The introduction of covered bonds will add a new source of securities with an AAA-rating, the highest credit rating available, but they are not risk free and could negatively impact the domestic banking sector, Tyndall warns in a white paper.
Although the new bonds come with a strong credit rating, investors must remember that the debt is not government guaranteed, Tyndall Investments head of credit John Sorrell said.
"They offer investors further high quality credit investments, but investors must remember that they are still bank debt and not a direct substitute for government guaranteed bank debt," Sorrell said.
The bonds also have limited liquidity. "Risks are not completely removed since the assets are correlated with the issuer and are long-dated illiquid assets," Tyndall senior credit analyst Ileria Chan said. Possibly for trading as early as late 2011, the bonds differ from common bonds in that they are backed by a group of loans other than the pool from which they were created. They originated in the European bond market and embraced in 2006 in the United States, although the global financial crisis has slowed down the development of the market there.
Covered bonds could have an indirect negative effect on the market, as they have the potential to create further disparity between funding options of the major banks as well as those of small and mid-sized banks. "While the introduction of covered bonds in Australia is a strong positive for the major banks, they may weaken, rather than enhance, competition in the banking sector and could further widen the funding access gap between the major and the second tier banks," Sorrell said. "Covered bonds may also cause consequences for senior debt holders and bank depositors, leading to potential conflicts and regulatory risk," he said.
Sorrell said that the Tyndall fixed interest team will itself consider covered bonds as a potential sector for investment, depending upon pricing and liquidity.
