* S$25bn-$30bn potential issuance from banks in Singapore
* Regulatory clarification set to pave way for landmark debt
* Interest expressed for Singapore bank covered bonds
By Kit Yin Boey
Aug 22 (IFR) - The first covered bond issue from a Singapore
bank could finally be on its way as regulators near an agreement
to open a market estimated to be worth S$25bn (US$20bn).
Singapore's central bank set rules for covered bonds almost
a year ago, but the first deals have been delayed for lack of
clarity over title issues involving the city's pension fund.
Industry sources say the necessary clarifications are now
imminent, clearing the way for the city state's banks to access
the low-cost, stable funding tool.
"Going forward, covered bonds will be a popular source of
funding for the Singapore banks and the market potential for
such bonds will be tagged at around S$25bn-$30bn
(US$20bn-$24bn), based on the Monetary Authority of Singapore
(MAS) ruling that limits the amount of assets backing the bonds
to 4% of a bank's total assets," said Kevin Wong, chief
technical strategist for Asia at City Index.
Covered bonds are senior secured notes, secured against a
specific asset pool that remains on the issuer's balance sheet.
"Residential mortgages are one of the most commonly seen
assets in covered bond transactions because residential
mortgages are often the best performing asset on the banks'
balance sheet", said Jerome Cheng, Moody's senior vice president
for the structured finance group.
Using mortgages as security, however, requires the
involvement of Singapore's Central Provident Fund, which is a
key player in mortgage loans.
CPF is a compulsory savings system that keeps funds in trust
to benefit and provide old-age savings for employees. CPF
members, however, can use their funds for investment purposes,
including for interest and principal payments on mortgage loans.
That gives the fund a claim on homes financed with CPF money,
complicating efforts to pledge those mortgages to bondholders.
"The CPF system is unique to Singapore in terms of issuing
covered bonds globally," said an analyst. "Our understanding is
that, while CPF has first charge over the mortgage loan, the
agency has given banks first priority to proceeds from the
divestments or foreclosures of the properties."
While the CPF's subordination to lenders is set out in the
CPF Memorandum of Mortgage, banks are keen to obtain the fund's
explicit approval before transferring mortgage loans into a
cover pool, a typical structure for covered bonds.
DBS Bank, Oversea-Chinese Banking Corp and United Overseas
Bank may issue more than S$10bn combined during the next three
years, according to Colin Chen, DBS Bank's head of structured
Demand for the ultra-safe instruments received another boost
earlier this month, when the MAS said covered bonds rated at
least AA- would qualify as high-quality liquid assets and count
towards liquidity coverage ratios ahead of a January 1 2015
Similar rules elsewhere in Asia should ensure a broad base
of demand for high-rated Singapore covered bonds. The Reserve
Bank of India, for instance, announced in June that it would
impose LCR rules in stages, starting with a minimum requirement
of 60% from January 1 next year.
Bankers said they had received interest from banks in Hong
Kong, which would phase in LCR regulations from January next
year, for potential covered bonds in Singapore. An LCR of 100%
means a bank has enough liquid assets to meet 30 days of
"Covered bonds are already popular in Europe and Australia
and institutional demand should be strong, given the stable and
strong credit ratings of the three local banks (DBS, UOB and
OCBC)," said City Index's Wong.
On the supply side, Singapore's banks are certainly
interested in the format. DBS Bank appointed Barclays and itself
as joint arrangers early last year in anticipation of the
Wong expects these covered bonds to fund future expansion
plans of local banks, particularly in the merger and acquisition
The global shortage of covered bonds is so acute that it has
driven pricing of such issues in Germany to deep sub Euribor
levels. In Asia-Pacific, only the Australian, New Zealand banks
and Korea Housing Finance Corp have sold covered bonds.
Bankers expected KHFC to sell a new issue after a new
Covered Bond Act came into force in March, but the lender is
believed to be working on the composition of its mortgage assets
before selling such paper.
A surge in covered bond sales from Asian banks is unlikely,
as lenders have access to cheap unsecured global markets.
However, analysts and bankers argue that this is the perfect
time to sell such instruments.
"Covered bonds are an alternative funding tool which are
still available during the more stressed situations, " said Joe
Wong, Moody's assistant vice president and analyst for the
structured finance group. "Banks would be better equipped if it
sets up a covered bond programme before the crisis."
(Reporting By Kit Yin Boey Editing by Steve Garton)