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Ceturtdiena 22.02.2018 | Name days: Rigonda, Adrians, Ārija

Spain lures investors with juicy yields

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Despite the raging eurozone debt crisis, investors can earn juicy yields purchasing covered bonds secured on Spanish mortgages, says Neil Unmack, financial expert and Reuters columnist.

“The snag is that no one can really tell what would happen in a covered bond default,” he says.

According to him, it is hardly possible not to be tempted by the yields on some Spanish mortgage covered bonds that have a priority claim on the banks’ real estate loans.

“Take Bankia, the soon-to-be-recapitalised lender, whose such bonds maturing in May 2018 are yielding almost 9 percent, according to Thomson Reuters prices, about three percentage points more than Spanish government securities,” the expert stresses.

Unmack points out that yields would drop if the eurozone met its promise to establish a banking union, where lenders are centrally regulated and recapitalised.

“Even if that doesn’t happen, it’s hard to see covered bonds taking a principal loss. Euro zone governments are still wary of forcing losses even on unsecured bank creditors – they recently shied away from it in Spain’s bank rescue. Haircutting covered bonds would be much more controversial, since the securities are revered as risk-free in Germany, where they were invented.”

He points out that even if a bank failed, the bonds would be protected by the assets that would be sold to meet maturing debt.

“Take Bankia. At the end of the first quarter, each euro of its covered bonds was backed by 2.08 euros worth of residential and commercial real estate loans according to Moody’s. Assume a stressed scenario similar to the Irish housing downturn, as modelled by Fitch Ratings. The collateral would still fetch enough to cover 111 percent of the debt, even after deducting expected losses from defaults and assuming each loan had to be sold for 70 cents of its nominal value.”

However, the financial expert also points to some factors that should be taken into account.

“First, the amount of collateral backing the bonds is not set in stone; it would reduce over time before default, say if a bank issued lots of covered bonds to the European Central Bank. Second, it’s hard to see who would buy the loans in an extreme, systemic crisis. Losses could be even steeper if Spain left the euro.”

Current yields can indeed provide ample compensation for those risks, but given the uncertainties, investors must be confident that Spain can avoid the worst, according to Unmack.

Ref: 103.105.105.2077


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