August 22, 2014 / 8:42 AM / in 3 years

Covered bonds on the cards at last in Singapore

* S$25bn-$30bn potential issuance from banks in Singapore

* Regulatory clarification set to pave way for landmark debt issue

* 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 debt solutions.

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 deadline.

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 liabilities.

“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 guidelines.

Wong expects these covered bonds to fund future expansion plans of local banks, particularly in the merger and acquisition segment.

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)

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