The periphery markets saw wild gyrations in the spread between sovereign, covered and senior unsecured bonds. And for those willing and able to transact, the dislocations provided some interesting investment opportunities.
Market volatility has increasingly seen a new breed of credit investor join the ranks of the covered bond market. Though they have increased the net sum of demand, these buyers are less prone to buy and hold to maturity. But, with potentially around one third of the covered bond market expected to lose its triple-A rating within one year, these buyers will be needed to plug the gap left by rates investors who can only buy triple-A.
But ever since the collapse of Lehman Brothers and the abandonment of the head-to-head interbank market making in 2008, the nature of covered bond liquidity has drastically changed. Once taken for granted, liquidity is now a highly prized commodity. At times, bid-offer spreads for many jurisdictions have widened by multiple times as risk managers, and not DCM, oversee the bank’s balance sheet. Moreover, dealing in a size of anything over €5m in the periphery markets can no longer be taken for granted.
All too aware of these changing dynamics, investors and banks are increasingly building the strong and trusting relationships that they need to, so that when conditions become difficult, they can work orders and get the best execution. And though market makers are there at all times for their clients, it is inevitable that on some occasions clients will prefer to bide their time and wait until liquidity improves and transaction costs fall.
Yet, because covered bonds now play such an important role in bank financing, owing to their favourable regulatory treatment, almost every bank has increased its investor coverage, at least as far as covered bonds are concerned.
In theory, investors should be the best providers of liquidity, as they own most outstanding stock. Some e-platforms have started, but none have yet reached critical mass, so in practice banks remain the most able providers of liquidity at the point it is most needed. But not every bank is a good as the next, which means issuers and investors must discriminate and work with their most capable partners.
Participants in the roundtable were:
Iain Bremner, head of credit investment,
La Banque Postale Asset Management
Vincent Cooper, credit research analyst,
BlueMountain Capital Partners LLP
Florian Eichert, senior covered bond analyst,
Crédit Agricole CIB
Mariano Goldfischer, global head of credit trading,
Crédit Agricole CIB
Vincent Hoarau, head of covered bond syndicate,
Crédit Agricole CIB
Gavin Jackson, European covered bond trading,
Credit Agricole CIB
Yvan Lavastre, covered bond portfolio manager,
Direction des Fonds d’Epargne CDC
Kristion Mierau, senior VP, portfolio management,
Pimco Allianz Global Investors
Nicolas Poli, global head of SSA and
covered bonds trading, Crédit Agricole CIB
Jozef Prokes, covered bond portfolio manager,
BlackRock International
Frederic Segur, credit portfolio manager analyst,
La Banque Postale Asset Management
EUROWEEK: How important is liquidity?
Kristion Mierau, Pimco: It’s paramount. Liquidity is a risk, but as a risk, it is simply the existence of uncertainty. Sure, liquidity translates into transaction costs for managers which should be minimised but in the context of liquidity being a risk, one should attempt to maximise not minimise risk-reward. We look for opportunities to get compensated for providing liquidity by using quantitative finance techniques and modelling as an aid to identify the liquidity premium. As with any risk metric we will avoid getting involved where we think risk-reward is not attractive. Elevated liquidity risk, as reflected in wide or shallow secondary markets, can be a deterrent to implementing a strategy which is fundamentally compelling.
Iain Bremner, La Banque Postale AM: We manage a number of buy-and-hold portfolios where we are not so concerned about liquidity, but for the mutual fund portfolios where we have a significant turnover, we definitely need liquidity.
Yvan Lavastre, CDC Fonds d’ Epargne: We are also a long term investor but we still need to have the ability to buy or sell covered bonds in large size. Liquidity is not as good in covered bonds as in the government bond market.
Mariano Goldfischer, Crédit Agricole CIB: But it is still there, albeit in smaller size compared to normal market conditions. It’s important investors can at least sell a part of what they bought in primary market when market conditions are stressed.
Jozef Prokes, BlackRock International: The covered bond market is still tradable. It is not like a rates market, but you are still able to get in and out of positions and that is critically important. Nonetheless, banks are less willing to put their balance sheet to use for liquidity purposes compared to before the crisis, but we live in a new paradigm so this is not surprising.
Some banks do an excellent job in providing liquidity and they will naturally see more flow from clients. But issuers need to consider this too when mandating for primary deals.
Vincent Hoarau, Crédit Agricole CIB: The lack of liquidity in a name in the secondary market can have an impact on its curve in the primary market, be it a premium of illiquidity, or a higher new issuer premium. This shows that illiquidity in the secondary market is not painless for an issuer. Some investors can refuse to cover an issuer because bonds are not liquid in the secondary. Jozef is right to outline the fact that issuers have to recognise the job done by dealers in the secondary market.
Gavin Jackson, Crédit Agricole CIB: The benchmark is being able to get a bid on your bonds within a reasonable set of parameters, but this will depend on the circumstances.
EUROWEEK: How has this changed since the crisis?
Prokes, BlackRock International: If you compare to pre-crisis times, then you will be disappointed; but then you will be for all markets, except perhaps for Bunds. As an investor you need to adjust your expectations. Before the crisis you could ask for a two way price in €100m and you were able to transact on small bid-offer spreads. But then we had forced market making commitments and, as we all learned, this was artificial liquidity which disappeared at the first sign of stress.
Nowadays you can still transact, but you need to adapt to how the market is behaving. There are differences between the core and periphery. It is natural to expect that, for countries like Spain and Italy, size will need to be adjusted down and the bid-offer spread is going to be wider versus the core and you will need to work more on an order basis. Looking at the core, one can transact in €25m-€50m clips and in normal markets a 3bp bid-offer spread is usual.
Florian Eichert, Crédit Agricole CIB: Inter-dealer market making has finished so that artificial overlay to liquidity has changed drastically. We are in a more sustainable place nowadays but it’s much more dependent on the sovereign backdrop, how stable the issuer is and how and recent primary issuance has been.
Bremner, La Banque Postale AM: I appreciate these arguments but our feeling is that the market is still not functioning normally. We don’t have the feeling that trading conditions were better before October 2008 when market making agreements were withdrawn. No doubt liquidity can get better from time to time, such as when we had plenty of new issuance in the first quarter. At those times you get pockets of liquidity and you are able to trade more easily. But in general terms liquidity has deteriorated, compared to pre-crisis times, especially more lately with the collapse of the sovereign market.
