EMEA Covered Bonds 2012 Outlook

北京穆迪投资者服务有限公司 Tom Millward


　　The key threats to covered bond credit quality in 2012 are the worsening financial conditionof sovereigns and deteriorating issuer credit quality1.

　　In 2012 worsening financial conditions among sovereigns will continue to negatively affectcovered bonds. The deterioration will put downward pressure on issuer credit quality directlyand, further, it will increase refinancing risk as: (i) the price of government debt acts as afloor for refinancing costs across a jurisdiction; and (ii) sovereigns are less able or willing todirectly or indirectly support the refinancing of assets and/or covered bond programmesfollowing issuer default.

　　In the wake of the sovereign crisis and other pressures, banking sector outlooks are largelynegative. Issuers in peripheral euro zone countries are at most immediate risk of deterioratingcredit quality, particularly in Spain and Italy. Banks elsewhere in Europe also face significantchallenges, including direct exposures to the peripheral euro zone, a more difficult operatingenvironment created by the crisis, and increased regulation and reduced government supportin their own countries.

　　The EU’s bail-in proposals for creditor burden sharing are likely to progress in 2012. Thebail-in rules will in all likelihood exclude covered bonds from burden sharing. This exclusionshould increase demand for covered bonds and promote a deeper and more liquid market forthem, which should help to mitigate refinancing risk. However, the proposals have yet to befinalised by the EU and are surrounded by political uncertainty.

　　If a new framework is adopted which protects covered bond collateral from burden sharing,this may be beneficial for covered bonds in a post-issuer default scenario, as seen followingthe amendment of the German Pfandbrief Act. This amendment was a driver for ourimproved assessment of the likelihood of timely payments on German covered bondsfollowing issuer default.

　　Regulatory changes at the national and pan-European levels continue to improve safeguardsand increase transparency for covered bond investors and these improvements will continue.

　　As negative sovereign and banking sector outlooks continue to feed through to deterioratingissuer credit quality there will be a continuing reliance on repo funding, particularly inperipheral Europe. We may see programme restructuring in weaker countries in an attemptto remove or mitigate refinancing risk, for example by issuing bonds with long extensionperiods.