Covered Bond Watch – Achmea returns with conditional pass-through

by: Joost Beaumont

DISCLAIMER: This report has not been prepared in accordance with the legal requirements designed to promote the independence of investment research, and that it is not subject to any prohibition on dealing ahead. This report is marketing communication and not investment research and is intended for professional and eligible clients only.

  • Achmea Bank soon to return to the euro benchmark covered bond market
  • It has set up a EUR 5bn conditional pass-through programme…
  • …which was registered at the Dutch Central Bank at the end of October
  • The number of Dutch CPT issuers outnumbers the number of soft bullet issuers…
  • …although the volume of outstanding CPT deals equals 14% of Dutch total
  • Like all Dutch CPT structures, maturity extension only post-issuer event of default
  • The structure is rather similar to other Dutch CPT programmes…
  • …except for the documented OC and the minimum mortgage interest rate level
  • Achmea Bank has a balance sheet total of EUR 14bn, of which EUR 11bn mortgages
  • The average principal balance of the mortgages in the pool is relatively low…
  • ….while the WA indexed LTV of 73% is roughly in line with the average
  • First deal will be EUR 500mn (no-grow) with a 7y maturity
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Achmea Bank to become fifth Dutch conditional pass-through issuer

Achmea Bank is currently meeting investors for its return to the covered bond market. The bank has setup a new covered bond programme with a conditional pass-through (CPT) structure, which has replaced its previous non-registered covered programme. The last bond of this programme redeemed in August. The last time that Achmea Bank issued a euro benchmark covered bonds was ten years ago.

At the end of October, the bank received the official approval of the Dutch Central Bank when its new programme was registered in the central bank’s covered bond register. As such, Achmea Bank became the third new bank in the register this year (after Rabobank and NN Bank). What is more, the number of CPT issuers has now overtaken that of soft bullet issuers (five versus four). However, in terms of the volume of outstanding Dutch euro benchmark covered bonds in the iBoxx index, the share of Dutch CPT covered bonds remains limited to 14% (including the upcoming deal of Achmea Bank).

Overall, though, the Dutch covered bond market has grown rapidly in recent years. Now, the country counts nine covered bond issuers, which have EUR 40bn of benchmarks in the iBoxx index. This makes the Netherlands the 7th largest covered bond country in the index with a share of 5%. This year, the Netherlands ranks third in the euro benchmark covered bond issuance league tables, having issued EUR 8.75bn so far this year, which is some 9% of total new supply of euro benchmark covered bonds.

Achmea’s CPT structure stays close to other Dutch names

The new CPT programme of Achmea Bank looks rather similar to that of the other Dutch CPT issuers. The main similarities are:
• The maturity extension can only be triggered after an issuer event of default, which is materially different from other CPT structures (e.g. in Greece and Portugal)
• The programme is registered at the Dutch Central Bank and will therefore fully comply with the Dutch covered bond law (which was updated in 2015 in line with the EBA best practices).
• The programme size is EUR 5bn.
• The programme will be UCITS 52(4) compliant, while meeting the CRR Article 129 requirements. Therefore, the bonds should be eligible for a 10% preferential risk weight.
• The bonds should classify as level 1 asset in the LCR, being eligible in ECB refinancing operations, while being eligible for CBPP3 as well.
• The expected rating is Aaa/AAA at Moody’s/Fitch. Actually, it will be the first Dutch CPT programme rated by Moody’s.
• The maximum maturity extension is 32 years.
• The covered bonds will be fully backed by Dutch residential mortgages, of which the LTV will be capped at 80% in the Asset Cover Test in order to comply with the CRR.
Swapless; Achmea Bank’s CPT programme allows for swap agreements, but this seems only optional for now. Indeed, we expect that the issuer will not use swaps in the program for the foreseeable future, which would be in line with all other Dutch CPT programmes as well as some Dutch soft bullet programmes.

However, there are also some small differences between Achmea Bank’s programme and that of other CPT issuers:
• Achmea Bank did not include a documented level of OC, which implies that the minimum OC level will be equal to the 5% required by the Dutch covered bond law. This stands in contrast to committed OC in other Dutch CPT programmes, which ranges from 10% to 15%. Only Rabobank has also not committed to a previous set OC level. Overall, this means that Achmea Bank’s OC levels will be driven by the break-even levels set by the rating agencies.
• Indeed, the Asset Percentage will be 93.5%, which is in line with other CPT programmes, and translates to an OC of at least 7%.
• Still, we calculate that Achmea Bank will have some 40% of OC after having issued a EUR 500mn benchmark deal. This will be the highest Dutch OC level.
• Achmea Bank has not set a minimum mortgage interest rate level for a mortgage to be eligible for the cover pool. Mortgage interest rate levels have declined substantially in previous years, which induced other issuers to set minimum levels between 1% and 3%. Including a minimum level provides some safeguards against interest rate mismatches between the assets and liabilities. Having said that, it seems that Achmea Bank assumes that mortgage interest rates will overall remain well above levels of covered bond coupons.

Achmea Bank is also part of large insurer

Achmea Bank is part of the Achmea Group, which is the largest insurance group in the Netherlands. This is similar to Aegon Bank and NN Bank, which are also part of large insurers. Achmea Bank’s focus is on mortgage and retail savings products. The bank has a total balance sheet of EUR 14.2bn at the end of June this year, of which EUR 10.8bn residential mortgages. The bank’s CET1 ratio was 19.1%. The bank has a A/A- rating at Fitch/S&P, which is comparable to that of NN Bank and de Volksbank, while two notches below ABN AMRO and ING. As such, the bank would still have received a triple-A rating for a soft bullet covered bond programme, albeit at a slightly higher level of OC.

  

Relatively low average principal balance of mortgages in pool

The cover pool of Achmea Bank will include EUR 702mn of Dutch residential mortgages. The mortgages will have an average principal balance of EUR 137K, which is the lowest of all Dutch cover pools, which have an average principal balance of EUR 212K. Meanwhile, the WA indexed LTV ratio is around 73%, which is roughly in line with the 71% average in Dutch cover pools. The same holds for the seasoning of the residential mortgages ( Achmea 8.1yrs versus average of 8yrs). In fact the average LTV ratio in Dutch cover pools has come down significantly, from 84% in 2014Q4 to 73% now. This reflects the increase in house prices in recent years as well as the fact that the share of annuity mortgages in mortgage production has risen sharply.

  

Indeed, the share of redeeming mortgages is slightly higher than the average in Dutch cover pools. Having said that, at 58%, the share of interest-only mortgages in Achmea Bank’s cover pool is still the largest (as in most other cover pools). This is also slightly above the average share of 53%. The regional breakdown of the cover pool shows that most mortgages have been extended to households living in the region of Noord-Brabant (which is only also the case at the Volksbank), followed by Zuid-Holland and Noord-Holland. Finally, almost a quarter of the mortgages benefit from a national mortgage guarantee (NHG).

  

First deal will EUR 500mn (no-grow) 7y deal

Achmea Bank will complete the roadshow this week and already announced that it will return to the covered bond market with a EUR 500mn 7y deal (ABN AMRO involved in the deal). As such, Achmea Bank follows in the footsteps of NN Bank, which also debuted with a 7y deal. This deal was priced at ms flat, below guidance of ms +4bps. It attracted an order book of EUR 1.9bn. The deal is currently quoted at around ms -8bps.