COVERED BONDS: Belgium shows how it's done

Fri Dec 7, 2012 11:42am EST

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LONDON, Dec 7 (IFR) - Belgian banks' prudent approach to the opening of the country's covered bond market should be the model adopted by Asian and Latin American issuers who are next expected to make use of the financing tool.

The careful preparation, attractive pricing and time given to investors to assess the secondary market performance of Belfius' debut deal stand in stark contrast to the unseemly scramble by the Australians when they opened up their sector a year ago.

Australia's top four banks oversaturated the US dollar, euro and sterling markets by printing bonds in quick succession, leaving no room for performance. ANZ's US dollar debut in November 2011 was followed just two days later by Westpac.

Belfius opened things with a bang in November, luring EUR5.6bn of orders for an inaugural five-year that priced at mid-swaps plus 45bp.

"Belfius spent a lot of time with investors because it was the first deal to come out and it was important for it to do well," said Chris Agathangelou, fixed income syndicate at Nomura.

The deal performed in the secondary market, tightening in by 13bp before KBC took its turn. Nearly two weeks later, KBC went a step further and managed to attract orders of EUR6bn for the EUR1.25bn five-year that priced 2bp inside Belfius's deal but still offered investors an attractive pick-up to the underlying sovereign.

"Belgian banks are showing there is strong demand for the country's assets," said Rik Janssen, group treasurer at KBC.

"With this deal we tried to balance our need for low cost funding with investors' desire for attractive spreads on bonds that perform well in the secondary market."

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The new funding source will give Belgian banks access to a wider pool of investors and allow them to diversify their funding.

"We plan on putting an emphasis on covered bond funding in 2013," said Janssen.

"There have been several instances when the senior unsecured market has been closed in the past two years for the European banking sector and we think covered bonds will give us greater flexibility in our funding."

BNP Paribas Fortis and ING Belgium are watching developments and will have been encouraged by the reception Belfius and KBC received.

Until now, Belgian banks have been at a disadvantage to other European credit institutions as they cannot offer investors UCITS and CRD-compliant bonds. The ability to issue under a legal framework is expected to improve their cost of funding.

"It is great to see Belgium open up its covered bond market in such a positive fashion. This Belgian debut underscores the positive momentum in the covered bond market is intact," Jens Tolckmitt, chief executive of the Association of German Pfandbrief Banks (VDP).

The additional flexibility covered bonds offer is increasingly attractive to a number of countries in Latin America and Asia. Singapore is poised to introduce guidelines allowing the issuance of covered bonds in the city state in the coming weeks.

Once the framework is in place, bankers believe that Singaporean lenders will waste no time in issuing secured debt - potentially even before the year-end. This is where Belgium's strategic approach will hopefully be replicated. (Reporting by Aimee Donnellan; editing by Alex Chambers & Julian Baker)

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