Tim Skeet on the Copenhagen Covered Bond Event

Among the throng at last week's covered bond conference in Copenhagen was Tim Skeet, head of covered bonds for Bank of America Merrill Lynch and one of the industry's best-known figures.  In Europe, he is senior advisor to the Covered Bond Investor Council (CBIC) of the International Capital Markets Association (ICMA) and serves as the ICMA's UK Regional Chairman.  In North America, he is a member of the Steering Committee of the U.S. Covered Bonds Council.  Here are his observations on the Copenhagen event:

Tim SkeetCOPENHAGEN — Every year now since September 2003, the people of the covered bond sector have converged on a European capital to discuss the state of their market, network and schmooze for a day.  By tradition, the one-day conference goes back-to-back with the plenary meeting of the European Covered Bond Council (ECBC).

And so it was that following the funereal atmosphere set last year in the splendid setting of central Paris and the entrance to the Louvre, the class of '09, numbering some 750 souls, gathered in the far more modest surrounds of a convention centre on the outskirts of Copenhagen, but in a mood of relief and general happiness.  If the 2008 convention witnessed a drowning of sorrows as markets froze, spreads ballooned and banks blew up, the 2009 gathering was marked by beers raised to more prosperous and stable times. 

Only the previous week, the annual gathering of the Association of German Pfandbrief Banks (vdp) in Frankfurt had set a positive tone— although even there, the missionaries of the Pfandbrief have had to concede that all signs of the famous and once efficient German style Pfandbrief 'market making' have now evaporated.  The secondary market remains a shadow of its former self, even while the primary market forges ahead.

Triumph of the ECB

Copenhagen's Caritas Fountain (photo credit: Ib Rasmussen)The meeting of the broader international community in the Danish capital was understandably upbeat.  This was, of course, thanks in no small part to the European Central Bank (ECB) and their intervention in the covered bond market announced in May, where they created a €60 billion purchase fund (of which €12,8 billion has been invested).  As a result, most areas of the European covered bond market were back in business, investors had made decent returns, and the nightmare of last year's dire crunch had evaporated like the mist with the rising sun.

The ECB's Michel Stubbe triumphantly addressed the ECBC plenary, and other officials from a host of central banks were on hand to pour soothing words over the rough edges of the asset class's periphery.  A week ago Bank of Ireland had successfully issued a jumbo covered bond showing there was life yet in the Emerald Isle's version of the product, despite a particularly nasty confluence of influences striking at the Irish banks.

Now, investors can look forward to the last struggling vestige of the freeze thawing as UK names prepare to add to the list of covered bond issuers.  Unsurprisingly, British officials from the Financial Services Authority (FSA) had also joined the throng in Copenhagen to take the temperature and sound investors in a sure sign that, post Northern Rock, they want to send the right signals to the market.

Against this more positive and upbeat backdrop the ECBC's chairman-elect, Santander's Antonio Torio, was nevertheless swift to warn, in his closing remarks, that 'this is a volatile and complex period' and that there are still 'difficult waters to navigate'.  No one really disagreed, though the mask of optimism was not allowed to slip from the faces of those listening.

Danish History Fires up the Market

'Copenhagen on Fire 1807' by C.W. EckersbergCopenhagen was an appropriate choice for the covered bond market's comeback party.  Although the Germans have a documented historic claim to having invented the product in the first place (as a result of one of those ugly little local wars of the late 18th century), Denmark is entitled to stake a claim to a parallel development.  In their case a version of covered bonds was devised to fund reconstruction of Copenhagen in 1795, following a great fire that laid waste to great tracts of the old medieval wooden city.  At least this was just an accident, not a war, although Copenhagen did not totally escape the cut and thrust of European power play.

It is interesting to note that a few years later, in 1801, Copenhagen hosted another unwelcome gathering of overseas visitors when the British Royal Navy appeared to force the Baltic fleets from adopting a policy of so-called 'armed neutrality' likely to aid Napoleon's attempts at blockading Britain.  Lord Nelson's success in defeating the Danish fleet (at what became the Battle of Copenhagen) also gave the English language, a new expression 'To Turn a Blind Eye'.  One-eyed Nelson ignored a signal from his superiors to disengage from battle by raising his telescope to his blind eye.  It is a useful expression that strikes a chord in the wake of the current crisis, where obvious signals were ignored as inconvenient.  Surprisingly, the sinking of the fleet did not lead the Danes to create the Ship covered bond, again leaving that to the Germans further south.

