The deal represents the revival of a Ñ50 billion deal which was cancelled in February this year in the face of deteriorating credit conditions globally. The dealÆs covered bond structure provides an alternative for investors to the residential mortgage backed securitisation (RMBS) market, which has suffered globally in the wake of the credit crunch.
Covered bonds are ultra-safe instruments that are usually backed by loans to government-backed entities or by prime mortgage assets. They have suffered much less than securitised products in the credit crunch.
ôWe believe this is a game-changing issue that will open up a new asset class in Japan, and that its example will be followed by other banks,ö says Robert Brennan, Shinsei BankÆs group treasurer.
Only financial institutions which are regulated by public authorities may issue covered bonds, adding to their security, according to the European Covered Bond Council. MoodyÆs rating agency has given the bond a provisional triple-A rating.
The investor base for the Shinsei bond is likely to be domestic pension funds and insurance companies, says Brennan, meaning they will likely buy and hold the instrument.
The bondÆs 10-year tenor will help Shinsei extend its yield curve û so far, the bank has focussed on one-year and five-year debentures.ôItÆs an asset liability management tool, which will serve as a hedge to our mortgage portfolio,ö says Brennan.
Shinsei Securities will be the lead manager for the deal, while other managers have yet to be announced.
Covered bonds are a growing asset class in the rest of the world, but are an especially large segment of the German bond market, where they make up 26% of outstanding bonds. Indeed, covered bonds in Germany, which are known as Pfandbriefe, originated there 200 years ago.
The difference between a covered bond and a securitisation is that the covered bonds stay on the balance sheet of the bank. Securitisation involves selling the loans off, thus freeing up the balance sheet and enabling the bank to make more loans. This is the model which encouraged poor lending decision by banks in the US û since the bank was not liable for any defaults, having sold off the loans. Under the covered bond structure, the issuer remains liable. Brennan says that ShinseiÆs mortgage pool is high quality.
In addition, the covered bond issuer must specify the pool of assets which will back the bond. Over-collateralisation is a feature of these pools, and in ShinseiÆs case it reaches 30%, compared to typically 5%-10% in European markets.
Japan does not have a special law regulating covered bonds, as Germany has. The law gives legal force to the subordination of other bond holders to the covered bond holders. In Japan, various structures in the Shinsei covered bond achieve the same outcome (giving covered bond holders seniority over others) despite the lack of a law.
Some sources suggest Shinsei could benefit from substantially cheaper funding through the covered bond structure than either a securitisation product or a straight bond, thanks to the safety features of covered bonds. If issuance in covered bonds takes off, funding costs for the issuer could go even lower, says one banker, pointing out that Shinsei may initially be compelled to pay a slight premium, given the newness of the product and the conservative nature of Japanese investors.
Japan has one of the largest mortgage securitisation markets in the world, and sentiment for this instrument is not as negative as elsewhere in the world. Securitisation deals can still get done, say bankers. However, the Shinsei structure could still diversify and enrich the market. But perhaps above all it could help position Shinsei as a smart and innovative financial player in a banking landscape dominated by gigantic players such as Bank of Tokyo Mitsubishi UFJ, Sumitomo Mitsui Banking Corporation, and Mizuho Bank.
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