Covered bonds, essentially bank-issued debt secured by mortgage loans or public sector assets, are expanding into new countries to meet growing demand for long-term funding, according to a report Standard & Poor’s Ratings Services published on Thursday.
“Covered bonds continue to stretch across the globe and into new territories–most recently in Australia and Turkey, with growing potential in Latin America and the US. We believe that demand in countries that already have covered bonds is growing as new investors shift away from senior unsecured bank debt, and as insurance and bank regulators both give covered bonds preferential treatment in their tightening capital and liquidity rules,” said credit analyst Andrew South.
However, today’s report, entitled “Covered Bonds Evolve And Spread Around The World,” highlights that the market hasn’t escaped the effects of the sovereign crisis and evaporating confidence in banks. Crosscurrents between increasing demand and the covered bond market’s continuing evolution have got the market–more than 200 banks issuing covered bonds in about 30 countries worldwide–focusing on how to maintain its credibility.
“The question for issuers, investors, and regulators, is how to determine which bonds will be the strongest during times of market volatility–and whether an ‘AAA’ rating is the only measure. Most of the covered bond market remains ‘AAA’, though we’re assigning lower ratings to more and more covered bonds,” Credit analyst Sabrina Miehs, added.
“Covered bonds continue to spread around the globe. As their expansion continues, however, it’s important that misconceptions are resolved and that various market stakeholders begin to provide greater transparency, rather than just acknowledging the need for it. As investors have different risk preferences, knowing the full range of risks that exist in any covered bond program and how these risks are addressed–from overcollateralization levels to liquidity coverage–clearly is essential to make an educated investment decision,” Miehs, added.