RPT-Fitch: Covered Bond Investors Open to Less Mature Markets

Tue Feb 11, 2014 4:45am EST

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Feb 11 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings says its latest survey shows that covered bond investors are likely to increase their holdings in Canada and Australia, as well as in the UK. They are also attracted to higher yields in the peripheral eurozone with a much larger proportion planning to increase rather than decrease their holdings in Ireland, Italy, Portugal and Spain. In its year-end 2013 Covered Bonds Investor Survey, Fitch says a larger proportion of the investors surveyed (24%) view regulatory treatment as the biggest concern facing covered bonds versus 5% last year. Based on number of respondents, regulatory treatment ranked second behind sovereign risk, and on a weighted view of the responses, second behind health of the banking sector. The uncertain impact of regulatory treatment was highlighted by mixed views on whether the Bank Recovery and Resolution Directive would increase or decrease the credit risk of covered bonds. Thirty-seven percent of polled investors expect higher credit risk, while 36% expect lower credit risk and 27% expect no change.

Continuing a trend from the past two annual surveys, significant proportions of respondents will consider investing in less traditional amortisation and cover asset types. Thirty-nine percent are prepared to buy covered bonds with a conditional pass-through redemption profile with 24% willing to buy those that amortise on a full pass-through basis. Investors also display flexibility regarding cover asset type: approximately 30% of respondents are comfortable buying covered bonds secured by senior tranches of MBS or SME loans.

Both the covered bond and issuer ratings are important to the investors surveyed. Twenty-one percent deem the issuer rating to be more important than the covered bond rating, with an additional 33% considering it as important as the covered bond rating. Ninety-four percent look for at least one rating for their covered bonds, but a 'AAA' rating is only required by 10% of respondents. Overall, 53 investors responded to the survey, of which 16% have more than EUR20bn of covered bonds under management, 22% have between EUR5bn and EUR20bn, and 62% have less than EUR5bn in their portfolios. Nineteen percent of respondents are based outside of EMEA compared with 5% last year. Although not exhaustive, Fitch deems the sample to be indicative of covered bonds investors as a whole.

The full survey is available on www.fitchratings.com or by clicking on the link above.

Link to Fitch Ratings' Report: Covered Bonds Investor Survey Year-End 2013

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