Investors have been dumping the riskier high-yield or emerging market debt instruments in favour of more secure assets that may pay less but provide a certain level of safety.
One asset class that is likely to take advantage of this trend, particularly in Asia, is the European covered bond market. That is why banks selling the covered bond story have been racking up vast frequent flier points visiting Asian investors.
ôWe are definitely in a risk-dumping mode,ö says one Singapore-based investor. ôBut in looking for some sort of pay-off, we are starting to look at the European covered bond space which is much more attractive in that respect to straight-forward government risk.ö
Covered bonds first originated in the region of Prussian Silesia in the aftermath of the Seven Years War. Devastated by the war, and seeking avenues to help it rebuild, Prussian King Frederick the Great conceived the idea of using land parcels as collateral for bonds, called Pfandbriefes.
Over time it has become a major market in Germany, representing almost Ç1.5 trillion. Since its humble beginnings in the late eighteenth century not a single Pfanbriefe has missed a payment. That is a statistic that investors the world over find very attractive in light of the current market volatility.
Muncher Hypothekenbank (Munich Hypo) is taking advantage of recent trends.
Recently, MunichHypo, led by Barclays, wrapped up pre-deal Asian roadshows for a planned Ç1.5billion Jumbo-Pfandbriefe that is expected to be launch this coming September.
Up until now, Asian investors have not played as strong a role in the covered bond market as in other high-grade sectors - where they have been buying upwards of 20% of euro-denominated sovereign and supranational issues. However this may change as investors seek to find secure assets that pay a premium over assets such as government bonds.
"Asian investors are becoming an increasing force in the covered bond market,ö says Ted Lord, head of European Covered Bonds, at Barclays Capital. ôTheir involvement represented around 10% of an issue a few years back. Now, Asian investor involvement can be anywhere from 20% or more for a euro-denominated issue and over 50% for a US dollar-denominated issue. We are also seeing larger private placements in yen. As the Asian investor base continues to grow in their familiarity with the asset class, we could see these percentages even rise further.''
Indeed, Freiderich Munsberg, member of the Board of Managing Directors at MunichHypo is confident that its newest offering should see very competitive allocations into Asia. ôWe have set a minimum target of 15% to 20% and we have seen substantial interest from investors,ö he says. ôWe would certainly be disappointed if it was less.ö
In actual fact, the interest in covered bonds among Asian investors has taken a substantial uptick in recent months. Insurance companies, asset managers and even retail investors (via private banks) have begun to look a lot more closely at the asset.
ôThis is one of the key features in expanding the investor base in the Asian market,ö says Munsberg. ôCentral banks are one of the primary buyers of Pfandbriefes, but that base is growing to include insurance companies who are starting to do some very noticeable tickets. Also pension funds are taking a serious look and have done some transactions as well as the larger asset managers. The base is definitely growing.ö
On this trip alone, MunichHypo visited upwards of 80 investors in Tokyo, Taipei, Hong Kong and Singapore. The reason for such a comprehensive roadshow û Asian investors need time to get credit approvals and get up to speed with the overall aspects of the market and the issuer.
The planned Munich-Hypo Jumbo-Pfandbriefe should offer is structured with bullet repayments which Asian investors are more comfortable with. It is also likely to be structured with a short-dated maturity of three to five years.
Perhaps more importantly Jumbo-Pfandebriefes are structured with an inherent liquidity that is provided by the underwriters at predetermined low bid-offer spreads. MunichHypoÆs deal will have upwards of 10 market makers which will make this issue extremely liquid.
ôAs one of the underwriters of this deal, Barclays has a desk in both Tokyo and Hong Kong which means that Asian investors can readily buy and sell these instruments,ö says Lord. ôIf for whatever reason there is data out of the US, for instance, that makes the market move and Investors want to do a transaction in the Asian timezone they can do it. That will provide a level of comfort to the Asian investors in terms of these instruments.ö
In fact, Barclays has a strong track record in the global jumbo covered bond space. Having finished number 1 in 2005, the British bank is currently head of the league tables with $9.8 billion in booked deals so far this year.
Despite having a perfect track record in terms of default, holders of MunichHypoÆs Pfandbriefes are protected via three fundamental aspects. Firstly, as a cooperative financial institution, it belongs to the creditor protection scheme of the FinanxVerbund (Co-op banking sector), ensuring that all member banks meet their financial obligations. Secondly in the case of insolvency, its shareholders are liable for the total amount of Ç441.6 million in uncalled liabilities. Thirdly, Pfanbriefe holders are protected by a preferential claim over the MunichHypoÆs mortgage and public collateral pools.