Doubts rise after covered bond debuts
The initial foray by Australian banks into the covered bond market appears underwhelming, with delegates at yesterday's Australian Securitisation Forum conference concurring that the pricing of the ANZ and Westpac issues would disappoint the two banks.
Lloyds Banking Group's head of structured securitisation, Robert Plehn, said the Australian issuers had not done as well as they would have hoped to do.
Plehn said: "People were expecting it to price like Canadian bank issues. But Australia is far away from the US and US investors demanded a premium."
Reserve Bank of Australia assistant governor Guy Debelle said the issues priced last week were "incredibly cheap for investors".
Both banks paid 115 basis points over US Treasury mid-swaps. ANZ issued US$1.25 billion and Westpac issued US$1 billion. This funding equates to an Australian dollar spread of around 150 basis points over bank bills after the cross-currency swap.
Secondary market spreads on ANZ's deal were already trading wider at the end of last week and this continued yesterday.
Triple T Consulting's Sean Keane wrote in his daily Credit Suisse circular that "it was notable that one of last week's covered bond issues was well offered in the secondary market, and was seen trading around 30 basis points wider than its issuance level by close of business today." The deals had pushed up Australian dollar swap rates, Keane said.
Commonwealth Bank, which as late as last week had been preparing a covered bond issue in the European market, has now flagged that it will take its time before making its own covered bond debut. Global debt-pricing has been volatile in recent days, with European markets the most volatile of all.
Aside from the short term considerations as banks put their new funding instrument to use, the industry may have reason to reassess the longer term benefits that covered bonds offer.
The RBA's Debelle provided an analysis of bank funding, and in particular secured funding, in his talk to the securitisation conference.
He said the current trend towards secured wholesale debt issuance, in preference to unsecured, was not sustainable.
Banks could not encumber their balance sheets through secured issuance "to such an extent that unsecured issuance, and even deposit gathering, is not longer possible", he said.
"Too much issuance of covered bonds and you're effectively back in the unsecured world.
Debelle also warned that, despite claims from their proponents, covered bonds were unlikely to lower banks' cost of funding very much, because unsecured investors would demand a risk premium for being pushed down the creditors' queue.
"Any pricing gain from issuing covered bonds is likely to be offset to some extent by a demand from unsecured debt-holders for more compensation in future," he said.
The Australian Prudential Regulation Authority's executive general manager policy, research and statistics, Charles Littrell, said: "Between securitisation, covered bonds, more collateral for trading exposures and the probable exploration of repos in the context of ADI liquidity, and other needs, we may be observing an historic shift from banks mainly [acting] as unsecured borrowers to banks pledging a great deal of collateral.
"Although each of these initiatives individually may give an ADI cheaper funding or better trading terms, a whole industry with lots of collateral pledged is most unlikely to make the remaining depositors and unsecured creditors safer."