* Eurozone supply to remain flat as new jurisdictions open
* Covered bonds to benefit from bail-in threat
* Moody's warns on issuer, credit quality
By Aimee Donnellan
LONDON, Dec 18 (IFR) - The globalisation of the covered bond
market is forecast to gather pace in 2013, making up for the
dwindling levels of supply in the European market, bankers say.
The trend - which has seen supply in the euro market shrink
from EUR195bn in 2011 to EUR100bn in 2012 - is expected to
continue as non-European jurisdictions open up and banks seek to
diversify their funding.
According to Barclays, 2012 was the first time in the
history of the euro that global covered bond issuance from
non-euro area countries exceeded issuance from euro area
A combination of bank deleveraging, improved access to
unsecured funding and banks' desire to preserve assets for cheap
ECB funding is driving the decline in issuance from European
The US dollar market and other currencies such as Australian
and Canadian dollars and Swiss francs are tipped to reach
EUR70bn-equivalent, up from EUR55bn last year, according to
Societe Generale says that US dollar supply - dominated by
Australian, Yankee and Canadian issuance - could increase by
almost 50% in 2013 to EUR45.5bn-equivalent from EUR31bn in 2012.
"Canadians, who are about to adjust their programmes to the
new specific covered bond legislation, and Aussies should remain
active and continue to benefit from their safe-haven status,"
wrote analysts at the French bank.
Covered bond volumes in many other markets may also be
boosted by the new legal frameworks that are being introduced,
including South Korea, Panama, Mexico, Morocco, New Zealand,
Singapore and possibly the U.S., continuing the relentless
advance of the product outside the European market.
But for European banks, many question marks remain. Banks'
reliance on central banks for funding is expected to continue as
long as the liquidity taps are kept open.
Bernd Volk, head of covered bond research at Deutsche Bank,
said supply from Dutch and UK banks will remain low, partly
because of deleveraging pressure and, in the case of the UK,
because of alternative liquidity available through the Funding
for Lending Scheme.
Meanwhile, retained covered bonds for ECB repo purposes,
which reached a record EUR306bn - primarily out of Spain, France
and Italy, according to data from Barclays for the twelve-month
period ending in October 2012 - are expected to remain a theme.
"An exit from the enhanced liquidity measures is not on the
agenda," wrote Barclays analysts. "In addition, funding from the
euro system balance sheet is usually cheaper than capital market
funding. Thus, benchmark covered bond issuance from euro area
credit institutions may be restricted to a few showcase
transactions which will be designed to demonstrate 'access to
capital markets' rather than to optimise funding."
As a result, bankers have mixed views on peripheral
issuance. Credit Agricole expects peripheral covered bond
markets to be the main growth areas, while Deutsche Bank said
supply would probably be subdued.
Peripheral banks, in particular, have relied less on covered
bonds this year as the unsecured market has opened up for them.
GLIMMER OF HOPE
But while central bank liquidity is likely to keep a lid on
issuance from European banks, new jurisdictions like Belgium are
expected to make the most of their newly set-up frameworks,
while issuance from non-European banks will help keep the euro
In Sweden, a recent change in the basis swap could push the
country's banks - effectively absent from the covered bond
market in 2012 - towards the euro market. One banker predicted
as much as EUR15bn to be issued out of Sweden next year.
One factor that could tip the scale in favour of banks
weaning themselves off central bank liquidity is the strong
performance of the asset class and the insatiable investor
demand for secured bank paper.
Covered bond spreads have tightened by more than 300bp in
certain jurisdictions since ECB President Mario Draghi promised
to do whatever it takes to preserve the euro, and they should
tighten even further next year as redemptions from Spain,
Germany and France skyrocket to EUR156bn-equivalent from EUR99bn
in 2012, according to Credit Agricole.
Although covered bonds continue to be considered a
safe-haven funding tool for issuers as well as a relatively
secure place for investors to park their cash, there could be
trouble spots ahead.
According to Moody's, ongoing negative pressure on
sovereigns and issuers will continue to threaten issuer and
covered bond credit quality in 2013.
European covered bond downgrades have increased sharply this
year. The quantity of downgrades in the seven months from
February was similar to the level seen in the previous four
years, the rating agency said.
In relation to bail-ins, although secured liabilities are on
the face of it excluded from the scope of the bail-in tool,
there is room under the terms of the European Commission's
Crisis Management Directive to allow for a potential carve-out
if secured liabilities exceed the value of the assets securing
In June this year, the Commission said that member states
were allowed to exempt covered bonds from the provision, but
this could lead to uncertainty for the asset class, bankers say,
as it will be down to the value individual national regulators
attach to covered bonds.
Analysts at Barclays warn that from an investor's
perspective this adds another element of uncertainty to the
analysis of the risk factors involved in covered bonds.
But despite these upcoming hazards, bankers say investors
have never been so willing to invest in covered bonds and the
bail-in regime may actually work in the product's favour.
"The funding balance is likely to shift next year in favour
of covered bonds as investors become wary about bail-ins and
retreat to the safety of secured funding," said Richard Kemmish,
head of covered bond origination at Credit Suisse.
(Reporting by Aimee Donnellan; Editing by Helen Durand and