Prokes, BlackRock International: From a trader’s perspective, being asked to bid for €100m when everything around you is collapsing is not easy. So I am happy to work on the basis of an order-driven market for certain issues, especially in the case of periphery bonds. It would be easy to complain that the market is broken but it isn’t, you just need to work harder, work with people you can trust and give them more time and flexibility to work an order.
Jackson, Crédit Agricole CIB: If you go back five years, everyone quoted 1bp markets in €50m, traders didn’t have risk managers running their balance sheets, it was DCM. Now we all have tighter risk management, and that means there’s a price for quoting in €5m and a price for €50m. Size can be an issue, balance sheet usage must be justified. There are generally fewer issues in core markets compared to peripheral markets, where there will be steps to follow as there’s more value at risk.
Mierau, Pimco: At a systemic level, conditions have improved since the crisis as facilities are now in place to provide access to liquidity to financial institutions. At the same time, institutions have tapped private capital and improved their capital position. Contrary to the crisis, we now have excess cash in the system which should continue to be supportive of the secondary market, at least in terms of providing demand for short dated covered bonds.
If you take current markets, there are resemblances to the crisis where we have seen massive volatility and turnover skewed to better selling but this time around I would say the situation is less futile as there are fewer forced sellers due to the need to raise liquidity. Elevated volatility combined with one-way selling flows simply makes the Street less able or willing to hedge or warehouse risk. In terms of bid-ask spreads, dealers struggle to make tight markets if they are not able to hedge efficiently and turnover is low.
Bremner, La Banque Postale AM: We must adjust to market conditions; before the crisis started we could come to the market, place an order and it would get done in a few minutes, now it’s very different.
Lavastre, CDC Fonds d’ Epargne: The crisis has demonstrated the importance of liquidity. Today, and more than in the past, we need to invest where liquidity is assured.
Frederic Segur, La Banque Postale AM: Before 2008 you had an inter-dealer market, which is not the case now. I think this is one major reason that we now have less liquidity. There is clearly a marked change today compared with the pre-crisis period. Today we are obliged to trade much smaller sizes and verify our axes before trading. This leads to a great deal of uncertainty and forces us to work closely with our counterparties.
Jackson, Crédit Agricole CIB: These days investors rarely ask for a two-sided market. If it’s in small size then a two-way price will often be quoted either side of the screen price, but if it’s for a valued customer or one we are trying to establish a relationship with, then we would quote inside the screen bid-ask spread, but this will only generally be in the core markets. Much depends on the market cycle and the customer, so pricing tends to be quite an art.
EUROWEEK: Is there such a thing as a good deal size to ensure liquidity?
Prokes, BlackRock International: I don’t think the €1bn mark needs to be reached in every deal. We have seen a number of smaller banks that do not have either enough collateral or large funding needs, doing successful deals below €1bln.
Eichert, Crédit Agricole CIB: The larger the deal size, the greater the potential number of buyers and sellers. If your bond is in the index, the greater the potential is for investor participation which should increase liquidity. Despite that, some €500m deals have better liquidity than €1.5bn deals — jurisdiction plays an important role.
Jackson, Crédit Agricole CIB: The minimum benchmark is €500m, but some customers prefer only to invest in €1bn deals. They shouldn’t be scared of €500m deals because the bonds are more likely to be absorbed so there is more chance that they will trade at tighter levels than peer bonds of a bigger size.
Segur, La Banque Postale AM: Size matters depending on the type of fund. For mutual funds we limit our investments on issues of €1bn or more outstanding. For buy-and-hold portfolios, liquidity is less of a concern.
Lavastre, CDC Fonds d’ Epargne: In our benchmark, the minimum size is €500m, also we can do jumbolino. However we prefer jumbo covered bonds, German Pfandbriefe excepted.
EUROWEEK: Should iBoxx allow €500m deals into its index?
Hoarau, Crédit Agricole CIB: Since the beginning of 2010, roughly 50 covered bond syndicated euro deals have been priced with a size of €500m, representing nearly 20% of syndicated covered bond transactions. This is large enough to justify the inclusion of these deals into the index. iBoxx eligibility in the senior unsecured market is €500m and it is widely viewed as a liquid market. Even though the market tends to prefer larger €1bn sized deals, I believe iBoxx will adapt to the new reality.
Prokes, BlackRock International: There are many different drivers of liquidity and size is only one of them. If a deal is below €1bn, there will still be appetite if the deal matches other investor criteria.
Mierau, Pimco: Large investors with demand in excess of €100m may not want to be involved in a deal if they own 20% of it. Managers can still pretty much replicate the index even without investing in €500m size deals or jumbolinos. However, if there is reduced access to the primary market and conditions tighten, smaller sized issues could become more prevalent and consequently a much larger constituent in the indices.
Bremner, La Banque Postale AM: We see iBoxx but it’s not our benchmark; for the mutual funds we use another covered bond index — as our sponsors follow this index.
EUROWEEK: What has happened to average jumbo bid-offers over time during the crisis?
Mierau, Pimco: Generally, during episodes of elevated market stress as we are currently experiencing, bid-offer spreads widen. There has been a distinct bifurcation between the core and periphery which one would expect given the synonymous relationship between market stress and liquidity. Bid-ask spreads have widened to perhaps 30bp for weaker peripheral country names, whereas in the core markets, the bid-ask can be in the low single digits.
Bremner, La Banque Postale AM: Before 2008 the bid-ask spread was fairly constant but today the market you get is very differentiated by country. There is little volatility in the Pfandbriefe whereas in Spain there is a lot, particularly among the cajas.
Jackson, Crédit Agricole CIB: For core markets in the five year it used to be 1.5bp, or about six cents, nowadays its 3bp or 12 cents. For periphery markets the bid-ask has moved a lot wider.
Eichert, Crédit Agricole CIB: Recent research we published showed that Portuguese bid-ask spreads had been as wide as 170bp, while Greek and Irish bid-ask spreads ranged around 60bp-70bp. Until mid-July, Italian bid-ask spreads had generally been around 20bp while Spanish bid-ask spreads were 30bp-40bp.
Lavastre, CDC Fonds d’ Epargne: During the depths of the crisis, the average jumbo bid-offers were unsustainable. Without the help of the ECB (purchase agreement programme), the situation could have been worse.
EUROWEEK: Are current levels tight enough for you to be able to trade?
