Banks line up to clone NIBC covered pass-through
* Dutch bank draws EUR1.3bn of orders for historic bond
* Higher ratings and reduced collateral costs spark issuer interest
* RMBS flavour fails to spoil investor appetite
By Aimee Donnellan
LONDON, Oct 4 (IFR) - At least eight banks are scrambling to replicate the covered bond pass-through structure sold by NIBC earlier this week as they seek lower funding costs through a less collateral intensive format.
The EUR500m five-year bond, rated triple A by S&P and Fitch, attracted orders of EUR1.3bn and priced at mid-swaps plus 50bp - half the spread of a shorter dated recent Dutch RMBS issue, and a tighter level than where NIBC would issue a vanilla covered bond.
In the wake of the deal, bankers say that a mixture of core and peripheral European lenders as well as non-European banks are looking at creating their own pass-through programmes.
"From a structural perspective this deal represents the most important step forward for the covered bond market since the introduction of soft bullets," said Christoph Anhamm, head of covered bond origination at RBS.
"The structure allows issuers to reduce the level of overcollateral, offers higher ratings and higher rating stability, which brings down the total cost of funding substantially."
NIBC's covered bond uses something of a hybrid structure - borrowing techniques from RMBS, but utilising the legal framework from the covered bond world.
By using pass-through structures, lower rated issuers like NIBC don't have to use as much collateral as they would in a traditional covered bond, and are still able to achieve a Triple A rating. NIBC's vanilla covered bonds, by contrast, only have a single A+ rating from Fitch.
This will come as welcome news to the covered market that has been losing its reputation for hosting triple A rated bonds since the crisis.
Moody's, S&P and Fitch have cut the proportion of bonds they rate triple A from an average of over 90% in June 2010 to less than 60% today, according to data from Deutsche Bank.
As well as being less collateral intensive, the structure delinks the rating of the covered bond from the issuer itself, by maturity-matching the cover pool assets with the ultimate legal final maturity of the bonds - in NIBC's case, December 2046.
This means that if NIBC Bank defaults between now and the five-year point, there will be enough assets to pay back the bonds, but not until 2046 - an obvious downside for some investors who would rather not wait that long.
This is unlike traditional covered bonds, where additional overcollateralisation (additional assets) ensures bullet maturities are paid out in full and on time.
High ratings were a definite pull for some 80 investors that welcomed NIBC's deal with open arms, and the 5bp secondary performance shows it is still finding support.
This kind of positive response is a major achievement in the covered bond world, where investors and issuers alike are often reluctant to see the covered brand tainted in any way.
Covered bonds have benefited from regulatory favour, with the ECB allocating EUR100bn to buy paper outright and setting haircut margins at favourable levels against comparably rated securitisations.
They also provided a funding lifeline at the height of the crisis, so any dilution of safety elements tends to send investors running for the hills.
"This is a great development for the covered bond market," said Olaf Pimper, a portfolio manager in Commerzbank's treasury.
"The only negative we see is that you risk being paid very late, and you have to be aware of the bank's senior unsecured rating."
NIBC's senior unsecured rating is on the cusp of junk at Baa3/BBB-/BBB-, which raised alarm bells for certain investors that are more cautious about Dutch banks following the bail-in of SNS Reaal in February.
And although some investors say they need to see further issuance before they take part in these kinds of structures, NIBC met its pricing and size objectives comfortably.
"We're very pleased with the results of this transaction that attracted a lot of demand from a wide range of investors," said Sjoerd Wegener Sleeswijk, director of structuring at NIBC.
"The success of the deal has already caught the attention of a number of banks in Europe and beyond that are looking to save on collateral costs and achieve higher ratings."
NIBC is already eyeing further issuance in the format, and many argue that if the covered bond product was being designed today, issuers faced with the option of soft or hard bullets or pass-through would probably choose the latter structure.
"We aim to be a regular issuer with this new programme, offering at least one benchmark a year, perhaps more. In addition, we will also look into private placement opportunities in due course," said Toine Teulings, associate director of Treasury at NIBC. (Reporting by Aimee Donnellan, editing by Helene Durand, Julian Baker)
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