Some argue that it is simply a matter of economic funding. For example, Javier Blanco, head of syndicate trading at BBVA in Madrid, says that cedulas hipotecarias offer a lower cost of funding compared with the increasing cost of issuing senior unsecured debt and corporate bonds. “The main [reason] why Spanish banks are issuing cedulas is because it is cheaper funding at close to Libor rates. It is not directly linked to the growth in mortgage lending,” he says.
Different view
Because the growth of the cedulas market has more or less mirrored the rise of Spain’s burgeoning residential housing market, other bankers believe the instrument’s growing share of the mortgage funding market is directly linked to growth in the mortgage business.
“Although the cedula hipotecaria is an old instrument, it has not been used by commercial banks until the last three or four years. This interest came about because Spanish banks have increased their share of the mortgage business, and issuing cedulas hipotecarias allows us to finance our growth,” says a spokesperson for Banco Santander Central Hispano (SCH) in Madrid.
While commercial banks are playing an increasing role in the mortgage market, cajas de ahorros – the savings banks dotted around the country’s highly regionalised banking sector – still offer a large percentage of the country’s mortgage products; and around 50% of all lending at most of the savings banks is for mortgages, says Maria Cabanyes, senior vice president, financial institutions, at Moody’s in Madrid.
Housing boom
Savings banks have funded a boom in the housing market in the past few years. According to Spanish Mortgage Association figures for the end of June 2003, the total outstanding amount of home mortgages in Spain was E419.6bn, or nearly 58% of GDP, double the figure recorded at the end of 1998. And it’s not over yet: “We are continuing to see mortgage lending growing at around 20% on an annual basis, quarter after quarter,” says Ms Cabanyes.
Funding capacity is therefore strained to the limits. La Caixa argues that retail deposits remain relatively healthy, and that it has been able to grow its deposit base by around 10% a year, but few in Spain deny that the country’s low-interest rate environment has dented savings and their foundation as the bedrock of mortgage lending; most banks have looked to plug an ever-widening gap with additional sources of funding.
Covered bonds are increasingly taking up the strain. According to the 1981 mortgage law, Ley del Mercado Hipotecario, a lender can issue cedulas against up to 90% of its eligible mortgage book. With that in mind, there is still lots of room for Spanish banks to grow their issuance. “They are not near their limits yet,” says Ms Cabanyes.
Whatever the underlying reason, the growth rates for cedulas hipotecarias at some of Spain’s banks has been almost meteoric – although it must be remembered that many of them started from zero only a couple of years ago. But even in this short time, many institutions have now reached a solid level of issuance – creating ongoing programmes with established maturity curves.
Issuance prediction
Can such growth rates be maintained? Some bankers say that they are not happy to obtain more than about 30% of their funding from covered bonds, and that they have already reached that “comfort zone”. Consequently, they say, issuance will now flatten out.
Banco Santander Central Hispano, for example, is the third-largest issuer of cedulas. It has issued a total of E10.5bn and had a market share of about 13% at the end of September 2003, with a total mortgage book of about E29bn. The bank has issued a variety of cedulas with maturities ranging from 3-10 years, with issue sizes ranging from E1.5bn to E3bn. “We might grow a little bit more, but we don’t want to go overboard. One or two transactions next year might be possible. My personal feeling is that next year will be the last year of accelerated growth,” says BSCH’s spokesperson.
Caja Madrid has E8.8bn in outstanding cedulas hipotecarias, or 12% of the Spanish market. Fernando Cuesta, head of funding at Caja Madrid, agrees that it will be difficult for the mortgage market to continue growing at its current pace and says that as it slows, so too will the bank’s issuance of covered bonds. “Our funding requirement will not be as huge as it was in the past. The 20% mortgage funding growth is likely to slow next year and the year after. We expect to issue once in the cedulas hipotecarias market next year,” he says. Caja Madrid completed its latest covered bond issue in October 2003: a six-year, E1.5bn transaction.