Lavastre, CDC Fonds d’ Epargne: Liquidity provision changes quickly over time, particularly for periphery markets which are suffering now. By the time this article is published, the situation could have changed again. But in general the market is less liquid as you can’t buy or sell in size in the periphery markets anymore. You can trade in €5m, but no more than that these days. It’s a problem when I want to sell because I need to do so in size, often in €20m. So if I cannot trade then I must wait until conditions improve.
Segur, La Banque Postale AM: A liquidity window will hopefully arise in September/October depending on how the global economy looks.
Mierau, Pimco: Seasonal factors are at play and conditions are far from ideal, which can make it difficult to implement relative value trades when transaction costs erase value added. But there are always opportunities, even when the market is less conducive. Though the tone is fragile in the periphery right now, the core markets don’t have the same level of anxiety. It’s easier to transact in regions where there are natural buyers. The domestic German bid has been supportive to stronger core names.
Lavastre, CDC Fonds d’ Epargne: Since the subprime crisis, and now with the sovereign debt crisis, covered bonds have been difficult to trade and will remain that way while this situation continues.
Bremner, La Banque Postale AM: We are still able to trade even though execution costs are much higher and sizes are smaller. This means we need to be opportunistic about liquidity and use periods when the market is active to exit and enter news positions. Our liabilities are stable, we don’t see emergency withdrawals, but if we had them we would be forced to sell.
Mierau, Pimco: The Street is currently less willing or able to extend its balance sheet so when trading a large size, it’s more difficult to find a participant to take the other side of the trade. We can still transact, just at a reduced frequency and capacity. Transacting in weaker names is becoming problematic as bids are defensive while on the offer side, forced sellers have yet to surface.
EUROWEEK: Are banks as willing to put their balance sheet to use?
Goldfischer, Crédit Agricole CIB: We will put the balance sheet to work to support deals that have been arranged by Crédit Agricole CIB. Even in periods of stress we are committed to trade deals. We always adjust, upward and downward, the maximum size we are ready to trade in accordance with the market situation. But our interest to make markets remains.
Jackson, Crédit Agricole CIB: Balance sheet commitments are run by risk managers. It’s a lot more responsible but ultimately the balance sheet is there to be put to work.
Mierau, Pimco: With respect to banks’ market making activities, we have seen a large increase in balance sheet allocation to covered bonds, although recently, as is to be expected, some are reducing or much more reluctant to extend balance sheet and have a strong quality bias. Additionally, most major banks now have dedicated resources to the asset class such as research, trading and sales teams. Our coverage universe has doubled or even tripled since the crisis and we now have a very large number of counterparties. Remember, we’ve had a record year of new issuance in the covered bond space, so it has been a pretty lucrative place for dealers to be. This could be a sign of things to come so it’s logical banks are allocating resources to participate in this market.
From the standpoint of banks as issuers or investors of covered bonds, banks have a better improved capital position as a consequence of more strenuous capital requirements under new regulatory regimes. Covered bonds have actually benefited from favourable regulatory treatment, which has resulted in increased allocation and monetisation of balance sheets, both as investment and funding vehicles.
EUROWEEK: Is liquidity discretionary depending on the client?
Goldfischer, Crédit Agricole CIB: Over time we will build relationships with our clients and it’s inevitable that this will be better with some and not as strong with others. I would not say we are discretionary in where we provide liquidity, but we may be more inclined to step up for certain clients in times of stress, though we will be happy to provide support for all clients in all our deals.
Hoarau, Crédit Agricole CIB: Especially in periods of stress and non-functioning markets, trading and syndicate also try to be as far as possible aligned with regards to who we provide liquidity to, and on which names.
EUROWEEK: Aren’t investors potentially the best source of liquidity?
Jackson, Crédit Agricole CIB: Absolutely! I don’t know about best — but certainly a very important source. In the current market structure, our job is to recycle client flows and ensure that a flow from an end investor ends up, ultimately, in another end investor portfolio. It is very unlikely that we do not have to warehouse the bonds for a while; sometimes for too long. Indeed, often accounts are on the same side. For example, many investors look at the cédulas to Bonos spread so their orders tend to be clustered around either end of a given range.
Prokes, BlackRock International: There are some initiatives out there, in terms of connecting investors, but I think we need to be careful. The concept of a buy-side to buy-side e-platform makes sense, but it is important to retain a market making community as well. Investors aren’t necessarily geared up to provide liquidity to each other at the point it is needed, market makers should be.
Lavastre, CDC Fonds d’ Epargne: Investors cannot replace banks.
Mierau, Pimco: We’ve seen some platforms bypassing market makers and pair up the buy-side. These platforms were gaining traction, but the current stagnation of the market is probably not conducive to their business.
Banks do take risk, which is different to what these platforms do. For this they have to be compensated. Being able to transact in an efficient way also means we need to be timely. Hunting down the offer or the bid may be time intensive which can result in mark-to-market risk. So it’s important to weigh up the pros and cons of both systems. If there is a 30bp bid-ask spread, there may be some upside to waiting a couple of days to find other side of the trade.
EUROWEEK: Can you rely on bid-offer pricing on screens?
Mierau, Pimco: Screen prices are indicative so you can’t generally rely on them. Executable levels depend on many variables which screen prices cannot perfectly incorporate. Market making is very complex as there are a lot of moving parts — such as repo market, correlations, hedge ratios, dealer inventories, and so on.
In general, the more the supply, the larger the float, the higher the turnover, the more clarity on valuations, the more balanced the flows are. Together this translates into tighter markets and an ability to transact in larger size at levels close to the screen price. Additionally, technology can be constraining during volatile times as dealers cannot update screen prices in a timely fashion and/or do not have the automated pricing algorithms.
Lavastre, CDC Fonds d’ Epargne: The bid-offer pricing on screens is not perfect but generally, we can rely on it to trade. There are some covered bonds with substantially better liquidity than others. The screen price is generally more accurate on large and recently issued deals.
Bremner, La Banque Postale AM: You can’t rely on the screen bid-offer spread — the real price can be quite different.
Segur, La Banque Postale AM: The size you want to trade will affect the spread. Also, different banks will have differing interests on some bonds, and this will be reflected in their pricing.
Hoarau, Crédit Agricole CIB: Lots of issuers monitor prices posted by their core dealers on Bloomberg screens. This is a very good attitude as it also forces dealers to be consistent in what they are doing there. Key investors are well connected to big issuers and sometimes they talk to each other. Inconsistency between screen prices and real bid-offer prices can rapidly lead to damageable consequences from a pure DCM perspective.
