SME Covered Bonds _ GlobalCapital housing benefit eligible rent

Heberlein, fitch: I’m not in the business of defining what a true covered bond is. I’m in the business of saying which debt I analyse with fitch covered bond criteria. In the case of the commerzbank SME structured covered bonds we did analyse the programme based on our covered bond criteria because of the dual recourse structure against one financial institution and against a cover pool of assets.

Lavastre, CDC: SME covered bonds are structured covered bonds with unique collateral and therefore have very different characteristics from mortgage covered bonds. First and foremost SME loans do not benefit from the additional security offered by a mortgage loan that is backed by a specific claim on real asset.

Heberlein, fitch: indeed, SME covered bonds are not ucits compliant because none of the european legislations accepts unsecured SME loans as eligible collateral, but in turkey for instance, the legal framework explicitly allows SME loans as collateral.Housing benefit eligible rent

from a rating agency standpoint, ucits or CRD compliance doesn’t matter so much.

Lavastre, CDC: top ratings will typically either require high OC or long soft-bullet/pass-through structures, as is commonly used in ABS, and SME covered bonds do not comply with ucits or CRD and cannot get an ECBC label.

Heberlein, fitch: but in turkey there is a legal framework which qualifies those bonds under the ucits definition though clearly the assets do matter to investors from a capital weighting standpoint. But for rating agencies it doesn’t matter whether the covered bonds are compliant or not.

Goldfischer, CA-CIB: in my opinion SME collateral is more suited to ABS than covered bonds, unless the loans have a public sector wrap. But we have an undersupplied market and spreads are tight, so the asset class should benefit as, in general, people will try to grab the higher relative yield offered by this instrument.Housing benefit eligible rent

Burmeister, deawm: I won’t be negative on SME secured bank bonds, as long as they’re not called covered bonds. In volume terms the ABS market is still far from recovering so one funding tool is still missing from banks’ toolboxes. If the SME structure can improve their funding situation, attract new investors and bring back old credit investors who used to buy ABS then these bonds could be a good thing.

But the point is they’re not covered bonds in the true sense. By definition, not all assets on a bank’s balance sheet can be the best ones. You would need specialist expertise to assess the quality of SME structures and that level of analytical proficiency is out of reach for most traditional covered bond investors. As the SME assets are short-maturing, turnover in the pool could be high which would mean that constant surveillance would be required.Housing benefit eligible rent

Prokes, blackrock: there’s been a lot of turmoil in the market and banks always need funding, which covered bonds help with. But it concerns me when someone says this is a covered bond when it might have all the features. When the time comes, and a bank is facing a credit event, it is important to know where, as an investor, you stand. I’m happy to invest in labelled covered bonds that are priced correctly and where I can understand the risk.

Eichert, CA-CIB: the credit quality of SME loans is still migrating south and issuers are less concerned about how to fund them than they are about their capital consumption. SME assets aren’t eligible for covered bonds under the capital requirement directive and I feel they’re better off being funded through ABS which the european central bank is keen to promote, as recently shown by their decision to reduce ABS repo haircuts.Housing benefit eligible rent

Juhasz, world bank: they are recognised within the eurosystem collateral framework but I don’t believe they are real die-hard covered bonds at this stage. SME bonds will have to stand the test of time over the long run, but in any case I see them as a hybrid instrument between an ABS and a true covered bond.

Denger, MEAG: we should not risk the quality of the covered bond market by adding new types of collateral. Instead, one should focus on bringing back the ABS market. Covered bonds and ABS are markets which existed side by side before the crisis and that was not without reason. Now we have such low interest rates there should be a decent investor base that should be tempted to buy high quality structured products.

Prokes, blackrock: it’s very important that when you start talking about resolution and moving assets between a good bank and a bad bank that there is a clear vehicle of choice for the resolution authority.Housing benefit eligible rent you can easily start arguing some of the collateral which could be presented in a covered bond pool might not be a core asset of the bank. There is therefore a risk that the introduction of new types of collateral risks diluting the preferential regulatory treatment that still benefits traditional covered bonds.

In ireland and spain for example, the national governments have taken measures to support their housing markets. So, in the absence a government’s protection of the SME sector, investors must develop greater trust and comfort in the issuing banks’ selection capabilities and their capability to judge the quality of the SME borrowers.