Over the past five years, the covered bond market has exploded in Spain, and this year it will overtake Germany to become the world’s biggest issuer. For more than a century Spanish banks have been trading in what they call cédulares hipotecarias, but until 1999 the market was limited to small retail investors.
The approval of new covered bond legislation six years ago brought about radical change, paving the way for jumbo issues targeted at institutional investors and providing a cost-effective means for Spanish banks to raise funds using their huge mortgage loan portfolios as collateral.
“Spanish banks have discovered that covered bonds are a very efficient way of financing themselves in the international capital markets for large amounts, at long maturities and at cheaper levels than other types of funding,” says Carlos Stilianopoulos, head of capital markets with Caja Madrid, Spain’s fourth largest bank.
Fastest-growing
“Spain is by far the fastest-growing market in the world for covered bonds,” says Avelino Abellás, a Madrid-based executive director with Caylon, the corporate and investment bank. Spain issued €30bn in covered bonds last year, roughly on a par with Germany, and is set to move clearly ahead in 2005.
Outstanding covered bonds issued by Spanish banks total €115bn, a higher net value than in Germany which, as a result of being in the market longer, has more redemptions.
In 1999, there were only two covered bond issues in Spain and bankers had a difficult time in interesting investors in anything other than German products. In the space of five years, the Spanish market has grown exponentially as investors became more familiar with Spanish products. “Investors have grown to like the Spanish mortgage market,” says Mr Stilianopoulos. “They buy the story, they like what’s behind it and they’re prepared to invest.”
Pace setting
Spain is also setting the pace in terms of covered bond maturities. “The benchmark maturity for Spanish covered bonds is 10 years and there have been issues for as little as three years,” says Mr Abellás. “This year we had the first 20-year issue. This is a rare maturity for any covered bond and Spanish institutions have just made three successful issues in a row.”
In January 2005, Caja Madrid became the first Spanish bank to issue a 20-year covered bond. Banco Bilbao Vizcaya Argentaria and AyT Cédulas Cajas followed with similar issues. Demand has been huge. Investors placed orders worth €6bn for the €2bn issue by Caja Madrid. “This issue means we now cover the whole spectrum of the yield curve, with our first covered bond due to mature in 2006 and the last in 2025,” says Mr Stilianopoulos.
Spanish banks like covered bonds because they provide funds at a lower cost than issuing senior debt. “Because they are backed by the collateral of mortgage loans, covered bonds tend to benefit from a two-notch ratings upgrade in comparison with senior debt,” says Mr Abellás.
Cost-effective
They are also slightly more cost-effective than the securitisation of mortgage portfolios through the issue of residential mortgage-backed securities (RMBS), says Mr Stilianopoulos. “We also prefer covered bonds because we like to keep our mortgage loans on our balance sheet,” he adds. “Caja Madrid has been in the mortgage business for 300 years and we want to keep our loans on our books.”
The surge of trading in covered bonds has provided an additional boost for Bolsas y Mercados Españoles (BME), the company that runs Spain’s equity, fixed-income and derivatives markets.
The BME includes AIAF, one of the few regulated bond markets in Europe and one that Javier Hernani, BME’s chief financial officer, describes as a defining feature of the Spanish bourse. Trading volume on AIAF has increased fivefold over the past few years, reaching a total of €567bn in 2004. New issues have soared from 90,000 a year in 1999 to 328,202 last year.
“Asset securitisation has become one of the pillars of the Spanish financial system,” says Mr Hernani. “It is one of the most popular segments of AIAF and has great potential for growth. It is a success that highlights the ability of the Spanish debt market to meet the financing needs of the private sector and especially the strong demand for mortgage credit we have experienced in the last few years.”
In April, the BME, Europe’s fourth largest stock market by trading value, announced a plan to list its own shares. No timetable has been set, but the move is expected to be completed by the end of 2005.
The BME holding company was created in February 2002 through the merger of stock exchanges in Madrid, Barcelona, Bilbão and Valencia, as well the derivatives exchange, MEFF, and the fixed-income market, AIAF.
The holding company is owned by the market makers, including banks, savings banks, Spanish brokerages and the central bank.
Chairman Antonio Zoido says the planned listing, which was envisaged in the BME’s original statutes, would give these shareholders an objective valuation of the company and “provide a means of exchange that will ease the possibility of future corporate operations”.
The public listing comes against a background of attempted consolidation by some European bourses, with the two largest, Deutsche Börse and Euronext, having expressed an interest in buying the London Stock Exchange. All three have also demutualised into publicly quoted companies in recent years.
Watching trends
“BME views in a positive light any activity that plays in favour of investors and market participants and closely follows any movement in this field,” says Mr Hernani. “We will continue to watch trends in the industry, only participating in those operations which are in the interests of our clients and shareholders, as well as those which favour the better functioning of the securities industry.”
The BME is already co-operating strongly with Latin American markets. In December 1999, it created Latibex, which trades in euros and is the only international market for Latin American securities.
Latibex is aimed at channelling European investment into Latin America, enabling European investors to trade in shares and securities in leading Latin American companies through a single market, with a single operating system for trading and settlement and a single currency, the euro. The market is based on the trading and settlement platform of the Spanish stock market and Latin American securities listed on Latibex are traded and settled in the same way as Spanish securities.