Ratings Souvenirs

As the class of 2009 gathered in peace in Copenhagen's vast Bella Centre (so named surely after the Italian meaning of 'Beautiful' and not the Latin word for 'Wars') the pilgrims exchanged views on the financial Crunch and its origins.

Danish Royal Library (photo credit: Arne List)Attention was soon turned to the actions of the rating agencies that had attracted the particular opprobrium of the covered bond world with their ABS infused methodologies casting shadows over the hallowed turf of the government sponsored covered bond asset class.  If on the panels, diffident bankers eschewed more aggressive words, it was the formidable shape of vdp president Henning Rasche who delivered the broadside over lunch, referring to the 'increasingly questionable approach of the rating agencies'. The polite assembly continued to tuck heartily into the statutory conference meal of smoked fish, chicken and something chocolaty, but many a table emitted restrained noises of agreement.

It should be noted that the rating agencies did bravely turn up in force, setting up their stands cheek-by-jowl with the market's finest, though perhaps the passers-by quickened their pace before heading for the allure of handout souvenirs piled on the various other stalls.  And here, it should be noted that if 2008 brought a meagre selection of pencils and pens, there were better items on offer in 2009.  Citi, for instance, produced a nifty mini vacuum to keep keyboards clean for all the feverish trading, DZ handed out fluorescent orange jackets for the next time the car or the markets break down, umbrellas from LBBW for when the storms return or even fresh coffee and cakes from the enterprising folks from the GOH Portugal stand (the upstart Portuguese version of Germany's vdp).

Fine Words

Beyond the open area of stands and cluster stations where the networking furiously raised the room's temperature, there was the serious business of the speeches, panels and workshops. It remains something of a mystery how so many panels, workshops and words could be filled with thoughts on covered bonds. There were talks titled 'Yes We Can! Covered Bond Funding in the Era of GGBs' (the oratory was not on a par with Barack Obama, however); glitzy titles promising some pizzazz such as, 'And the Oscar goes to ...the ECB'; there was 'Rising from the Ashes' (a nod also to the Danes with their history of fires—a cultured lot these covered bond people).

Other titles included a geographically challenged, 'The Nordics—an Island of Stability'.  (The Nordics, an island?  And as to stability, what about the small matter of Iceland?)  Also an intergalactic reach, as in the panel: 'Mapping a New Universe' (possibly mixing Copenhagen 2009 with a West Coast Trekkie convention).  Some of these titles hinted at poetry, literary imagination or Hollywood. The results were, however, mostly prosaic, although worthy. 

Themes and Thoughts

A number of serious themes did emerge from the two days of deliberations.  The needs of greater transparency and minimum levels of market liquidity were raised. Investors, both on the panels and in the corridors, called for urgent action on these topics.  There were also several demands for a measure of greater consistency across the market, with a hope expressed from several corners that a narrower definition for covered bonds might be established.

Copenhagen at night (photo credit: Bill Ebbesen)This of course has long been a holy grail. The term 'covered bond' has been hijacked in the service of financial innovation.  The result has been some measure of confusion as sundry products seek cover under the safe umbrella of the covered bond epithet. Investors and regulators are not happy.  However, all attempts to forge a common definition have so far failed as different interested parties have fought their corner and pushed the boundaries of the definition to suit their case.  Might this not be the Bella Centre's 'Casus Belli' as the market thinkers set their views on the definition of the covered bond against the tide of regional innovation?

Indeed Brad Brown from Bank of America, speaking for the U.S. Covered Bonds Council, made mention that several new asset classes were being considered for the revived U.S. market. This had sundry Europeans jumping, but given the preliminary nature of the U.S. initiatives, and the need to reopen the U.S. investor base, Europeans should not reach for the aspirin just yet.

Certainly as the covered bond has prospered, the slow tentative progress of the ABS market back towards some sense of recovery has set the two apart—and thereby heightened sensitivity over the blurring of the edges, provoked by innovation and the rating agencies, between those two asset-backed forms of financing.  The take-away from Copenhagen was the great deal of interest and concern that European banks, investors, regulators and others share in seeing the covered bond market restored and strong.

The location for next year's event has yet to be set, but perhaps by then the U.S. will have finally joined the ranks of legal covered bond jurisdictions—though the fight for product definition will continue.  See you all in 2010!

Text copyright © 2009 by Tim Skeet.  All rights reserved.