Talk:Covered bond
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Washington Mutual, Countrywide Head to Europe for Covered Bonds
Sept. 18 (Bloomberg) -- Washington Mutual Inc., the largest U.S. savings and loan, is heading to Europe's corporate debt market for cheaper financing in its biggest bond sale.
Washington Mutual will be the first U.S. lender to sell so- called covered bonds, securities backed by loans and guaranteed by the issuer. The Seattle-based company may offer as much as 3 billion euros ($3.8 billion) this week, said Fitch Ratings. That would be the company's biggest offering of securities with a fixed-interest rate, according to data compiled by Bloomberg.
COMPANIES THAT SELL COVERED BONDS MAY SAVE ABOUT 9 BASIS POINTS IN ANNUAL INTEREST COMPARED WITH U.S. MORTGAGE-BACKED SECURITIES, according to data compiled by Merrill Lynch & Co.
LOWER FINANCING COST MAY HELP SAVING AND LOAN INSTITUTIONS BOOST PROFITS AS THE END OF THE FIVE-YEAR HOUSING BOOM REDUCES DEMAND FOR HOME LOANS.
``We're looking at it with interest, said Vincent Breitenbach, managing director of treasury finance for Countrywide Financial Corp., the biggest U.S. mortgage provider, ``We'll watch what other people do and learn from their experiences, he said in an interview from New York.
Sales of covered bonds in Europe backed by U.S. home loans may exceed 20 billion euros a year by 2008, said Christoph Anhamm, a Frankfurt-based analyst at ABN Amro Holding NV, one of three banks organizing Washington Mutual's sale.
The securities, also known as pfandbriefe, typically get top AAA credit ratings by requiring borrowers set aside assets that can be sold to pay investors and increasing collateral as needed.
Housing Slump
European covered bonds have beaten U.S. mortgage-backed securities in three of the last four years, returning an average 17.9 percent during the period, according to data tracked by Merrill Lynch.
That compares with an average 16.5 percent return for a Merrill index of 285 U.S. mortgage-backed securities.
Washington Mutual may sell about 20 billion euros of debt in Europe, Robert Williams, the company's treasurer, said in an interview.
``The covered bond market is a very deep, vast market and naturally fits the type of collateral and balance sheet we have, said Williams. ``The more sources of funding you have, the more stable your risk profile.
Washington Mutual, founded in 1889 to help fund rebuilding after a fire in Seattle's financial district, offers consumer and commercial banking services throughout the U.S. It had $351 billion of assets at the end of June, of which more than $200 billion was loans to individuals, Bloomberg data show.
Frederick the Great
The 1.8 trillion-euro market for covered bonds -- which started in 1769 when King Frederick the Great of Prussia needed to rebuild the country after the Seven Years War against Austria and Saxony -- finances about 17 percent of European Union home loans, according to the European Mortgage Federation. Banks increased sales 52 percent since 2000, according to data compiled by Bloomberg.
Washington Mutual has issued bigger floating-rate notes, the last being $4 billion of mortgage-backed securities offered in December 2005, Bloomberg data show.
The National Association of Realtors, the U.S. real estate industry's largest trade group, cut its 2006 forecast for home sales, and expects prices to fall for the first time since 1993.
The decline in the U.S. real estate market reduced mortgage applications to a four-year low in July, according to the Mortgage Bankers Association.
Higher Yield
The slowdown may prompt investors to demand a higher yield than they would on covered bonds sold by European companies, said Max Beinhofer, who helps manage 12 billion euros of covered bonds at Deutsche Asset Management in Frankfurt.
``We expect a risk premium for the U.S. collateral, said Beinhofer. ``The advantages for European investors of diversification might be offset by the risk of a slowdown in the U.S. housing market.
WASHINGTON MUTUAL IS PLEDGING MORTGAGE DEBT AS COLLATERAL, RATHER THAN THE HOME LOANS USED IN EUROPEAN COVERED BONDS, according to Fitch.
Payment of the mortgage bonds depends in part on the U.S. real estate market.
HBOS Plc, the U.K.'s biggest mortgage lender, is paying 4.375 percent interest a year on 1.5 billion euros of 10-year covered bonds sold in July.
The yield was 4.06 percent on Sept. 14, or about 5 basis points more than the 10-year mid-swap rate in euros, a benchmark for pricing securities.
The bonds are rated AAA by Moody's Investors Service, Standard & Poor's and Fitch Investors. A basis point is 0.01 of a percentage point.
Barclays Capital is advising Washington Mutual, according to S&P. ABN Amro and Deutsche Bank AG are helping to sell the securities. Moody's, S&P and Fitch say they will give the securities AAA ratings.
"EVERY SINGLE U.S. BANK THAT HAS MORTGAGES ON ITS BALANCE SHEET IS LOOKING AT THIS MARKET AND EVALUATING WHETHER THE PRODUCT IS SUITABLE,"
said Stefan Dreesbach, head of debt capital markets for frequent borrowers at Royal Bank of Scotland Group Plc in London.
``Every bank that has a European operation probably has people out on the road talking to U.S. borrowers.'
http://www.bloomberg.com/ apps/news?pid= 20602093&sid= afTU_1B2AvZk&refer=rates
Does this means that if Assest Price goes down then the bond is no longer covered.
Didn't allot of people in Hong Kong lose their house when their house price went down and the Banks asked them to cover the difference?
