Despite the headwinds around slowing economic growth and the US-China trade war, 2020 looks bright for covered bonds in Asia-Pacific, according to a Moody’s Investors Service (Moody’s) research note that said that the covered bond market would be supported by high issuer credit quality.
“The credit strength of the issuers, both as primary obligors on their covered bonds and in terms of their ability to support cover pools, is a key driver of covered bonds' credit quality,” says Joe Wong, Moody’s vice president and senior analyst.
The firm also adds that sovereign credit quality in Australia, New Zealand, South Korea, Singapore and Japan will remain strong in 2020, resulting in further support for covered bonds’ credit quality. Strong sovereign credit quality means countries can support their financial systems and the liquidity of their mortgage markets, thereby reducing mortgage refinancing risks if covered bond issuers default.
In Singapore for instance, the three major local banks, DBS, OCBC and UOB, which are frequent issuers of covered bonds, have strong assets to support future covered bond issuance. Covered bond issuers such as UOB have tapped the market multiple times in an attempt to diversify their investor base. For example, in August 2019 when the bank priced its US$500 million covered bond, it was met with strong investor demand including a 58% allocation to European accounts.
Other markets such as South Korea are expected to maintain high credit quality against a backdrop of mortgage collateral risks and rising unemployment. Moody’s believes the country’s weighted average LTV (loan-to-value) of residential mortgages at just 50% will mitigate the risks associated with unemployment and household debt.
Another interesting development in South Korea’s bond market and the covered bond space has been the rapid increase of sustainable and ESG (environmental, social and governance) bonds. Korea Housing Finance Corporation (KHFC) tapped the covered bond market this summer, presenting investors with its second social covered bond for which the proceeds were allocated to housing welfare in the country.