Most covered bond investors intend to increase their holdings, despite growing concerns over sovereign debt risk, according to a new survey from Fitch Ratings.
One year on from its previous investor survey, Fitch says that sovereign risk still constitutes the main challenge facing the covered bonds market, according to 59% of covered bond investors polled by the agency at year-end 2011, up from 37% a year earlier. Regardless, 88% of respondents are planning to either increase their current holdings or maintain them, up from 83% in the previous survey.
The eurozone crisis is clearly at the forefront of investors’ minds. The poll revealed that although around 50% of respondents intend to increase their holdings, certain jurisdictions are favored over others in terms of investment opportunities.
“Our survey shows that investors have a growing appetite for covered bonds, but are selective in what they buy. They expect to increase exposure to Scandinavia, Australia, UK and the Netherlands, which is where most of the supply has come from in the first weeks of 2012,” said Beatrice Mezza, Senior Director for Business & Relationship Management at Fitch.
The poll also revealed that investors are continuing to adapt in the face of structural changes and ratings pressure that the market has witnessed in recent years. In-line with last year’s findings, the vast majority of respondents (83%) can buy non-’AAA’ covered bonds. Their rating limits for non-’AAA’ covered bonds were evenly split between ‘AA’, ‘A’, ‘BBB’, and no limit at all. In addition, a growing number of investors – 71% compared to 62% a year ago – are prepared to buy covered bonds with soft-bullet maturities. The percentage of participants that would only buy hard bullet covered bonds has decreased to 29% from 34%.
However, investors appear less willing to innovate with regard to types of collateral, with only 35% of respondents comfortable buying covered bonds secured by assets other than mortgages or public sector loans, and requiring a higher spread to do so.
When asked to rank the sources of information used to monitor their holdings, respondents valued rating agency research highest. 68% of investors deemed it necessary for covered bonds to have two or more ratings for them to buy them, in-line with 2010 results.
For details, see Covered Bonds Investor Survey