EUROWEEK: What role does liquidity play when you decide about asset allocation?
Vincent Cooper, BlueMountain Capital Partners: Liquidity can change very quickly, particularly in Europe, and this is something we take into account when we consider any position. Most of our covered bond investments have been in the more distressed parts of the market so we expect them to be less liquid than the overall covered bond space. Lower levels of liquidity are unlikely to completely deter us from making an investment, however they will certainly affect how we size the position.
Mierau, Pimco: Liquidity is a component in the valuation of any credit product and covered bonds are no exception. Ideally, we want to transact to optimise our portfolios, such that liquidity premiums are realised and not paid. If you were to derive the liquidity premium across the term structure you could approximate the slope of the ‘liquidity curve’. We want to be where the slope of the liquidity curve is steepest and roll down the curve to capture the liquidity premium over specific holding periods. It goes without saying that during times of stress, asset allocation, whether it be on buy-side or sell-side, will have a tilt to more liquid assets — you could liken this to the expectation of a shift or steepening in the liquidity curve.
Lavastre, CDC Fonds d’ Epargne: Liquidity is important, but less than the security and creditor protection offered to the buyers of covered bonds. The financial crisis demonstrated quickly that liquidity in its classic definition can and does disappear. It is not the main influencing factor, but we keep it in mind.
Bremner, La Banque Postale AM: For our mutual funds we have liabilities that can move and we need to be ready to move the assets in a short period. Liquidity definitely has an impact on asset allocation and it explains why we decided to move out of the less liquid senior unsecured market and buy covered bonds on some portfolios.
EUROWEEK: Brokers, do you use them?
Prokes, BlackRock International: Brokers should in theory be able to provide a lot of price colour but sometimes they give a wide two way price, and when you try to trade the price is suddenly gone. I am not a big supporter of buy-side trading with IDBs (inter-dealer brokers) as IDBs do not have balance sheets and hence cannot offer liquidity at the necessary time.
EUROWEEK: Why are traders demanding brokers give up names?
Nicolas Poli, Crédit Agricole CIB: Most of covered bond traders think that name give up will help to improve liquidity, transparency and restore confidence. The covered bond market could benefit, and while brokers might lose a few investor orders, they will definitively increase the number of inter-bank trades.
Jackson, Crédit Agricole CIB: The larger houses that dominate the London markets tend to play it straight down the middle. They have sales desks with Chinese walls between two parts of the organisation. But some Frankfurt and Paris-based brokers have active sales desks working alongside their inter-dealer brokers which can lead to conflicts of interest and this causes angst among some traders.
EUROWEEK: Should investors be forced to give up their names before trading via brokers?
Lavastre, CDC Fonds d’ Epargne: For the covered bond market it’s important to have complete transparency. As with other big investors this is for our desk managers to resolve.
Poli, Crédit Agricole CIB: If customers are still keen to work with brokers, they will disclose their names like any other counterparty
EUROWEEK: If the market has been working well up until now, why change it?
Poli, Crédit Agricole CIB: The covered bond market’s liquidity has really improved since the ECB purchase programme in 2009, but we are still vulnerable to liquidity humps as with any other fixed income markets. By introducing trade transparency and name give up at the inter-dealer brokers we would be moving to the next step in improving liquidity.
EUROWEEK: Is there a compromise?
Poli, Crédit Agricole CIB: There is a compromise, we could still face brokers like today, but when the transaction ticket is written it would contain both the price of the trade and counterparty’s name. This would improve transparency.
EUROWEEK: Do you conduct relative value analysis between senior and covered?
Cooper, BlueMountain Capital Partners: We are experienced in trading senior unsecured and subordinated financial debt, as well as CDS, which means we do a lot of analysis into the relative value between covered bonds and other parts of a bank’s capital structure. We screen all covered bonds against a matched senior unsecured as well as its CDS. This is a big driver of whether we think it’s worth doing more detailed work into the cover pool and legislative framework.
Prokes, BlackRock International: Considering both senior and sovereign levels when investing in covered bonds is an important part of the process. Both core and peripheral markets offer interesting relative value opportunities against other asset classes. Covered bonds tend to be, in my experience, more resilient when sentiment is negative, so can often be used for defensive asset allocations.
Jackson, Crédit Agricole CIB: We consider the spread to senior and I always have an idea of relative value. I’m more surprised at the trades which haven’t gone through. Bar one account we didn’t see much selling of covered bonds to buy senior, when the senior market was heavily sold. This speaks volumes about the buy-and-hold investor base of covered bonds. There are also a lot of new covered bond funds which means there’s a net add to demand.
Mierau, Pimco: Relative valuations of covered versus senior unsecured are particularly helpful to identify market dislocations where the value of collateral does not reflect fundamentals. We use a methodology that employs recovery rate differentials of covered bonds versus senior unsecured. This helps us not only isolate the implied value of collateral reflected by market valuations, but more importantly helps put valuations in context within country sectors and across individual issuer covered bond programmes.
An unsecured-secured relative value framework is particularly powerful when combined with proper bottom up fundamental analysis of both issuer credit strength and quality of collateral.
Bremner, La Banque Postale AM: We sold senior and bought covered for liquidity purposes, but also when the spread between the two sectors is tight we prefer the covered bond. The case for this has grown a lot since senior bank debt is now going to be part of a bank’s resolution regime.
Goldfischer, Crédit Agricole CIB: At Crédit Agricole we look at relative value on a regular basis. We look at covered versus seniors, CDS and other parts of the capital structure. We also look at covered bonds on a relative basis versus govvies. To take advantage of the above, our covered bond traders work with financial, SSA and govvie traders to provide good ideas and colour to issuers and investors.
EUROWEEK: What influences the senior to covered spread?
Lavastre, CDC Fonds d’ Epargne: There are a number of factors that theoretically influence the relationship between senior unsecured and covered bond spreads of one issuer, such as quality of the issuer, the quality of the covered bond framework, the quality of the collateral and market liquidity. But these relationships are sometimes driven more by technical factors than by pure economic logic. For example, the cédulas of an issuer are often cheaper than its senior unsecured!
I also look at RMBS versus covered in the UK and the Netherlands. Rabobank’s Obvion RMBS offers a 120bp spread pick-up which is double the covered bonds of ING and ABN. In contrast Italy only offers a 120bp pick-up in RMBS but some covered bond spreads are nearer to 200bp.
