Monday 30th May 2016
NEWS TICKER, FRIDAY MAY 27TH: BGEO Group plc, the London listed holding company of JSC Bank of Georgia, has this morning announced that Bank of Georgia, Georgia’s leading bank, and the European Bank for Reconstruction and Development (EBRD) have signed a GEL220m (approximately £70m) loan agreement with a maturity of five years. EBRD obtained the local currency funds through a private placement of GEL-dominated bonds arranged by Galt &Taggart, a wholly owned subsidiary of BGEO. This is the largest and the longest maturity local currency loan granted to a Georgian bank, which will allow Bank of Georgia to issue longer-term local currency loans, providing essential support for micro, small and medium sized enterprises to converge to DCFTA requirements, as well as underserved women entrepreneurs. “We are keen to develop financial products and lending practices, to service specifically women-led SMEs, which will ultimately increase their involvement in developing Georgia’s private sector”, says Irakli Gilauri, CEO of BGEO Group - The UK’s CBI has responded to analysis from the Treasury showing that a vote to leave the European Union could negatively impact UK pensions. Rain Newton-Smith, CBI Economics Director, says that: “All pension schemes benefit when funds can be invested across a stable, growing economy, to best support people in their retirement years. Any financial market turmoil caused by a Brexit is likely to have a negative effect on household wealth, the value of funds and damage pensions here at home, especially for those looking to retire within the next few years. The sheer weight of credible evidence points towards a serious economic shock if the UK were to leave the EU, meaning a hit to the value of our private pensions, jobs and prosperity.” - EPFR Global reports that Nine weeks into the second quarter mutual fund investors remain underwhelmed by their choices as they seek to navigate a global economy characterized by political uncertainty in Europe, lacklustre corporate profits and the prospect of another interest rate hike in the US, economic stress in major emerging markets and Japan's experiment with negative interest rates. During the week ending May 25 all nine of the major EPFR Global-tracked Emerging and Developed Markets Equity Fund groups posted outflows, as did Global, High Yield, Asia-Pacific and Emerging Markets Bond Funds, seven of the 11 major Sector Fund groups and three out of every five Country Equity Fund groups. Alternative Funds look to have taken in over $1bn for the fifth time in the past 14 weeks. Overall, EPFR Global-tracked Bond Funds added $2.6 billion to their year-to-date tally while another $9.1bn flowed out of Equity Funds. Some $12bn was absorbed by Money Market Funds with US funds attracting the bulk of the fresh money. EPFR Global-tracked Emerging Markets Equity Funds remained under pressure from many directions. China's economic data and policy shifts continue to paint a mixed picture for growth in the world's second largest economy, the US Federal Reserve is talking up the prospects of a second rate hike this summer, Europe's recovery appears to be running out of stream and the recent recovery in commodities prices is being viewed with scepticism in many quarters. All four of the major groups recorded outflows during the week ending May 25, with the diversified Global Emerging Markets (GEM) Equity Funds seeing the biggest outflows in cash terms and EMEA Equity Funds in flows as a percentage of AUM terms. Latin America Equity Funds extended their longest outflow streak since late 3Q15 as investors who bought into the prospect of political and economic change in Brazil confront the messy reality. However, year to date Brazil has been the top emerging market for all EPFR Global-tracked Equity Funds as managers bet that the impeachment proceedings against President Dilma Rousseff will open the door to more centrist economic policymaking says the funds data maven. Among the EMEA markets, the firm reports that GEM managers are showing more optimism than investors. EMEA Equity Funds have now posted outflows for five straight weeks and investors have pulled over $300m out of Russia and South Africa Equity Funds so far this month, though GEM allocations for both South Africa and Russia climbed coming into this month. The latest allocations data indicates less optimism about China despite is still impressive official numbers - annual GDP was running at 6.7% in 1Q16 - and the edge the recent slide in the renminbi should give Chinese exporters. GDP growth in Emerging Asia's second largest market, India, is even higher. Elsewhere, India Equity Funds have struggled to attract fresh money as investors wait to for domestic business