Ralf Grossmann is head of covered bond
origination at Societe Generale in Frankfurt. He also chairs
the European Covered Bond Council’s
[ECBC’s] technical issues working group, a body
that describes itself as the think tank of the covered bond
community. In this frank interview, Grossmann reflects on the
Council’s progress as it approaches its two year
anniversary, as well as the importance of maintaining high
standards in the face of a rapid evolution of covered bond
structures, and why rating agencies need to rethink their
treatment of aircraft covered bonds.
How would you gauge the success of
the ECBC’s Covered Bond Label
The ECBC launched the label almost two years ago
and, in that time it has been acknowledged by regulators and
the market as a key initiative for increased harmonisation and
transparency across the market.
The label gives the market access to a web-based
platform that aggregates a wide variety of data on covered bond
issuers. Investors can view information on specific issuers by
means of individual transparency profiles. These profiles are
presented in the form of standardised national templates that
facilitate easy comparisons.
The ECBC is focussing on the national transparency
templates because cross-border comparison is much less
meaningful. [This is] because different countries operate under
different mortgage lending frameworks and borrower preferences
with regards to mortgage products and tenors vary between
Moreover, the ECBC label helps to identify and
ring-fence classical covered bonds against new-style covered
bonds. It says that only certain assets are eligible for
inclusion in the cover pool and only covered bonds that comply
with the Capital Requirements Directive IV [CRD IV] will
qualify for the label.
What are your thoughts on the
momentum towards financing non-mortgage assets with covered
Covered bonds do have an important role to play in
financing non-mortgage assets. Europe has a lot of high credit
quality lending, be that infrastructure or transport assets
– even in the SME [small and medium size enterprise]
space we can generate high quality portfolios. Those assets are
a natural basis for funding via covered bonds.
Should these new structures be
considered covered bonds? If not, how important is it that such
new products remain distinct from each other?
The challenge is that the term 'covered
bond’ is not registered or protected in any way,
so any issuer can use it for their product. Therefore, issuers
should comply with certain technical standards to make sure
they design robust, safe products and get investors on
The idea is to bring covered bonds that use new
assets in the cover pool as close as possible to the classical
covered bond market in terms of security features. After that,
it’s up to investors to decide whether they will
invest or whether they would rather stick to the classic
mortgage covered bonds.
In this respect, aircraft covered bonds are
interesting. They do not benefit from privileged regulatory
treatment, despite the fact that aircraft lending is a very
safe business. Aircraft are high quality assets that have to be
constantly updated with the latest technology. If an airline
encounters financial difficulty, the leasing companies that
typically own planes can just pass the asset on to somebody
"The ECBC label
helps to identify and ring-fence classical covered
bonds against new-style covered bonds"
Ultimately the credit performance of aircraft as an
asset class is essentially linked to growth of the global
economy - so long as airline traffic increases at a certain
minimal level the asset class will perform. All this means that
for the lender the risk is very low. Here, therefore, we have a
good example of a high quality asset that could be used in the
cover pool, but that isn’t very much in use
One key problem is that European rating agencies
haven’t yet developed models to properly evaluate
the asset pools. As a result, covered bonds backed by airlines
only get a small rating uplift over the senior unsecured rating
of the issuer. If the product were evaluated properly, triple A
ratings should be feasible.
What is your view of efforts to
harmonise the covered bond product across Europe?
The European Banking Authority [EBA] is due to come
up with a comparative overview on covered bonds which will
outline the areas it believes are in need of harmonisation
across Europe. My understanding is that supervision,
transparency and post-insolvency administration are the main
areas the EBA thinks need harmonising. The ECBC initiative has
made great progress towards enhancing transparency in the
industry, but the regulator will likely push for more.
On supervision, the EBA is likely to focus on cover
pools. At the moment, the banking regulator conducts a highly
technical analysis of the cover pool, but there are differences
in how different countries address this topic. While some
countries– such as the UK – are very
advanced, others are just starting to build their technical
expertise. I think European authorities will be looking to
strengthen supervision and potentially introduce harmonised
stress testing regimes.
More and more jurisdictions are
enacting covered bond legislation. Where do you expect to be
the most active jurisdictions for covered bond issuance in the
Europe, Canada, Australia and New Zealand have
established covered bond frameworks and will continue to be the
backbone of the market. When looking at newcomers, I see the
most growth potential in Central and Eastern European
countries, as well as Turkey. There is also good potential from
the higher rated OECD [Organisation for Economic Cooperation
and Development] countries, such as Korea and Singapore.
Thirdly, I would say the Latin American market presents good
opportunities. It is more heterogeneous as a region, but there
are some highly rated countries.
Look out for
IFLR’s Covered Bond Guide 2014, which will be
published in the July/August issue of IFLR
SME covered bonds’
Momentum grows for EU covered