads are going. Mitigating this is the vast frustrated demand for the bonds from investors. Bank treasurers looking to fill their liquidity buffers, for example. And a return of investors from unsecured debt in response to some form of bank credit problem. 

2: An issuer will fail

But we will cope with it. With the Single Resolution Board being found not guilty of a breach of ‘no creditor worse off’ in the case of Banco Popular, their reticent to put another bank into resolution will be reduced. The more ‘forward looking’ resolution can be – remember Banco Popular was very solvent - the more candidates appear. But, of course, we as a market will cope with it. Whatever resolution path is taken the covered bond creditors should be fine.

3: The directive will have been passed

But it won’t have much effect immediately. The risks of dumbing down the good covered bonds to the minimum level defined in the directive and of market fragmentation due to excessive national discretions in the directive will, of course, not happen. Market discipline will ensure that.

Many countries will need to update their supervisory processes, prospectuses will need to be amended, rating agencies will have to opine. But, with the possible exception of Spain, there probably won’t be too much that investors will need to respond to. Everything will just be a bit better than before.

4: We will survive a house price crash
But it will scare us a little. There are many reasons why the current crazy levels of house prices in most countries are what they are. But sooner or later in at least one jurisdiction the inevitable crash will happen. Covered bonds are very well structured for precisely this type of risk – we’ve seen it before; we’ve survived it before - but it will still cause downgrades and a long hard look at our exposure to something that is, ultimately, unsustainable.

5: We will have more covered bonds from emerging markets

But not many. Sorry. It always takes longer than you think. What the market lacks in immediacy, it makes up for with potential.

6: We will have European Secured notes.

But, see above, not many. Whether Commission puts legislation in place or not, some issuers will use their SME collateral in a dual recourse instrument. But not many, traditional covered bonds will always be better.

7: Green covered bonds will be issued
But they will change. The first wave of green covered bonds has a limited potential size. The next wave – whether based on the Luxembourg model, an amendment to the ESN proposals or a pure contractual basis – has the potential to be much larger.

8: The covered bond conference will take place in September in Barcelona.

No buts about that one.

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