After BNP Paribas, which recently issued for 2 billion euros of bonds, the Banque Populaire Group has, on 16 January, the first issue of securities as part of its program of Covered Bonds (1 billion euros over 25 billion euros planned). Why, in a context of crisis Subprime , banks show them such a craze for bonds?
Securities guaranteed doubling operating in a favorable legal framework ...
Securities guaranteed by the security basket and transmitter
The bonds are debt instruments issued by financial institutions and secured by mortgages very good or loans to the public sector. These assets are clearly identified, isolated and high-quality constitute the basket of security. "
In addition to the guarantee provided by the security basket, investors have the guarantee of financial institution: indeed, the assets remain on the balance sheet of the issuer (while being identified as security basket), which deals guarantee the repayment of bonds to investors.
In case of default by the issuer, investors enjoy a privileged ranking in the security basket.
In case of early redemption of securities, assets are replaced.
Although the three major ratings agencies are based on three different methods to assess the quality of the bonds, they are more often an excellent rating (Triple A) and enjoy a strong reputation liquid. Given the double guarantee enjoyed by investors (that of the issuer and the security basket), these financial instruments are considered very safe.
Bonds of operating in an organized
With a favorable since the 60s, the evolution of this type of refinancing is punctuated by four major dates in France. After the establishment of the mortgage market in 1966, CRH (Caisse refinancing Habitat, formerly Refinancing Mortgage Fund) appears in 1985, followed by the establishment of a legal framework for securitization in 1988 and the creation of bonds in 1999. The bonds are then their equivalent in the European Pfandbriefe in Germany, Cedulas in Spain ... ( Finance Information City )
... Enjoying a growing market
The market for bonds, which reached almost 2 000 billion, is the second outstanding bond in Europe after the bonds. Today, demand from investors is such that it is expected an increase of 11% of emissions for 2008
A market that has not completely escaped the Subprime crisis in 2007 ...
Like many markets, the end of 2007 was not conducive to market bonds. The high volatility and erratic movements of credit spreads, have forced several financial institutions to postpone or cancel their bond issues secured.
Worse, the fear that issuers announce new asset write-downs prompted the European Covered Bond Council to suspend transactions on the interbank market for a few days last November.
... But which draws its pin game in 2008
Yet, in early 2008, the market for bonds rose, contrary to the "Asset Backed Securities (the risk of bonds have been a time associated with the ABS by investors ).
The explanation lies in the benefits of these instruments compared to other tools securitization:
they allow to use the market to refinance, among others, mortgages or real estate at a cost
they offer investors a higher security
their implementation is faster and easier
The bonds have two advantages
In a securitization, the loans are assigned to a vehicle ad hoc. Thus, assets are out of balance, credit risk and prepayment are transferred and an economy in equity is achieved.
This vehicle ad hoc then refinance itself through issuing securities backed by the receivables: ABS.
For bonds, the issuer retains the assets on its balance sheet and issuing bonds. These are subject to specific legislation in most European countries, which govern all emissions and to protect investors. These laws also fit the precise management principles.
Moreover, the French system of bonds, one of the most secure in Europe, imposes severe constraints which makes its implementation difficult. It needs to create a land which imposes particular:
to transfer the receivables in the balance sheets for land
to appoint a "special controller, which is responsible for monitoring the quality and eligibility of assets
to prepare specific reports to the Commission Bancaire
If legislative framework or to enjoy greater freedom, certain issuers emission launched outside the legal framework. This is called a "structured bonds" in recent obeying contractual arrangements.
The ABS are riskier than bonds because they do not receive an appeal against the lending institution and can be repaid in advance without the assets being replaced.
Second advantage: compared to investors and issuers
The Covered bonds are a safe investment for investors in this context of crisis.
The bonds allow investors to purchase financial products almost equivalent in terms of risk to state titles in OECD countries, but with higher remuneration. However, risks remain on the quality of protection of the basket of safety in case of bankruptcy of the issuer, despite legislation in place.
Thus, as management of liquidity, the bonds have different advantages, including that of an excellent risk / return for investors and a source of funding to very good cost for issuers.
Although the evolution of their market in recent months have occasionally suffered the effects of the Subprime crisis, the bonds continue - and continue - to attract investors. The issuance of bonds will grow more quickly than other sources of funding for banks is restricted.
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