Eichert, Crédit Agricole CIB: We have a dedicated weekly publication that compares covered bonds and senior pairs for various countries and issuers. Differences are driven by the quality of the issuer, the quality of the covered bond framework and quality of the cover pool.
Bremner, La Banque Postale AM: The spread will depend on the strength of the bank and its liability structure. The weaker the bank, the wider the spread should be. It will also depend on the legal framework. The stronger this is the wider the spread is likely to be.
EUROWEEK: How tight does the senior covered spread need to be before investing?
Cooper, BlueMountain Capital Partners: When covered bond spreads get close to about 90% of the unsecured Z-spread then we take a closer look. However, since we are likely to want to buy and sell the pair together we have to consider the technical backdrop, including borrowing costs and the investor base. Then we might start to do a lot more work on stressing the collateral pool. We also spend a lot of time analysing the legislative framework, if it’s not a region we’re familiar with.
Lavastre, CDC Fonds d’ Epargne: It depends on the country, but when senior-covered spread is lower than an average 60bp we may have an interest to invest in covered bonds.
EUROWEEK: To what extent do you use senior CDS when trading covered bonds?
Cooper, BlueMountain Capital Partners: BlueMountain is very active in the CDS market and we use it a lot in our credit investing, but there are important considerations when looking at CDS in conjunction with covered bonds. For example, we will want to ask whether the covered bonds are deliverable into the CDS contract or whether there are unsecured deliverables of a similar maturity. We will want to assess the total package of the bonds plus the upfront cost of the CDS contract. The way we weight the trade will depend on our view of the issuer, whether a succession event on the CDS is likely at any time and on assessment of the likelihood of a credit event on the CDS.
Prokes, BlackRock International: The cash/CDS basis can be an issue which might be cause for concern in times of stress. But even in this respect, I do believe there is a sense to using the CDS market for relative value and hedging purposes vis-à-vis covered bonds. I’m surprised a lot of traders are not using CDS to hedge their books. It’s definitely a tool you would want to consider using as a covered bond investor.
Mierau, Pimco: We have not used CDS in creating basis trades versus covered bonds. This type of tactical strategy is more for hedge funds or prop desks. I think on occasion even some trading desks look to hedge covered bond positions versus CDS.
We are aware of instances where the basis actually went negative between covered bonds and unsecured or sovereign CDS. But these dislocations must be looked at on a case by case basis. It’s important to understand the mechanics and legalities of CDS such as the value of the delivery option, counterparty risk, and in the case of sovereign CDS, a structural positive basis versus govvies.
Eichert, Crédit Agricole CIB: A few guys do look at CDS and buy both covered bonds and CDS to hedge their position. In some instances the spread levels are close to covered bonds. These trades are not designed to generate massive income, but to generate insurance.
EUROWEEK: What regional differences do you see in the senior-covered spread?
Prokes, BlackRock International: You clearly see when sovereign issues become a topic for the market, covered bonds and seniors are pushed out and you naturally see more relative value opportunities. But there are also some good opportunities in the core markets.
The last 10 year BNP Paribas covered bond was priced just over mid-swaps plus 60bp, which was about 20bp inside the senior. This shows that it does not cost much to take the more defensive trade and it is not only the periphery to watch for the big moves.
Lavastre, CDC Fonds d’ Epargne: The senior-covered spread is attractive for covered in Spain, Italy, Scandinavian countries, France and Switzerland (less than 60bp). It is less attractive in Germany, the UK, the Nederlands and Austria.
EUROWEEK: What role does the sovereign play when considering fair value in a trade?
Eichert, Crédit Agricole CIB: It’s very relevant. If you want to invest in the covered bond you need the sovereign credit line, but if that’s been cut it doesn’t matter what your view is, you can’t do anything. This is driving spreads in Portugal and Greece and overruling any other element. Distressed funds then get involved and you can see why. Portuguese covered bonds trade in the mid-60bp-70bp area but you are likely to end up with much higher recovery. Just because some investors have dropped out of those countries doesn’t mean bonds are not money-good.
Mierau, Pimco: As with senior unsecured, issuers’ respective sovereign debt can help put valuations into context. Under circumstances where sovereign debt is assumed to be the ‘risk-free’ benchmark, sovereign spreads should function as the theoretical spread floor to covered bonds. Conversely, the issuer’s senior unsecured could be viewed as the spread cap. As with relative value versus senior unsecured, one needs to assess the strength of the sovereign’s balance sheet to properly assess relative value in this framework.
Assessing fair value using this methodology is not a trivial task in the case of sovereign debt of stressed and overleveraged economies where the sovereign debt itself is more of a credit than ‘risk-free’ instrument. You add another layer of complexity when the collateral performance of the covered bond programme is a function of the same variables that contribute to the weakening credit strength of the sovereign.
Bremner, La Banque Postale AM: Covered bonds lag the sovereign move. We have seen covered bonds periodically trade tighter than govvies, but in the long run the spread always normalises.
Jackson, Crédit Agricole CIB: In the periphery, for example, the rule of thumb used to be when the sovereign market widened 3bp or 4bp, covered bonds would widen 1bp but recently, when the sovereign markets moved out 50bp in two sessions, covered bonds disconnected.
Lavastre, CDC Fonds d’ Epargne: Just as we take into account the senior unsecured debt, a covered bond portfolio manager must also look closely at the sovereign debt, and keep in mind interest rates and swap spread levels.
Segur, La Banque Postale AM: There are some interesting deals we can do between govvies and covered bonds. When covered are wider than govvies there is interest to buy and when covered are tighter, it’s a good moment to sell.
EUROWEEK: Would you ever pay through the sovereign for a covered bond?
Cooper, BlueMountain Capital Partners: Yes we would. To the extent you are comfortable with the domestic legislative framework for the covered bonds and consider there to be value in the collateral pool then in our view there is a strong argument that the security covered bond investors have enhances its value versus sovereign bonds, particularly if the situation becomes distressed.
Lavastre, CDC Fonds d’ Epargne: It could make sense because the covered bonds will provide a very good recovery rate, always better than the recovery rate of the sovereign debt. However, the collapse of the sovereign credit quality mostly has an impact on domestic banks and therefore also adversely affects covered bonds.
