Garrett Mention - FT.com: Covered bond legislation seen necessary to jump-start alternative program to TLGP
Washington,
May 8 -
By Kathy Fitzpatrick Hoffelder
Investors on the lookout for an immediate launch of the US covered bond market may have to keep squinting. But if Rep Scott Garrett (R-NJ) has his way, legislation could be afoot shortly to revive some life into the program that stalled over a year ago.
Rep. Scott Garrett will soon be issuing a bill in the new Congressional session to provide clarity on how covered bonds could be used as a means for banks to find alternative funding sources to the FDIC’s Temporary Liquidity Guarantee Program (TLGP), he told this new service. The new bill updates his previous Equal Treatment for Covered Bond Act released 30 July.
”We are hearing in general from the marketplace and from financial institutions who are supportive of it,” he said.
Citigroup (NYSE:C,A/A3), Bank of America (NYSE:BAC,A2/A), Wells Fargo (NYSE:WFC,AA/A1), and JPMorgan (NYSE:JPM,A+/Aa3), last summer publicly announced plans to jump start this program but the FDIC’s TLGP program overshadowed its launch, industry sources said. BoA and Washington Mutual are the only banks that issued covered bonds prior to talk of the official program launch last summer. Washington Mutual, now part of JPMorgan, issued covered bonds in euros in 2006 and BoA issued in both USD and in euros in 2007.
Some of the largest banks involved in setting up the program have discussed having one common structure for covered bonds to simplify the process so there is no difference between covered bonds issued by one bank compared to another, a banking source familiar with the situation said.
The first issuance under any such established program is likely to come from JPMorgan or BoA, who could self lead their transactions when the TLGP deadline approaches in October, he said.
The looming deadline of 31 October for when the debt guarantee portion of TLGP runs out and widespread financial problems at the government sponsored entities (GSEs) have prompted some market participants to recently consider alternative funding, particularly covered bonds, said a lawyer and the banking source involved in the talks.
”In the long term, it’s hard to think the government will backstop bank borrowing forever,” another lawyer familiar with the situation said.
The quasi-sovereign AAA investor would be interested in the US covered bonds but investors have to be convinced to take this instead of FDIC-backed government bonds, said Gunnar Stangl, head of index and bond strategy at Dresdner Kleinwort.
Community and regional banks, which would not be able to issue covered bonds on their own, have also been considering the bonds, according to the first lawyer. They have been in discussions to potentially package individual covered bonds issued by the larger banks and then put them into a master program that would be able to compete in size, he said.
The concept of covered bonds is also beginning to get more recognition in Washington. Rep Barney Frank (D-MA) said for the first time last week at a hearing on Mortgage Reform and Anti-Predatory Lending that the time has come to have a hearing on covered bonds. A debate has grown among industry participants over whether or not legislation is needed to push this program forward or if covered bonds could be regulated just by the FDIC.
Covered bonds differ from corporate bonds in that they are secured debt backed by mortgage loans or public sector loans that make up a ”cover pool.” Unlike securitized bonds, covered bonds are on-balance sheet items and are typically AAA rated.
Actual legislation is needed, however, to offer assurances and convince investors that the bonds would be safe and separate from other assets of an issuer in the event of insolvency, said Garrett and the first lawyer. Garrett’s bill adds a clause ensuring bank failures do not impair the value of covered bonds.
”Investors have become so very risk averse even for products that historically have been as safe as covered bonds; there has not been a default in their history. A legislative framework would be something that would be helpful,” the lawyer said.
European framework could assist with the US program for covered bonds
Legislation is one of the reasons covered bonds have thrived in Europe in recent years. Most governments have a legislative structure in place to effectively issue and trade covered bonds. US legislation on covered bonds would be reassuring to an investor base that could potentially be largely European in scope, the second lawyer added.
A revival of European covered bond issuance could assist with development of the program in the US, he said.
After the credit crisis began in 2007, European covered bond issuance slowed to a trickle. But recent issuance from ING, which tapped the market with a USD 125m increase bond due 2018, and SocGen, which issued a new USD 2.25bn bond due 2019, have shown some signs of a revival. South Korea’s Kookmin Bank also yesterday launched a debut USD 1bn five-year covered bond, the first for the Asia Pacific region.
”The (European) market has picked up again from the recent lows. Late last year, even the covered bond market was pretty much closed for new issuance,” said Dresdner’s Stangl.
Compared to Europe, the US has had several alternative funding sources which have hampered a full blown launch of a covered bond market even before the FDIC’s TLGP was created. GSEs and Federal Home Loan Banks (FHLBs) have traditionally provided funding at inexpensive costs.
Terms on government guaranteed bonds are attractive enough currently to entice banks to keep on issuing them. But if legislation were formally enacted and government funding arrested, the banking source close to the situation said there should be demand for covered bonds in the US once you move away from the guarantees.
