In a recent interview with Bloomberg Kozlowsk said the sale would likely take place sometime late in Q3 or beginning of Q4 this year, adding that pulling the trigger would likely hinge on Moody’s forthcoming assessment of Poland’s sovereign rating.
Earlier this year PKO sold PLN500mn in mortgage-backed covered bonds, just four months after legal reforms aimed at strengthening the country’s covered bond market came into force, which included changes to the minimum legal over-collateralisation requirement and asset liquidity testing provisions.
The country avoided a downgrade by the CRA in May this year, but its outlook was revised down and the risk of a downgrade in September remains intact. The economic and political environment in Poland has eroded to some degree after it imposed new taxes on its banks and introduced controversial and expensive social security programmes.
Between May and July the zloty jumped from 3.8004 to 4.0078 to the US dollar. Polish bond yields dropped rapidly following the Brexit vote, with yields on Polish 10-year government bonds falling from 2.845% on the 24th of June to 2.546% as of July 14; however, covered bonds continue to offer good spreads following the vote and have proved resilient, according to analysts, while yields on DM assets continue their downward march.
“Covered bonds have a number of strengths – they are typically resilient, more secure for investors, often cheaper to issue than senior unsecured notes, get higher credit ratings, and are still offering yield – the latter of which is pretty important in a post-Brexit world,” said Joost Beaumont, Senior Fixed Income Strategist at ABN AMRO Bank N.V.
Beaumont said we may likely see more Euro-denominated from strong performers in the emerging market sphere, particularly Turkey.
Earlier this year Vakifbank sold Turkey’s first residential mortgage-backed covered bond notes denominated in Euros. The €500mn notes priced at a yield of 2.578% paying a coupon of 2.375%.
That deal saw the lowest yield ever achieved by a Turkish issuer in an international euro-denominated public transaction, and successfully helped Vakifbank access a broad cross-section of covered bond and emerging market investors, mostly based in Europe. About 41% of demand for the bond came from Germany and Austria; 26% from the UK; 10% from Europe; 8% from the Benelux region; and 15% from other regions. All told, over 280 accounts participated with the deal.
But while some of the country’s other lenders – Garanti Bank and Yapi Kredi – were tipped to be issuing euro-denominated covered bonds of their own as early as late last year, neither have yet to pull the trigger; both have issued senior unsecured notes in the past year.
“One possibility for the holdup in the Turkish case is the relative cost of TL swaps – it is difficult finding a counterparty to take this on, though that may change if we see the euro slip,” a currency analyst explained.
Other nascent EM covered bond markets are being held up by legislation road blocks.
Brazil’s covered bond market, which was pegged by Fitch back in 2015 to have the potential to become one of the world’s largest, has stalled in large part because the covered bond framework introduced in late 2014 still requires more detailed legislation and congressional approval before it can be implemented.
South Africa’s Central Bank was also mulling the development of a framework that would allow the country’s banks to issue mortgage-backed covered bonds within three years, but those plans have since been shelved.
“Turkey has the legislation. The country’s banks have gone to great lengths to set up their covered bond programmes. There is a huge opportunity to attract liquidity from Europe and other non-traditional EM investors. We will definitely see more deals out of Turkey, and it is clear there is a growing internationalisation of these once Europe-focused assets,” Beaumont said.