Prokes, BlackRock International: I agree there are strong arguments for covered bonds trading inside the sovereign in a distressed situation but this is unlikely to get translated to the primary market. Even though the universe of credit investors is getting bigger I still think traditional rates investors are needed to give a deal traction. If an issuer tries to price inside the sovereign and fails, it could get ugly very quickly. But a tap of a covered bond could probably price inside the sovereign if the bond has been squeezed.
Eichert, Crédit Agricole CIB: In a sovereign default local banks are likely to be in severe stress due to high domestic sovereign bond holdings and if the cover pool is backed by domestic assets their quality would be severely affected too. But in the event of a significant haircut on sovereign debt, the covered bond could well turn out to be the better investment.
Bremner, La Banque Postale AM: I can see the sense, but more usually investors who get negative on the sovereign will want to get out of the country risk entirely, including its covered bonds.
Jackson, Crédit Agricole CIB: Much depends on the issuer name and jurisdiction. I would never expect to see a French borrower trade through the OAT, but for Italian or Spanish national champions I see no reason why they shouldn’t trade inside the government market in the current environment.
Lavastre, CDC Fonds d’ Epargne: The world has changed, sovereign debt is not viewed in the same way as the past. It’s no longer correct to view the sovereign as a zero risk weighted asset.
EUROWEEK: How much of a new issue premium do you look for?
Prokes, BlackRock International: It is two sided. If you hold outstanding bonds you do not want to see a big spread pick-up to new issue; conversely if you are short you want to see as big a pick-up as possible. Ultimately you need a decent concession. It is not possible to quantify exactly how much but clearly, the more distressed the market, the bigger the spread pick-up will be. The premium is there as a sweetener for investors to get involved, it is not really there to realise a profit in switch trades.
Mierau, Pimco: As a rule of thumb we look to the bid-ask spread of comparable bonds in the secondary, the supply and demand technicals of the issuer’s programme, the slope of the issuers’ curve, and our internal demand for the particular bond to help approximate the liquidity premium we require to participate.
Lavastre, CDC Fonds d’ Epargne: Generally, we expect a spread pick-up of 10bp, but there is no formula. Generally the less liquid, the greater the new issue premium.
EUROWEEK: If you are underweight and supply is scarce is the new issue premium small?
Mierau, Pimco: Issuers are rational and seek to minimise their financing costs. Contrarily, of course we and other market participants will demand less of a premium for providing liquidity when the issue is desirable and demand exceeds supply.
Again, liquidity is only a component of risk premium, so if market valuations are already compelling for a particular issue and availability in the secondary is limited, participants may be willing to pay secondary offer spreads for a primary deal. If they are in an advantageous position issuers will exploit this.
Lavastre, CDC Fonds d’ Epargne: When the supply is scarce, it is difficult to have a new issue premium. You must consider the quality of the issuer, quality of the covered bond framework, quality of the collateral, liquidity and technical factors.
EUROWEEK: How do you explain the fact Pfandbriefe and Nordic bonds trade tight to core SSA?
Prokes, BlackRock International: Some core markets can be viewed as overvalued and I can see why some investors might want to be underweight in these markets and look to cover their exposure with agency products. But the big advantage these countries have is their large domestic investor base. These investors are less likely to sell on negative news than international investors. There are fewer domestic investors in the case of euro denominated Scandinavian deals and domestic placement is more specific to the bank. But even domestically supported local markets can come under pressure, as shown in Denmark at the end of July and early August after Moody’s negative rating action.
Eichert, Crédit Agricole CIB: There is little fundamental justification but a lot can be justified on technical grounds. SSA issuance is still strong but Pfandbriefe issuance is shrinking. Moreover Germany has a loyal investor base and many smaller ones will only have credit lines to German Pfandbrief issuers.
From a small German investor’s perspective there is not a lot of upside as they will be blamed if things go bad and to many it is simply unthinkable that a German Pfandbrief would have a problem. This is the mindset — stick to what you know, even if it pays less.
Mierau, Pimco: Germany and Nordic countries have solid macro-economic fundamentals and strong sovereign balance sheets. Covered bond collateral performance and issuer credit strength in these regions are a function of many of these same variables. Additionally, strong statutory covered bond frameworks provide an additional layer of investor protection although in most cases covered bonds are not viewed as comparable to explicit or implicit guaranteed core SSA paper. As probability of default in these asset classes is negligible, much of the differentiation in valuations is due to liquidity premium.
Segur, La Banque Postale AM: The Pfandbrief is very expensive and Nordic bonds are too but we still have some interest to invest in Nordics due to their strong economic growth. But the case for investing in Pfandbriefe is less compelling, we would generally prefer France to Germany.
Lavastre, CDC Fonds d’ Epargne: It is more of a technical factor. Last year, we took the exceptional decision to buy KfW instead of public Pfandbriefe when the latter were trading at pretty tight levels. German bonds include commercial assets which are generally less favoured, but probably better than some other eurozone assets. German banks are weak but this is compensated by a strong framework.
Bremner, La Banque Postale AM: Even if governments are trying to reduce deficits and have less need for bond issuance you are still going to see SSA supply, whereas for German covered bonds the market is shrinking.
Hoarau Vincent, Crédit Agricole CIB: German redemptions exceeded issuance by €13bn in the first half of this year and next year I doubt supply will exceed the €36bn of bond redemptions. As supply has shrunk and demand has remained steady the secondary and primary market look set to remain relatively expensive. For these technical reasons a 10 year French agency, with an implicit state guarantee, can trade wider than a similar dated Pfandbrief. This situation is also explained by the profile and attitude of the German investor base. Many buy Pfandbriefe as a higher yielding alternative to the Bund and because they are not authorised to buy anything other than German triple-A debt.
EUROWEEK: Do you see any big change in the covered bond investor base?
Hoarau, Crédit Agricole CIB: There are a lot of investors from the senior unsecured world who have started to take an interest in covered bonds as they are concerned about their position within the capital structure of a bank. The other area where there have been some big changes in the investor base have been the very low rated covered bond programmes from countries like Ireland, Portugal and, to some extent, Spain. There are a number of investors though that look at these programmes from a pure recovery analysis.
Goldfischer, Crédit Agricole CIB: The investor base has expanded as a result of stress and traditional senior investors have expanded into covered bonds. As a result covered bonds are attracting faster money where concepts of relative value have increased. Much higher volatility means these accounts can generate alpha by picking the right names — versus just being directionally long and suffering the mark-to-market consequences.
EUROWEEK: Taps, do you like them?
