19. May 2017 Scope research  – Covered bonds

Retained covered bonds help issuers with liquidity management, but may catch investors on wrong foot

Issuers can change the terms and conditions of retained but pari passu-ranking covered bonds without investor consent. The higher the share, the greater the issuer’s ability to alter the whole programme’s risk profile. More transparency is still needed.

Last week Italian Banca Monte dei Paschi di Siena S.p.A. (MPS) reminded investors that covered bond programmes are actively managed funding instruments. Investors must actively monitor the risk profile of covered bond programmes, in particular when these contain ‘retained’ covered bonds. Such programs might be subject to a higher volatility of changes to their repayment risk profiles compared to those that are fully placed with investors.

Scope’s commentary highlights that investors do not have the ability to easily identify the share of retained covered bonds. Currently there are no regulatory or market-driven disclosure standards that allow easy identification.

The ECB has become the largest covered bond investor via its asset purchase programmes and is increasingly becoming a role model for other investors. They have started to require more detailed and more regular information from issuers. The central bank might also facilitate more disclosure on retained covered bonds. In the second half of 2017 they will propose changes to their repo requirements on such covered bonds.

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