THE three Singapore banks are gearing up to sell the first covered bonds in Singapore, with the maiden issuance expected to occur as early as this year.
Popular in Europe and Australia and targeted at institutional investors, these are bank bonds backed by a specific asset pool like mortgages that sit on the issuer's balance sheet.
Industry experts said a typical covered bond issue is usually between about $500 million and $1 billion, with a yield of about 1.5 per cent to 5 per cent and a tenure of five to 10 years.
"We expect the first covered bond issuance to take place this year," United Overseas Bank chief risk officer Chan Kok Seong told The Straits Times.
But he added that how soon this happens would depend on external considerations, such as further regulatory, legal and tax-related clarifications, as well as the finalisation of the rating agencies' assessment of the bond.
There is a market potential for Singapore banks to issue around $25 billion to $30 billion of such bonds, said DBS Bank's structured debt solutions head Colin Chen. He added that this was calculated based on Monetary Authority of Singapore (MAS) rules that limit the amount of assets backing the debt to 4 per cent of a bank's total assets.
Bankers expect covered bond issuances by local banks to hit $10 billion in the next three years.
"Institutional demand for covered bonds issued by the three local banks would be strong, (given) the strong credit ratings of Singapore banks," said OCBC chief financial officer Darren Tan.
Having such bonds will allow Singapore banks to further diversify their funding sources and reduce such costs, he added.
Covered bonds are increasingly used by banks in other countries as a funding instrument, in addition to deposits and senior issuances, he said.
Mr Chan said: "The bonds offer yields that are commensurate with the lower-risk profile and are suitable for investors holding a long-term view, as well as those wanting to diversify their portfolio by adding an alternative asset class."
If the bank defaults on its payment, investors will have recourse to both the pool of assets and the bank. Most covered bonds are backed by residential mortgages originated by the bank.
Since the global financial crisis in 2008, governments from several countries, including South Korea and Australia, have introduced covered bond rules to facilitate bank borrowing.
Likewise, MAS has allowed banks incorporated here to issue covered bonds, and has put in place key rules. A consultation paper was released in 2012, and response to the feedback received was given in December last year.
Unlike the infamous collateralised debt obligations (CDOs), which triggered the global financial crisis in 2008, covered bonds are regulated by central banks and rules are in place to govern risk management adequacy, disclosure and reporting.
CDOs are securities backed by a pool of bonds and loans, including mortgages and other assets.
Covered bonds originated in the 18th century in Prussia and Denmark, and industry players said there have been no defaults in their long history spanning more than 200 years.
The bonds were one of the first markets to rally following the 2008 financial crisis, given the security provided by the cover pool.