Covered Bond Sales In US Poised To Slow As Investors Fill Up
6 October 2011
By Al Yoon, Dow Jones Newswires
--More than $30 billion of covered bonds sold so far in 2011
--Volume has already exceeded 2010 total, but still a niche
--Investor base not expanding as quickly as supply of bonds
NEW YORK (Dow Jones)--Investors in the European and Canadian mortgage-backed securities called covered bonds that are being sold in the U.S. are close to their fill, a leading institutional fund manager said, suggesting resistance to the growing number of issuers that want to tap the market.
John Cerra, a managing director at TIAA-CREF, a pension-fund manager that oversees $453 billion in combined assets, has long been a proponent of covered bonds--mortgage securities guaranteed by the banks that create them--and advocated adopting them in the U.S.
For issuers, however, 2012 "might be time to stop and look in the mirror," Cerra said. "Investors are going to say 'I'm full.'"
Part of the problem for European and Canadian covered bond issuers is that the pool of potential investors in their U.S. dollar-denominated securities hasn't expanded, and other investors said a lack of transparency in the market disturbs buyers already rattled by the euro zone's fiscal and banking woes.
The issuers of the bonds, a major source of financing for mortgages outside the U.S., have for two years taken advantage of demand for top-rated securities with extra yield over sovereign debt. More than $30 billion in sales of dollar-based covered bonds by non-U.S. banks in 2011 have already surpassed volume in 2010, according to Dealogic.
Investors in the U.S. have yet to fully embrace the bonds as they remain foreign to the American mortgage-finance system, which relies on government agencies, such as Fannie Mae, Freddie Mac and the Federal Housing Administration. That limits understanding of covered bonds, said some investors at an Information Management Network conference in New York on Thursday.
Covered bonds have been heralded in the U.S. as an alternative to the Wall Street-issued mortgage-backed securities that helped to inflate the housing bubble. Instead of laying off risk to investors, issuers of covered bonds keep a "cover pool" of loans on their balance sheet, transferring monthly payments on to holders of the securities.
Investors like covered bonds because they offer a claim on mortgages or public-sector loans if the issuer becomes insolvent, offering more protection than lower-ranked unsecured debt.
However, more acceptance of the product may not happen until U.S. issuers become active, or until the government reduces the role of Fannie Mae and Freddie Mac as intended, said some panelists. But other than fits and starts by Bank of America Corp. (BAC) before the financial crisis, a potential U.S. market has been hampered by regulatory hurdles and inaction by lawmakers.
Notably, the Federal Deposit Insurance Corp. and industry groups have been unable to hammer out agreements over who would control the cover pool in times of the issuer's bankruptcy. The FDIC wants to ensure its insurance fund isn't left powerless, while investors want the pool to be bankruptcy-remote.
Legislation to create a legislative framework has passed a committee in the House of Representatives but has since stalled, and some attendees at the conference doubted any progress until 2013.
"The covered bond as it comes from Europe is a fine product, but its an avocation, it's small" as part of U.S. portfolios, Pamela Westmoreland, a senior analyst at GE Asset Management, said on an IMN conference panel.
Covered bonds from Europe are also becoming more of a "tough sell" as they are from markets under stress from Europe's fiscal and banking crises, said Darren Getek, a trader with Conning Asset Management, which he says owns mostly covered bonds backed by Canadian mortgages.
European banks appear to be relying on the strong history of performance of their covered bonds, said Westmoreland. But the attitude of "don't worry, be happy" is wearing thin under the shaky circumstances in Europe, she said.
Looking at Spain's housing market, for instance, Westmoreland said she gets inconsistent results that give her pause. It is also difficult to find information on the collateral, she said.
Of Spain's market, for example, she said she gets responses that "it's really great" or "it's about to fall off the face of the earth." |