Mierau, Pimco: We may, or may not, like them on a case by case basis. Issuers that are opportunistic and exploit their creditors will ultimately be penalised with higher costs of funding.
Those that are responsible tap on the basis of reverse enquiry and this can be compelling where secondary depth cannot accommodate our internal demand.
Eichert, Crédit Agricole CIB: As long as it’s down to reverse enquiry there is nothing wrong as taps will improve liquidity. A tappable CRH has not performed any worse than a not tappable CRH.
Lavastre, CDC Fonds d’ Epargne: I could be interested in taps if a certain yield target is met, for example, or if I was unable to get involved in an issue, or if I did not receive the full allocation that I had expected. But generally it is better to buy the primary deal.
Jackson, Crédit Agricole CIB: Taps are useful to help accounts access liquidity and put money to work. We often see a big build up of interest before taps are done. So I’m generally in favour of them as long as they are done responsibly and not just used as league table vehicles, which is unfortunately still occasionally the case.
Prokes, BlackRock International: I will get involved in a tap when I am specifically looking for a certain bond. If there are a sufficient number of buyers looking, then tapping the bond is a viable solution. But a lot of taps are not transparent. My concern is that some taps are done behind closed doors and the market finds out about them after the event. Not to mention that, investors that are long the bond which trading desks shorted to create a tap, are unlikely to be feeling very happy. Clearly taps done because the issuer cannot get benchmark funding are not something I would view positively
So to sum it up, taps can be beneficial but they need to be transparent and for valid reasons.
EUROWEEK: What do you think about the posting of secondary market pricing on a public forum?
Prokes, BlackRock International: The investor community has been pushing for this via the Covered Bond Investor Council. I believe this would be beneficial for all stakeholders and especially investors who trade less frequently. I don’t necessarily need to have volumes, but it would be nice to have some sort of guidance — for example, up to €10m or between €10m and €25m.
Eichert, Crédit Agricole CIB: The big guys will not want to give up information. Banks put up their balance sheet and provide liquidity to the market to get an information advantage, if anyone else sees this information there is less incentive to do that.
Jackson, Crédit Agricole CIB: It is going to level out the playing field. The top banks doing the lion’s share of secondary turnover will have to share their secrets. Those who claim to support an issuer’s bonds in the secondary market, but do little except take the fees, will be exposed.
Mierau, Pimco: More transparency is better — especially to the smaller investor. Knowing where bonds actually trade is good information, especially if you have the volumes, and particularly when there is elevated volatility, but no liquidity, so it would be interesting to see this information.
Goldfischer, Crédit Agricole CIB: Market transparency is always good as it improves liquidity. The more clarity there is for dealers and investors, the easier it will be to trade in a bigger size.
EUROWEEK: What about Mifid 2 and the initiative of ICMA?
Hoarau, Crédit Agricole CIB: For the time being Mifid 2 is still at the consultation stage and therefore there are no specific details as to what extent the primary market will be concretely impacted by post-trade transparency, transaction reporting and trade details required. Elsewhere, the current discussions at ICMA level will also certainly affect the way we deal with market sounding and price discovery. It’s all about transparency and dealer integrity, which is what we all need.
EUROWEEK: How big and granular is the investor base for dollar AAA covered bonds?
Poli, Crédit Agricole CIB: The US dollar covered bond market really picked up in early 2010 with significant supply. The main issuers, benefiting from attractive cross-currency swap levels, were located in Canada, France and Nordics to feed appetite of a few large US asset managers. I think we’ll see new potential investors out of Asia and Middle East next. The incoming US law should be a catalyst replacing the old Freddie Mac-Fannie Mae funding model. Longer term, the US dollar market has the potential to become bigger than the euro market.
Mierau, Pimco: Trying to estimate supply and demand is likely to depend on what alternatives there are to ABS and agencies. Investors see Canadian covered bonds as one alternative. The question will be whether there is a new paradigm to funding mortgages in the US. If that happens the sky is the limit, it could potentially be a $2.5tr market, but to get traction first they will need to get the right legislation in place.
Prokes, BlackRock International: We have been involved in the dollar covered bond market from the very beginning. Developments are looking very positive and passage of legislation now seems to be closer than ever. But there is still a long way to go with respect to overcoming some of the current disagreements. It will be tough for European covered bond investors, who are used to their own model, to accept what the FDIC would like to see, for example. Much also depends on how the concerns of the smaller US banks that use FHLB are resolved.
As for Europe, the covered bond model is likely to continue to grow in importance as a core funding tool, but we are going to see more and more non-euro issuance emerge. There is clear demand from US investors for US dollar denominated covered bonds, which leads me to believe that the importance of the US dollar as a covered bond funding currency will grow over time.
Poli, Crédit Agricole CIB: The lack of private label RMBS has obliged investors to diversify and shift mainly to the SSA and corporate markes. However they are still desperately looking for duration though ‘guaranteed’ bonds and they will certainly favour a new type of US covered bond. The US covered bond market has potential to follow the US SSA market which has overwhelmed the euro market in the past two years.
Goldfischer, Crédit Agricole CIB: The US dollar covered bond market has become attractive to issuers and investors as a diversification instrument but it is still relatively small. I think the US dollar covered bond sector has the potential to be big, especially if the pending legislation is approved. The US market needs an alternative to Freddie and Fannie and covered bonds is a very good one. The potential for this market over time is to be even bigger than the European market.
EUROWEEK: What’s the best performing and safest collateral?
Eichert, Crédit Agricole CIB: Investors are very attentive to deals backed by public sector collateral where the sovereign has been downgraded. Even in Germany you see a very diversified pool of public sector collateral so investors are increasingly taking this into account and pricing for it.
Mierau, Pimco: Investors are looking closely at the periphery exposure in German public sector deals and differentiating between programmes. Mortgage backed deals are more tangible, as you can look at the collateral attributes such as the LTVs and origination standards, and assess the quality. For public sector deals lack of transparency to loan level data is problematic to thorough analysis. It’s no longer the case where simply a double or triple-A rating on the public sector loan collateral is enough to make investors sleep at night.
For covered bonds backed by RMBS there is the advantage of having a comparable market proxy and increased transparency which facilitates collateral performance and helps with simulation modelling to assess loss severities. An issuer’s RMBS backed covered bonds should not trade wider than its RMBS, presuming a similar structure and collateral quality of the RMBS in the cover pool. This provides a theoretical cap on the spread of its covered bond.
