Australian covered bonds welcomed in Europe

Over $5billion of the recent issuance of covered bonds were denominated in Australian dollars, due to large transactions from Commonwealth Bank of Australia and Westpac.

Market participants believe the new class of issuers will be an important option for European investors this
year and beyond.

One debt capital markets official at a major European house said: “They’re already well known to the European investor base from the senior unsecured market, where they trade very competitively alongside other top issuer groups such as the Scandinavians.”

Under Australian covered bond legislation, banks can only securitise 8% of their eligible assets which caps the market’s total value at around $150bn. Bankers in Australia involved in originating the recent crop of deals believe this will offer a meaningful addition to the universe of investable covered bond assets in Europe.

“We could see $3bn to $5bn a year from each of the four major Australian issuers across currencies,” said one. “Once you strip out other currencies and private placements, I think $1 to $2bn of euro-denominated issuance from each one is likely, so we could be looking at a market of $6 to $8bn annually.”

Demand is also likely to be spurred by the limits on supply provided by the cap on the use of eligible assets. Investors know there will not be a limitless progression of new deals and are therefore more likely to participate in new ones when they have the opportunity.

The cap is also a smart move from the point of view of senior unsecured investors. The question of encumbrance – the structural subordination of unsecured creditors as each new covered bond reduces the number of assets to which they can lay claim in the event of a default – is an increasingly important one in Europe but one that the Australians legislation avoids.

Some European markets permit a much larger proportion of assets to be secured – in Spain it is 80% - and in time market participants expect European regulators to look at the example of newer entrants such as Australia.

“Long term I think it’s something they will look at,” said one covered bond specialist.