Bloomberg News

Dexia Covered Bond Rates Overestimate Risk, Morgan Stanley Says

October 13, 2011

Oct. 13 (Bloomberg) -- Covered bonds sold by units of Dexia SA, the lender being rescued by Belgium and France, are trading at “excessive” yield spreads that belie the quality of the loans backing the notes, according to Morgan Stanley analysts.

Dexia Municipal Agency’s covered bond program is secured mostly by loans to French public authorities, which account for 64 percent of the collateral pool, Leef Dierks, a London-based analyst at Morgan Stanley, wrote in a note to investors. Loans to German borrowers comprise 67 percent of the assets backing covered bonds issued by Dexia Kommunalbank AG, he wrote.

Dexia Municipal Agency’s 1 billion euros ($1.4 billion) of 3.75 percent covered bonds due 2016 yield 230 basis points more than swaps, compared with 91 basis points in May when the notes were sold, according to data compiled by Bloomberg. The spread on Dexia Kommunalbank’s notes due 2014 has widened to 156 basis points, a five-fold increase since the debt was priced in May.

“We believe the current spread discount to be excessive given the geographical composition and the over- collateralisation of the respective collateral pools,” Dierks wrote in a note published yesterday. “Despite the elevated uncertainty and possible rating actions ahead, we recommend overweighing” the notes sold by Dexia’s units.

Belgium, France and Luxembourg provided a 90 billion-euro, 10-year guarantee to cover Dexia’s funding needs on Oct. 9. The Belgian government is buying Dexia’s national consumer lending unit for 4 billion euros, while France’s Caisse des Depots et Consignations and La Banque Postale are in talks to take over the bank’s French municipal lending unit.

Covered bonds are secured on mortgages or public-sector loans and guaranteed by the issuer.

--With assistance from Ben Martin in London. Editors: Andrew Reierson, Paul Armstrong

To contact the reporters on this story: Esteban Duarte in Madrid at

To contact the editor responsible for this story: Paul Armstrong at

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