European banks suspend trading in mortgage bonds


By Esteban Duarte and Steve Rothwell
Bloomberg News Service
Wednesday, November 21, 2007

European banks agreed to suspend trading in the $2.8 trillion market for mortgage debt known as covered bonds to halt a slump that has closed the region's main source of financing for home lenders.

The European Covered Bond Council, an industry group that represents securities firms and borrowers, recommended that banks withdraw from trades for the first time in its three-year history until Nov. 26. Banks are still obliged to provide prices to investors, according to the statement today.

Banks, including Barclays Capital, HSBC Holdings Plc, and UniCredit SpA, took the step as investors shun bank debt on concern lenders face more mortgage-related losses than the $50 billion disclosed. Abbey National Plc, the U.K. lender owned by Banco Santander SA, became the third financial company to cancel a sale of covered bonds in a week as investors demanded that banks pay the highest interest premiums on covered bonds in five years.

"We are in a deteriorating situation," Patrick Amat, chairman of the Brussels-based ECBC and chief financial officer of mortgage lender Credit Immobilier de France, said in a telephone interview. "A single sale can be like a hot potato. If repeated, this can lead to an unacceptable spread widening and you end up with an absurd situation."

...Sales Pulled

Covered bonds are securities backed by mortgages or loans to public-sector institutions. The notes offer more protection to bondholders than asset-backed debt because the issuing bank is liable for repayments. They typically have the highest credit ratings.

"There's a crisis of confidence for everything but AAA government bonds," Arnd Stricker, a management board member at Corealcredit AG, the German commercial property lender owned by Lone Star Funds, said at a conference in Frankfurt. "Covered bonds are being thrown in the same basket" as mortgage securities, even though they are safer, he said.

Abbey National in London said today it postponed its sale of covered bonds because of "poor" demand. AIB Mortgage Bank, a unit of Dublin-based Allied Irish Banks Plc, pulled a covered bond sale in euros yesterday and Ahorro y Titulizacion, an investment unit controlled by Spanish savings banks, decided against issuing the debt on Nov. 16.

Northern Rock Plc, which suffered the first run on a U.K. bank in more than a century, may have the top credit ratings on its covered bonds cut by Moody's Investors Service, the ratings firm said yesterday.

...Spreads Widen

"In light of the current market situation and in order to avoid undue over-acceleration in the widening of spreads," the committee of banks and borrowers "recommends that inter-bank market making be suspended," the council said in an e-mailed press statement.

The extra yield, or spread, that investors demand to hold covered bonds sold by German banks instead of government debt has climbed to 38 basis points from 23 basis points six weeks ago, according to Merrill Lynch & Co. indexes. The premium is the widest in more than five years.

Some banks agreed to stop providing prices on covered bonds for half a day on Aug. 16 to stem losses from widening spreads, according to Johannes Rudolph, a covered bond analyst at HSBC in Dusseldorf. Today's suspension is the first from the industry association, ECBC's Amat said.

"Conditions have really weakened over recent days," said Andreas Denger, a covered bond analyst at Calyon SA in London. "Most investors are not willing to invest in the current volatile market."

...Pfandbrief 'Solidarity'

Trading in Germany's pfandbrief market was also suspended in a sign of "solidarity," said Helga Bender, a spokeswoman for the German Pfandbrief Association VDP's German Market Maker and Issuer Committee. Pfandbrief bonds are a subset of covered bonds with stricter regulations.

The European covered bond market grew in out of the pfandbrief market. The first covered bond was issued in 1769 when King Frederick the Great of Prussia needed to rebuild the country after the Seven Years War against Austria and Saxony. Spain, Ireland, Sweden, Denmark, Norway, Finland, France, Portugal, and Italy have new created laws to expand the market, according to Standard & Poor's.

The ECBC started in September an "8-to-8 committee" of eight banks that arrange covered bond sales and eight representatives for issuers of the debt to set recommendations in deteriorating markets.

"Without market making between banks, investors will shun the sales of new covered bonds," said Santiago Rubio, who oversees 14 billion euros ($21 billion) of assets as head of fixed income at La Caixa's asset management arm in Madrid.

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