LONDON, Jan 27 (IFR) - European regulators' latest
draft of CRD4 looks set to give structured covered bonds a shot
in the arm as it indicates that they will be recognized as
eligible assets to be used in banks' liquidity buffers.
CRD4 will implement the Basel 3 framework into
European law and, just like the Basel agreement, will require
European banks to adopt a Liquidity Coverage Ratio (LCR) and Net
Stable Funding Ratio from 2015.
A final text is expected to be published in September or
October this year but the potential inclusion of structured
covered bonds within the LCR would boost the potential demand
for these instruments.
European banks have been seeking to structure covered bond
instruments that would fall outside stringent legal frameworks
as they look to take advantage of unused collateral and lower
their funding costs.
Deutsche Pfandbriefbank has been looking at the possibility
of using structured covered bonds for 2012. "High
over-collateralisation requirements highlight the need for
alternative approaches, for example using non-encumbered assets
and analysing the possibility of structured covered bonds," the
issuer said in an investor presentation in September last year.
Meanwhile, Italian banks are also said to be among the
European Finance ministers are meeting in April and could
approve the CRD4 text then, but sources have told IFR that the
ministers were likely to focus more on discussing the various
national finishes and how these can be accommodated within CRD4.
"I don't know exactly when the final text will be published,
but the latest draft casts more light on regulation and I think
it will be great for spurring banks' demand. That way it will
also jump start the structured covered bond market," a banker
A second banker said that covered bond issuers could benefit
across the board as banks' demand for the asset-class grows.
"However, many will hold back with issuance as the final
details of the regulation are not totally clear," he said.
While covered bond syndicate bankers welcome the news, it
deals a blow to ABS professionals, who had hoped that
securitisation might finally be seen positively be regulators
"The new draft gives flexibility which appears to be
intended to potentially widen the range of eligible assets to
certain structured covered bonds, but, based on the words on the
page, ABS would be excluded," said Nicole Rhodes, a Consultant
Counsel with Allen & Overy's London securitisation group, said.
The CRD4 draft makes a distinction between ABS issued
directly by banks, that is eligible, and ABS issued by special
vehicles, that is ineligible.
The latter type is the norm, as it enables to de-link the
pool from the originator and achieve the bankruptcy-remoteness
demanded by rating agencies.
ABS professionals, however, wonder why the draft would
bother discussing securitisation if it was fully ineligible.
JP Morgan analyst Gareth Davies believes that the clause of
the draft, which mentions "asset-backed instruments of high
liquid and credit quality" is "designed to capture covered
bond-type instruments which currently fail to meet the
prescriptive definition of a covered bond outlined in Article
124 (3) and (4) (and coincidently include a significant amount
of traditional Danish covered bonds)".
Moreover, he thinks that the regulators have gone one stage
further by explicitly excluding ABS with the insertion in the
draft of a clause which includes, among the assets that should
not be considered liquid, a securitisation special purpose
entity and assets otherwise constituting securitisation
Rhodes agrees: "The revised draft clearly excludes
securities issued by SPVs and this is not the positive signal
for the ABS market that market participants were hoping for."
What is worse for securitisation professionals is that the
current wording does not leave any room for the high-quality
label that are preparing under the PCS initiative. This label
could become a reality in the second quarter of this year.
Investors involved in the PCS discussions commented that
regulators have stated that there would be an observation period
-- over several months, possibly over a year -- to review how
liquid the new product is.
According to them, this means that the door will remain open
for a while for the inclusion of the PCS product into the
liquidity buffer, irrespective of the Danish presidency draft.
But Rhodes is sceptical: "The text is not final and there is
scope for change, but currently ABS -- including bonds issued
with the proposed PCS label -- would appear not to be eligible
because they would be issued by an SPV in general."
(Reporting By Josie Cox and Jean-Marc Poilpre)