Portuguese pass-through first brings investment grade rating back
* New bond technology comes to the periphery
* BCP restructure brings bond back to investment-grade
By Owen Sanderson
LONDON, Jan 27 (IFR) - Portuguese bank Banco Comercial Portugues has used a new breed of bond technology to push its covered bonds back into investment-grade territory, potentially easing its access funding.
Because the bank has restructured EUR895m of bonds issued from its subsidiary Banco de Investimento Imobiliario into a "pass-through covered bond", they now carry an investment-grade rating with Moody's, broadening the range of investors who can buy them and easing its access to finance from the central bank or market counterparties.
Moody's has upgraded the newly restructured Series 1 bonds from BCP from Ba1 to Baa3, a move which takes them back into investment grade, while DBRS has upgraded them from BBB (high) to A (low).
Dutch bank NIBC issued the first ever pass-through covered bond in 2013, and BCP is only the second bank to use the technology, although market participants believe that this won't remain the case for long.
Like covered bonds, they give bondholders recourse to both the bank and a specific package of assets. But like a securitisation, if the bank cannot pay, cashflows can run straight through the structure and pay down the bonds over an extended tail period. Traditional covered bonds have a "bullet" or "soft bullet" maturity, meaning large chunks of bonds have to be paid back at once.
This means that the assets backing the bonds would have to sold quickly if the bank issuer could not pay, and this could come at fire-sale prices. If bondholders can wait, as they would in a pass-through or an RMBS, mortgage holders eventually pay back their loans anyway, amortising the bonds.
Using this kind of structure means banks can get away with using less collateral to back their covered bonds - or achieving a better rating with the same collateral. They can also benefit from the preferential regulatory treatment for covered bonds compared with issuing securitisations. (Reporting By Owen Sanderson, Editing by Helene Durand)
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