But covered bonds backed by RMBS do have more layers of complexity. There could, for example, be a structural mismatch on liability side. Adding complexity to a covered bond programme increases risk because you are relying on the competence of people responsible for managing risks such as hedging asset-liability mismatches.
Segur, La Banque Postale AM: Collateral is very important particularly between public sector and mortgages. Public sector collateral was once considered less risky but this is not the case these days.
Prokes, BlackRock International: Collateral is an integral part of the covered bond but we need to set this into perspective. Covered bonds are bank debt obligations so investors should always start with bank credit and then assess the cover pools. Investors today clearly prefer mortgage exposure especially in the periphery. The split between residential and commercial mortgages is also becoming important. Investors must make their own choices so it’s really important to have full transparency. The problem is we don’t always get full information, so I think the CBIC transparency initiative is a big step forward.
EUROWEEK: Is it important to see what’s driving issuers to put RMBS in covered bonds?
Prokes, BlackRock International: I don’t have an objection to deals backed by internally originated RMBS. The key for me is that the assets should have been originated by the issuer and not bought in the market for funding arbitrage.
One argument against the use of RMBS is the added complexity of the structure. However, on the other hand we can argue that RMBS can be beneficial, post-issuer default, in accessing liquidity for the cover pool but this should not be the driving force behind the investment decision.
Mierau, Pimco: If you look at some Luxembourg programmes or even French ones, there is a mix of collateral including RMBS, public loans and mortgages. Issuers somehow have to hedge away that risk using derivative and currency hedges. The covered bond then becomes a complex instrument and in some cases resembles a CDO. It is effectively a portfolio, where you are relying on the expertise of the issuer as a competent portfolio manager.
Segur, La Banque Postale AM: As far as RMBS is concerned we don’t really see the necessity to package them into covered bonds as we would rather buy deals backed by the raw mortgage loans. Covered bonds are supposed to be a simple product so I would avoid deals that have some structures contained within the pool.
Lavastre, CDC Fonds d’ Epargne: I am a credit portfolio manager and buy ABS as well as covered bonds. I know the two markets well. Generally I am happy to buy covered bonds backed by RMBS if they are self-originated. What I don’t want to see is covered bonds backed by third party originators.
Hoarau, Crédit Agricole CIB: The main thing people should look at is whether the issuer has originated the loans or not — this is key. Before the crisis, some issuers used externally originated RMBS to increase the performance of the pool, increase pool diversification or reach a critical mass so they could issue a jumbo sized transaction. Today RMBS are largely used to facilitate the transfer of the loans from the originator’s subsidiary to the covered bond issuing entity, so it is motivated by pragmatism and efficiency.
EUROWEEK: Is a spread pick-up justified for covered bonds backed by RMBS?
Mierau, Pimco: It depends on many things, such as how well capitalised the institution is. If the balance sheet is a fortress, maybe that offsets disadvantages of having RMBS in cover pool. There are a lot of moving parts. All things being equal, I would expect a complexity premium.
EUROWEEK: How important is the rating for the covered bond market?
Cooper, BlueMountain Capital Partners: While we monitor ratings to determine potential investor actions, we are not restricted by them, nor do we look at them when analysing a security. Our flexible mandate is an advantage when investing. The varying technicals of different investor bases across an issuer’s capital structure can throw up very attractive opportunities for us.
Prokes, BlackRock International: The market is functioning without a triple-A on all deals. It’s imporant to focus on the consequences of bigger rating migration. We are seeing various regulatory cut-offs, for example in Basel III and Solvency II. For most accounts the real concern would come once covered bonds are migrating below AA-. The next rating cliff is into the BBB space. These ratings levels are more important than not having a triple-A, as the investor base would materially shrink once they are breached. There are many more downgrades to come, so this topic is not easily brushed away.
Eichert, Crédit Agricole CIB: You could end up with a third of the market being non-triple-A, although investors are increasingly seeing through the ratings and doing their own analysis.
Mierau, Pimco: Our assessments are based rather on our internal ratings which is a function of expected loss and probability of default, among other things. External public ratings are generally lagging indicators. For example, a triple-A covered bond trading 300bp-400bp over swaps for nearly a year and subsequently gets downgraded nine notches is not a triple-A
valuation.
To identify value and preserve capital one needs a leading indicator. But the majority of investors are banks and insurers and they are rating sensitive, as regulatory frameworks are very rating dependent. Basel III and Solvency II rating thresholds could create forced sellers and this has a material impact on our decision making.
Eichert, Crédit Agricole CIB: Ratings are intrinsic to regulations like Basel III and Solvency II. For insurance companies, the beneficial treatment of covered bonds under Solvency II is limited to triple-A. Once the rating drops to AA+, the bond is treated in the same way as senior unsecured and the capital charge almost doubles. If bonds remain in double-A territory, issuers should still manage to sell their bonds at a higher spread. If the covered bond rating moves to single-A then this will have a material difference as they will no longer qualify bank liquidity buffer purposes.
Hoarau, Crédit Agricole CIB: We can expect more and more programmes to become double-A, single-A or lower rated. I expect people to look beyond the rating and focus on the features of the product, the legal framework and the intrinsic quality of the bank sponsor, obviously. In the end, we have to look into the definition and features of a covered bond. Is there a dual recourse to the cover pool and the sponsor bank? What are the eligible assets? Is there a priority claim by the covered bond investor in case of insolvency? Is there any strong supervision? If the answer is yes to all these questions then these programmes deserve to be labelled covered bonds.
The non-triple-A market could appeal to traditional covered bond investors, senior unsecured investors and emerging market buying desks.
Goldfischer, Crédit Agricole CIB: Ratings are important for regulatory reasons such as Basel III and Solvency II, and they are important for investors. Given the state of the market, we can expect further downgrades so it is critical that investors do their own analysis to avoid finding themselves in a forced selling position due to downgrades by the rating agencies.
EUROWEEK: What’s your view on non-traditional covered bonds, such as Kookmin or Sekerbank?
Prokes, BlackRock International: My first question would be where are the assets held, is it a special purpose vehicle or are they on balance sheet? Also, from the collateral perspective, the pools will have different dynamics than mortgage or public sector pools and different maturity profiles. Covenant language and the way the bank replaces collateral would also be important. I don’t think any of these deals would sit in a typical covered bond mandate (and I would refer to them as dual recourse bonds) but given BlackRock’s extensive experience in ABS markets, we are certainly able to look at this market and evaluate the potential attractiveness of such issues.