Joining forces
There are other avenues for growth such as structured covered bonds. Savings banks with smaller mortgage books or those with smaller refinancing needs that wish to use the capital markets to refinance their mortgage loans, are increasingly taking part in structured transactions, cedulas cajas, in which they combine forces to attain the required deal size. For example, in November last year, Caja Madrid arranged a E2bn deal, featuring a group of Spanish banks in which the cedulas were packaged by the special purpose vehicle (SPV) issuer Cedulas TdA 2.
“The reasons why these deals exist are that cedulas are very liquid and highly rated instruments, and therefore very well accepted by the market,” says Sandie Fernandez, an analyst at ratings agency Moody’s in Madrid. “Structurally, pooling several cedulas into one SPV is cost effective for each originator, and allows smaller entities to fund themselves more easily.”
The two vehicles through which Spanish banks can securitise their covered bonds – Ahorro y Tituizaion and TdA – between them accounted for 27% of jumbo cedulas issuance at the end of September 2003. It is expected that the structured cedulas deals will account for more than 30% of the overall covered bond market in Spain this year, which is up from 17% in 2002, according to Moody’s.
Ms Fernandez says that Caja Madrid, Unicaja, El Monte and Caja San Fernando in Andalusia, Caixanova and Caixa Galicia in Galicia, and Caixa Terrassa (Catalunya), Ibercaja (Zaragoza) and Caja Ahorros Mediteraneo (Valencia) have been the most active savings banks in the structured market.
As the covered bond market across Europe both matures and expands, Spanish bankers say the country’s cedulas hipotecarias are becoming increasingly attractive to investors.
“There have been lots of new investors coming to the cedulas hipotecarias market, particularly from Ireland, Scandinavia and the UK. I think the central and eastern European region in the medium term will be an interesting investor market,” says Mr Cuesta.
He says that in the first instance, central and eastern European participation is coming from the region’s central banks, who recently were among the central banks that took 1% of a La Caixa 10-year issue. Mr Cuesta believes that institutional investor interest will follow.
European interest
BBVA’s Mr Blanco agrees that demand is very buoyant. “We have seen a huge interest from European investors. For our cedulas issues there is a big market in the UK, France and Germany,” he says. Savings bank La Caixa, for example, closed a two-tranche issue in October 2003 featuring a 10-year E1.25bn tranche and a 15-year E750m tranche, the latter being the longest-dated covered bonds issued in Spain to date.
There was market talk at the time that demand could be dipping due to heavy issuance, but the longer-dated paper proved particularly attractive: the 15-year tranche was snapped up by French investors who took 46%, UK investors who took 29% of the distribution and Germans who took 15%. The rest of the issue was distributed across Europe.
“It doesn’t make sense to place paper into a segment of the market that has already been tapped when things are slowing down, as they [did] towards the end of [last] year,” says the BSCH spokesperson. “But I think you can place cedulas hipotecarias further down the curve, and there have been some 10-year and 15-year issues recently.”
FX risk avoidance
Spanish banks have clearly found a useful mechanism to tap long-term funding, but future deal success will of course be dependent on investor appetite. At the moment it is a wholly European investor base and a euro-denominated class: thus far, there have been no cedulas issued in sterling or dollars, for example. Market participants attribute this to lack of interest in the US for covered bonds – American investors prefer mortgage-backed securities from US agencies Fannie Mae and Freddie Mac – and a desire by eurozone investors to avoid foreign exchange risk.
That said, Spain is an increasingly liquid market – even if certain savings banks choose to hold on to paper to stimulate the market when spreads become less favourable. A banker from one of the largest Spanish cedulas players recently commented that some savings banks are purchasing the notes issued by the SPV, enabling them to transform illiquid mortgage loan assets into liquid assets that can benefit from a European Central Bank discount. If spreads on structured cedulas are higher than banks are prepared to pay, many of them are repurchasing the notes, he says.
The recent diversification in Spain with the introduction of cedulas territoriales – similar to the German Pfandbriefe structure where covered bonds are backed by public loans – is only likely to increase investor appetite for the Spanish covered bond market, with three deals completed in 2003 and more expected this year.
