In Q1 2015, strong investor appetite for covered bonds has accelerated the trend to longer-term issuances, which is credit positive for European covered bondholders because the lengthening of maturities strengthens the asset-liability match of the covered bond programme and reduces the likelihood of a fire-sale of assets, says Moody's Investors Service.
The new report "Lengthening of European Covered Bonds' Maturities in Q1 Reduces Refinancing Risk", is now available on www.moodys.com. Moody's subscribers can access this report via the link provided at the end of this press release.
"Two factors are driving the move towards longer-term issuance. Firstly, covered bonds have become a preferable investment for regulatory reasons as they are regarded as a high-quality asset. Secondly, the ECB is buying a large share of these assets, leading to a supply-demand change such that investors have fewer covered bonds to choose from." explains Alexander Zeidler, a Moody's Vice President - Senior Analyst.
Moody's says that the lengthening of bond maturities helps to better match the covered bond programme's asset profile considering that new mortgage loans often have a weighted average life (WAL) of 20-30 years. Longer bond maturities also reduce the likelihood that a large bond maturity occurs shortly following an issuer default, thereby reducing the fire-sale risk of assets. The rating agency estimates that the WAL of Q1 2015 bond issuances is about a year longer than the WAL of issuances in 2014.
"However, the overall higher longer-term issuance has not been uniform across countries. Issuers from Spain, Austria and the UK have placed particular emphasis on long-term issuances. On the other hand, issuances from Germany showed a wider range of bond maturities, largely because the asset-liability profiles of issuers in Germany are already strong.," says Mr. Zeidler.