investment and the government's reform agenda to kick into higher gears says EPFR Global – According to New Zealand press reports, stock exchange operator, NZX, will initiate confidential enquiries into listed companies that experience large, unexplained share price movements, to determine whether they may be holding undisclosed "material" information even while remaining in compliance with the market's Listing Rules that require disclosure of material information at certain trigger points. In an announcement this morning, NZX also warned investors not to assume that a listed entity's Listing Rules compliance statements meant they did not have material information in their possession which would potentially require eventual disclosure - Asian stocks were modestly higher today, largely on the back of increasingly softening sentiment from the US Federal Reserve. Most people think there will be one rate hike this year, but likely it will be in July rather than June. Either way, it will be one and not two or three. Fed chair Janet Yellen is scheduled to talk about interest rates at an event at Harvard University today and the expectation is that a softer approach for the rest of this year will be writ large; a good signal of intent will follow today’s quarterly growth stats. The presidential election will encourage caution; continued market volatility will encourage caution and mixed manufacturing data will encourage caution. Japan’s benchmark Nikkei 225 index added 0.4% to touch 16,834.84 and Hong Kong’s Hang Seng rose 0.9% to 20,576.52. The Shanghai Composite Index gained 0.3% to 2,829.67. The Straits Times Index (STI) ended 6.65 points or 0.24% higher to 2773.31, taking the year-to-date performance to -3.80%. The top active stocks today were SingTel, which gained 1.05%, DBS, which gained 0.07%, UOB, which gained0.11%, Keppel Corp, which gained2.47% and Ascendas REIT, which closed unchanged. The FTSE ST Mid Cap Index gained 0.27%, while the FTSE ST Small Cap Index rose 0.30% - The European Bank for Reconstruction and Development (EBRD) says it is taking the first step towards developing a green financial system in Kazakhstan in partnership with the Astana International Financial Centre (AIFC) Authority. EBRD President Sir Suma Chakrabarti and AIFC Governor Kairat Kelimbetov signed an agreement today on the sidelines of the Foreign Investors Council’s plenary session to commission a scoping study for the development of a green financing system in Kazakhstan. The study, scheduled to be completed in 2017, will assess the demand for green investments, identify gaps in current regulations, and make recommendations for the introduction of green financing standards and for the development of the green bonds market and carbon market services. The development of a green financing system would be consistent with the COP21 Paris Agreement, aligning financing flows with a pathway towards low greenhouse gas emissions and climate resilient development. The AIFC Authority was put in place earlier this year and is tasked with developing an international financial centre in Astana. In March, the AIFC Authority, TheCityUK and the EBRD signed a Memorandum of Understanding to support the establishment of the financial centre and to encourage and improve opportunities for the financial and related professional services industries – Turkey’s Yuksel has issued notice to holders of $200m senior notes due 2015 (ISIN XS0558618384), and filed with the Luxembourg Stock Exchange, that the company has agreed a term sheet with the ad-hoc committee of noteholders and its advisors to implement a restructuring of the notes and is currently finalising the required scheme documentation with the Committee. Once agreed, the Company will apply to the English High Court for leave to convene a meeting of note creditors to vote on the scheme proposals as soon as reasonably practicable when the High Court reconvenes after vacation in June 2016 - Following the agreement in principle of the May 24th Eurogroup for the release of the next loan tranche to Greece, domestic authorities have intensified their efforts for the completion of all pending issues reports EFG Eurobank in Athens. According to Greece’s Minister of Finance Euclid Tsakalotos, on the fulfilment of all pending issues, €7.5bn will be disbursed in mid-June, of which €1.8bn will be channeled to clear state arrears – This weekend is the second UK May Bank Holiday. FTSE Global Markets will reopen on Tuesday, May 31st at 9.00 am. We wish our readers and clients a sunny, restful, safe and exceedingly happy holiday.

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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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