Reuters: Regulatory News: First ever USD 7yr covered bond to help revive legislative push

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First ever USD 7yr covered bond to help revive legislative push Sep 27th 2012, 18:23 By Danielle Robinson Thu Sep 27, 2012 2:23pm EDT NEW YORK, Sept 27 (IFR) - Sweden's Stadshypotek issued the first ever US dollar seven-year covered bond this week, a deal expected to renew lobbying efforts in Washington to get US covered bond legislation back on the agenda. The US$1.5bn 1.875% offering due 2019, led by Bank of America Merrill Lynch, Barclays, Deutsche Bank and Morgan Stanley, attracted US$2.75bn of demand. It was snapped up by not only the growing number of rate investors forced to go beyond their five-year maturity comfort zone for yield, but also by corporate bond buyers who are warming up to the asset class. Covered bonds are collateralized by mortgage loans that stay on banks' balance sheets rather than being sold off and packaged as residential mortgage bond securitizations. The concept has been around in Europe for hundreds of years as a way of funding mortgage lending. The UK, Australia, New Zealand and Canada have introduced covered bond legislation so their banks can issue them at home and abroad, and Singapore and Korea are moving in the same direction. The US, however, has lagged the rest of the developed world, only allowing non-US banks to issue covereds in dollars. Bankers and lawyers who have spent the past four years fighting for US covered bond legislation argue the Stadshypotek deal clearly demonstrates that the Fed's easing measures, coupled with dwindling issuance by government agencies Fannie Mae and Freddie Mac, has increased the desire for Triple-A alternatives to Treasuries. "It's taken four years, but the foundation is now there for US covered bond legislation to be put in place," said one debt capital markets banker involved in lobbying efforts. "For your argument to be successful you need to have the investor base, the issuers and the lawmakers interested, and we have all that now." DIVERSIFIED FUNDING The most recent effort to push through legislation died in the Senate in March, 2012 from lack of interest, despite having bi-partisan support in both houses of Congress. The big US banks were also supporters, arguing that while they are flush with deposits and liquidity, it is in everyone's interest that they have the greatest diversified sources of funding to support any rebound in the housing market. The investor base at the time, however, was still a relatively small group of rate investors. It was difficult for Congress to see the importance of adding something as esoteric as covered bonds to the Jobs Act when the housing market was so anemic. Recent signs of strength in the US housing market are now bolstering the argument that a healthy banking industry should have as many ways of funding mortgage lending as everyone else. "At the moment, the fact that European banks can issue covereds in dollars and not US banks, means that US money is going to finance mortgage loans in foreign countries, rather than at home," said Jerry Marlatt, senior partner at Morrison & Foerster in New York. Proposals by US deposit insurer the FDIC to make major banks' senior unsecured debt 'bail-inable' is also increasing corporate bond investor interest in covered bonds. "If there is a possibility that banks' senior unsecured bonds could be written down or converted to equity in a bail-in situation, then investment-grade credit investors will look at those bonds as something more like quasi-subordinated debt, and covereds will become the way that banks can find high grade credit buyers," said David Knutson, financials analyst at Legal & General Investment Management America. Stadshypotek's seven-year maturity is significant because it's designed to appeal not just to yield-hungry rate investors, but also to reach into the intermediate part of the yield curve where credit investors tend to dwell. "It is definitely interesting to have a longer maturity, rather than covered at the very front end where the more conservative investors tend to concentrate," said Ashish Shah, head of global credit investment at AllianceBernstein. Having a greater amount of triple-A supply with some spread is appealing to corporate investors looking for higher quality paper to pull up the average rating in portfolios at a time when they too are being forced by the Fed to go down the credit spectrum. The rush out of Treasuries and into blue-chip non-bank corporate bonds has squeezed high quality corporate bond spreads so tight that a triple-A issue like Stadshypotek's seven-year is actually trading wider than single A unsecured bonds. United Parcel Service Inc, rated A+, for instance, issued a US$1bn 2.45% 10-year bond at 75bp over Treasuries in the same week as Stadshypotek issued its seven-year covered at 72bp over mid-swaps, or a spread of 85.625bp over Treasuries. Bankers are now moving to restart conversations with Congressmen in both houses and parties ahead of the November elections, to ensure that whoever wins in November, they will put the legislation on the agenda for the New Year. "We think there is a good chance that the legislation will be passed in 2013, and then I expect it won't be until 2014 that we would see US banks actually issuing covereds," said a DCM banker. For other related fixed-income quotations, stories and guides to Reuters pages, please double click on the symbol: U.S. corporate bond price quotations... U.S. credit default swap column........ U.S. credit default swap news.......... European corporate bond market report.. European corporate bond market report.. 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