Thursday 21st August 2014
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South Africa’s central bank has disagreed with a ratings decision by Moody’s to downgrade Capitec Bank Limited (Capitec) by two notches, and place it on review for a further downgrade. The central bank says it respects the independent opinion of rating agencies but that it does not “agree with the rationale given in taking this step”. Two reasons are given for the rating action: a lower likelihood of sovereign systemic support based on decisions recently taken in relation to African Bank Limited (African Bank), and heightened concerns regarding the risk inherent in Capitec’s consumer lending focus. “With regard to the first point, it is important to reiterate that the approach taken by the SARB to any resolution to address systemic risk will always be based on the circumstances and merits of the particular prevailing situation. Decisions will also be informed, as was the case with African Bank, by principles contained in the Key Attributes for Effective Resolution Regimes proposed by the Financial Stability Board (FSB), which have the objective that a bank should be able to fail without affecting the system,” notes the central bank in an official statement. “This is in keeping with evolving international best practice. In the case of African Bank bond holders and wholesale depositors are taking a 10% haircut, which is generally regarded as being very positive given that the trades following the announcement of African Bank's results were taking place at around 40% of par. Therefore in fact substantial support was provided, not reduced. Moreover, all retail depositors were kept whole and are able to access their accounts fully,” it adds - According to the Hong Kong Monetary Authority (HKMA) credit card receivables increased by 2.1% in the second quarter to HKD112, after a reduction of 6.7% in the previous quarter. The total number of credit card accounts edged up by 0.7% to around 16.8m.The rollover amount, which reflects the amount of borrowing by customers using their credit cards, increased by 2.9% during the quarter to HKD19.2bn. The rollover ratio also rose marginally from 17.0% to 17.1% in the same period. The charge-off amount increased to HKD569mduring the quarter from HKD528m in the previous quarter. Correspondingly, the quarterly charge-off ratio rose to 0.51% from 0.46% in the previous quarter. The amount of rescheduled receivables transferred outside the surveyed institutions’ credit card portfolios reduced to HKD94m from HK$109m in the previous quarter. The delinquent amount increased to HKD249m at end-June from HKD239m at end-March. However, the delinquency ratio remained the same at 0.22% because of an increase in total card receivables. The combined delinquent and rescheduled ratio (after taking into account the transfer of rescheduled receivables mentioned above) edged up to 0.29% from 0.28% during the same period - Harkand has been awarded a contract to support Apache with inspection, repair and maintenance work (IRM) as well as light construction (LC) across their assets in the North Sea, following completion of a competitive tender exercise. The award includes the provision of vessels, ROV and diving services for a three-year period, plus two one-year options. The firm will also support offshore marine construction contractor EMAS AMC who have been awarded a separate contract for pipe lay and heavy construction as part of the same tender process. Harkand Europe managing director, David Kerr, said: “This contract is an important step in strengthening our close working relationship and growing our North Sea business with Apache.

Investors remain keen even as pfandbrief issue volumes fall

Friday, 09 December 2011
Investors remain keen even as pfandbrief issue volumes fall German covered bonds (pfandbriefe) largely maintained their safe-haven status with investors through the deteriorating financial environment in the second half of 2011, despite an inevitable dramatic slump in primary issuance as markets took fright at developments—or lack of them—in the eurozone. What now? Andrew Cavenagh reports. http://www.ftseglobalmarkets.com/

German covered bonds (pfandbriefe) largely maintained their safe-haven status with investors through the deteriorating financial environment in the second half of 2011, despite an inevitable dramatic slump in primary issuance as markets took fright at developments—or lack of them—in the eurozone. What now? Andrew Cavenagh reports.

With just €1.5bn of jumbo pfandbrief issues since the end of June, and none since Eurohypo’s €1bn deal at the end of August, the primary market this year will fall way short of the €87bn recorded in 2010. Verband Deutsche Pfandbriefbanken (VDP), the association of German pfandbrief banks, now reckons the final figure for this year will come out at around €65bn, against its earlier forecast of €90bn, on the back of the €47bn of bonds that were sold in the first six months, including €19.8bn of jumbo transactions.

Pfandbrief spreads have nevertheless remained relatively stable, compared with most other classes of capital market debt and covered bonds elsewhere. While the differential between pfandbriefe and German sovereign debt (bunds) may be approaching historical highs at around 120 basis points (bps), average spreads are still only about 30bps over the mid-swaps benchmark as those on most other covered bonds are well into three figures. “Flight to quality has prevailed, and the pfandbrief has confirmed its benchmark position in the covered-bond market,” maintains a VDP spokesman.

This spread stability looks set to endure through next year. For even if EU authorities take the measures necessary for the bond markets to resume normal functioning, the overall pfandbrief market will continue to shrink, which will tend to support the current spread levels. In the jumbo sector of the market, for instance, most banks are forecasting that primary issuance will be around €26bn while redemptions, although lower than the €44bn this year, will still total €38bn.

Investor confidence in the market received a further boost on November 23rd, when the Moody’s rating agency raised its base-case timely payment indicator for mortgage-backed (hypotheken) bonds issued under the Pfandbrief Act from  “probable high” to “high”. The agency cited the strong legislative and regulatory support for the pfandbrief regime as the reason for its decision, including recent amendments to the act. These require issuers to maintain a so-called liquidity buffer of at least 180 days in respect of their pfandbrief commitments and enhance the powers of a cover-pool administrator in the event of an issuer insolvency. The pfandbrief market is nevertheless facing significant challenges over the next 12 months and beyond, which could yet alter the historical perception—which German banks and financial authorities are keen to maintain—that the instruments trade almost as an homogenous asset class.  

The increasing emphasis that both the rating agencies and investors are placing on the link between issuers and their covered bonds is certainly threatening to create a great deal more discrimination in the market, particularly in the present environment where individual banks’ sovereign exposures are under the microscope.

Moody’s decision to place UniCredit’s covered bonds on review for downgrade a week after it announced it was reviewing the bank’s senior debt rating was a recent example of such linkage. Moreover, the trend could clearly see the spread spectrum in the asset class widen significantly from historical norms. Timo Böhm, portfolio manager and member of the covered bond team at Allianz Pimco in Munich, says the mounting concern over banks’ exposure to the sovereign debt crisis has led to a more pronounced linkage between the spreads on an institution’s covered bonds and those on its senior unsecured debt. “That link to the seniors and the sovereigns is much tighter now, and therefore everybody is looking at what could be the worst case here,” Böhm explained. “Even if the covered bond is rated triple-A, its spreads will widen on these concerns.”

“From our point of view, covered pools should be split,” says Böhm. He points out that banks now price their commercial property loans to reflect the different degrees of risk involved, and that it was not unreasonable for bond investors to require the same consideration. However, issuers continue to oppose the need for such a move. They say the pfandbrief legal framework offers investors adequate protection while the transparency of the cover pools allows them to choose the type of investment that most closely meets their requirements.

“They can decide themselves what kind of strategy suits them best,” says the VDP spokesman. He points to mortgage pfandbriefe backed 100% by residential mortgages: “If you like to take entirely residential mortgage risk, you find such bonds, too,” he says. While that is clearly the case, it is equally evident that issuing banks that have high concentrations of commercial loans in their cover pools are going to have to pay progressively more for the privilege.

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