Bankers see room for covered bonds

LONDON (Reuters) - The resurgence of the covered bond market, driven by support from the European Central Bank, is not the final nail in the coffin for asset-backed securities, bankers told the Global ABS annual conference on Wednesday.

The ECB's pledge last month to buy 60 billion euros ($86 billion) of covered bonds has reopened the market for many issuers and drawn in new investors.

"The effect was instant," said Mauricio Noe, head of covered bonds at Royal Bank of Scotland.

In the past four weeks, there has been 20 billion euros of jumbo issuance compared to just 10 billion euros issued in the four months prior to that, said Noe.

"Our market is definitely back," he said.

The ECB is set to announce on Thursday further details on its covered bond purchasing program.

Kees Westermann, a partner at Clifford Chance, said he expects policymakers to set a minimum A rating for the bonds the ECB is willing to buy.

The ECB's clear support for the covered bond market does not mean the ABS market is a thing of the past. It, too, will come back, but it will just take more time, the bankers said.

"There will be a place for both. It will just take longer on the securitisation side because of all the negative headlines associated with it," said Ralf Grossmann, head of covered bond origination at Societe Generale.

Each have their merits as funding tools, he said.

A covered bond is a high-rated security, backed by specific assets that remain on the borrower's balance sheet, and therefore has little credit risk. It enables issuers to get long-term funding. Securitisation, meanwhile, can be used as a funding instrument and to transfer risk.

BROADER INVESTOR BASE

Grossmann said the investor base has broadened for covered bonds since the ECB's announcement in May.

"We're now seeing more relative value in covered bonds," said Grossmann.

Others shared that view.

"Those people who buy government bonds are now buying longer-dated covered bonds," said Thomas Cohrs, executive director at Calyon.

Activity should improve further. Most of the recent issuance has been in Germany and France, but the market is expected to open up to other markets at the right price.

The ECB was not the only catalyst for the revival of the covered bond market, but it has certainly helped a lot, the bankers said.

"It pushed margins down, which triggered the new issues," said Boudewijn Dierick at BNP Paribas.

Noe said that issuance premiums were now at more palatable levels for issuers.

"The market was open before but the banks could not issue at 300 basis points over when they were lending at 200 basis points," he said.

(Editing by Padraic Cassidy)