ABN AMRO has established a new market in its home country with the launch of Holland’s first structured covered bond.By Edward Russell-Walling.
If ever we forgot how inventive and adaptable markets can be, covered bonds would remind us. Even where there is no appropriate law, someone eventually structures a product that behaves as if there was one. Like HBOS in the UK, this is what Dutch bank ABN AMRO has done, establishing a Dutch covered bond market in the process.
Unlike Germany, France, Spain and Sweden, the Netherlands has no law governing covered bonds. It may introduce one but ABN AMRO decided not to wait. It announced the launch of Holland’s first-ever structured covered bond: a benchmark issue to kick off a €25bn programme. Covered bonds, backed by mortgage or public finance assets that remain on the issuer’s balance sheet, are in vogue with banks and investors. Banks get cheap funding and investors get high-quality assets. The ABN AMRO deal was greeted enthusiastically.
Diversity in mind
“Diversification is one of the key words with this product,” says Erik Bongaerts, ABN AMRO’s head of group asset and liability management. The bank, he says, wants a full suite of products so that it can respond to market conditions flexibly and fast. “We have a lot of programmes in place but this particular product was missing – and covered bonds are a very liquid market for institutional investors.”
Like other issuers, ABN AMRO has been diversifying its funding sources. One aim has been to mutate from what it calls “a traditional European issuer” into a “truly global” issuer, and a full product range is closely linked to that ambition.
To that end it has established medium-term note programmes in euros, and US and Australian dollars. “In the Australian dollar and euro in particular, we are committed to building and maintaining a full curve, with benchmark issues at least once a year,” says Mr Bongaerts. “The US programmes are more opportunistic.”
The covered bond programme is an important extension to this coverage. There have been moves to introduce specific covered bond legislation in the Netherlands but they are presently bogged down in politics. “It could take years rather than months, so we decided not to wait,” says Udo van der Linden, head of consumer asset-backed securities for Benelux and the UK.
The transaction’s collateral consists of euro-denominated prime residential mortgages (the bank has 14% of the Dutch mortgage market). Unusually, ABN AMRO has opted for three separate credit ratings and hard bullet repayment terms. “We did this on purpose,” Mr van der Linden explains. “In the current market, you won’t notice much difference in pricing between issues. But if credit spreads widen, we will benefit from these features.”
Securitisation for rating
In the absence of a law, the bank has used securitisation techniques to achieve an AAA rating for the issue, like a number of UK issuers before it. And like the UK issuers, it has probably designed a sounder product than any law would have produced. “The rating agencies have asked us such tough questions that this may be a better credit,” agrees Mr Bongaerts.
Dutch law allowed the ABN AMRO team to go one better than the Brits, however, when it came to structure. It is simpler and cleaner than the British variety, since the law allows mortgages to be transferred without the movement of cash. “In the UK diagrams, there are a lot of inter-company loans and cashflows moving back and forth,” says Mr van der Linden. “In our structure, cashflows only start when there is a problem.”
Simplicity breeds demand
This relative simplicity of structure, the bank believes, helped to whip up demand once the 10-year issue was finally opened. About €4bn of orders poured in during the first three hours, rising to more than €5bn by the time the book was closed.
The issue size was finalised at €2bn. Price guidance had been 7-8 basis points (bp) over 10-year mid swaps, and the size of the order book enabled a re-offer spread of 7bp. The issue was aimed at European institutions – as Mr Bongaerts says, Asian investors seldom buy the first issue of a new product. Investors from Germany, the Netherlands, France and the UK bought more than half the issue, and the balance went elsewhere in Europe.
ABN AMRO’s next covered bond transaction is likely to be a five-year deal. “This programme is committed to building a credit curve,” says Mr Bongaerts.
