Warren Buffet famously joked that only when the tide goes out do you discover who has been swimming naked. A year when the tide has been a long way out for the covered bond market – low funding needs, negative yields and poor liquidity – has been a true test of covered bond banks. LBBW’s long term commitment to the market, and yet willingness to innovate has been more important than ever and has made them GlobalCapital’s Covered Bond House of the Year.
The ebbing tide of covered bond revenues has led to some difficult conversations about the level of resources to dedicate to the product at many houses, not so at LBBW according to Patrick Seifert, head of primary markets. He says the level of resources that LBBW allocate to the market “is not a matter of one year of bull market growth, it’s more of a long-term belief, the product has paid us well and we have franchise value.” If anything, LBBW have added resources during the pandemic, they have increased the size of their dedicated private placement desk and have invested in the digitalisation of their processes.
We try to analyse investor trends more closely in primary and secondary markets on a robust basis – issuers need consistent data of stable quality to make decisions
They have also continued with the conversations, even with the issuers with no immediate funding needs. The UK, for example, has seen major shrinkage in its outstanding covered bonds, but it is important to the long term picture that banks such as LBBW continue their conversations with the issuers for when the Bank of England does start to normalise its policy.
But investors need bonds to buy and investment bankers need to earn revenue, which has driven innovation at LBBW. Seifert uses their approach to ESG as an example. LBBW have long been champions of ESG covered bonds but they realised that the distribution of ESG covered bonds was similar to that for other ESG products, such as SSA or senior unsecured bonds. So, it made perfect sense to them to develop their ESG product outside their traditional covered bond core. In recognition of which, many of LBBW’s traditional covered bond issuers have turned to them for other funding products, too.
Another area where innovation has been necessary this year is in digitalisation, and in particular how a better understanding of investor flows can help issuers in difficult markets. According to Seifert, “we try to analyse investor trends more closely in primary and secondary markets on a robust basis – issuers need consistent data of stable quality to make decisions”.
Seifert says it is not just questions of ‘who is buying?’, but ‘at what value relative to SSAs?’, ‘who values ESG factors?’ and ‘at what maturity?’, all of which are being analysed at what he jokingly refers to as ‘the LBBW covered bond lab’.
LBBW have long been associated with investor focused covered bond events, such as their flagship Fixed Income Forum in March. Obviously, this has had to be totally re-thought during the pandemic, but Seifert is keen to emphasise the positives of a virtual event. LBBW had over 5,000 virtual visitors this year, more than ten times what it has ever been able to as a physical event including for the first time many Asian investors and issuers. They are realistic, the engagement in a virtual event is for a shorter time and is focused on what the investors think is relevant to them, but those drawbacks are more than outweighed by the greater reach of the event this year.
Innovations such as virtual events, digitalisation of investor feedback and synergies between markets have all been necessary for LBBW but according to Seifert, it is easier to innovate if you already have a functioning business model and you know your clients.
For all of the efficiency of innovations such as virtual events, they miss some of the important interaction that the covered bond market has missed so much. LBBW have started to take small steps towards the ‘new normal’ with smaller regional events, gauging on a regional and client level basis the willingness to return to face to face interaction, something that clients have appreciated, according to Seifert, investors have said “you are the first guys we met with in a year, it’s really enjoyable to meet again”. A sentiment that we all share.
Seifert is an optimist. He believes that for covered bonds the tide will come back in when the ECB and other central banks start to normalise policy. When it does, the long term commitment to the market and the innovations that LBBW have demonstrated over the last twelve months will stand them in good stead.