German lender Commerzbank AG (CBK.XE) Thursday sold its first
covered bond backed by loans made to small and medium-sized
companies, a deal that may be seen as a test case for securing this
type of debt against nontraditional assets in the euro zone
region.
The 500 million euro ($669.2 million), five-year bond priced at
0.47 percentage point over the reference midswaps rate, a
benchmark, and will carry a coupon of 1.5%.
By contrast, German peer Berlin-Hannoversche Hypothekenbank AG
at the end of last month sold a 1.125% five-year mortgage-backed
covered bond at 0.01 percentage point under midswaps. The figures
highlight the difference in compensation investors demand according
to the type of collateral the debt is secured against.
Covered bonds are traditionally backed by highly-rated mortgages
or public-sector loans, and are widely considered the safest debt
banks sell. This is because not only are they typically protected
by special legislation, they offer double security: if a bond
defaults, investors have a claim on the bank as well as the
assets.
But even though the Commerzbank bond is structured to resemble a
covered bond, because it is secured against business loans, it
isn't bound by covered bond law. That could prove a sticking point
for some money managers.
"This is not really a covered bond," said Georg Grodzki, head of
credit research at Legal & General Investment Management. "It
will be interesting to see how it will trade but it may struggle to
gain broader acceptance in the absence of any preferential
regulatory treatment."
The fact the bond will essentially turn into a collateralized
loan obligation--a type of debt that fell out of favor with
investors in the wake of the subprime crisis--if the issuing bank
failed, may also deter potential buyers, Mr. Grodzki said.
Still, because the loans in the cover pool were made to German
companies, investor demand was robust, with order books in excess
of GBP1 billion and more than half of the bonds sold outside of
Germany, the bank said.
The high demand for the deal demonstrates the appeal of the
German "Mittelstand'--a reference to small and medium-sized
companies--for investors, said Holger Werner, divisional director
of strategy and projects at Commerzbank's Mittelstandsbank
unit.
While Commerzbank's bond is the first structured deal of this
kind out of Germany, HSH Nordbank AG last year sold a public-sector
covered bond that was backed by loans made by German development
bank KFW to small and medium-sized companies, or SMEs. Because
those loans were guaranteed by KFW, the bond fell under covered
bond law.
Turkish lender Sekerbank TAS has also previously sold covered
bonds secured against SME loans, but it remains a relatively niche
product given the lack of regulatory support.
A sizable SME covered bond market is unlikely to emerge, said
Bernd Volk, head of European covered bond research at Deutsche
Bank.
Commerzbank's deal Thursday follows a relatively barren spell
for covered bond issuance in Europe. Banks selling covered bonds in
euros had before Thursday raised about EUR3 billion this month, the
lowest at this stage in February on record, Dealogic data show.
Euro-denominated covered bond supply fell to EUR126 billion in
2012, almost half of what was sold the previous year and the lowest
in the single-currency era, Dealogic said.
Barclays PLC, Commerzbank, Credit Agricole SA, and UniCredit SpA
were the banks running Thursday's sale. The bond is expected to be
rated Aa2 by Moody's Investors Service and AA by Fitch Ratings.
Write to Ben Edwards at ben.edwards@dowjones.com
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