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Commerzbank AG (CBK) sold Europe’s first covered bonds backed by loans to small- and medium-sized companies instead of the safer real estate or public-sector debt traditionally used in the 250 year-old market.
BlackRock Inc. (BLK), which oversees $3.8 trillion as the world’s largest money manager, said using SME loans to back covered bonds risked devaluing the asset class, while Pacific Investment Management Co. said the notes may not qualify for benchmark indexes. While investors expressed doubts, banks are keen on the notes because they’re seeking new debt to package into covered bonds after Europe’s property meltdown.
“Commerzbank should be a good deal,” said Richard Kemmish, the head of covered bonds at Credit Suisse Group AG in London. “Similar deals,” may follow from “other countries such as Italy, where the SME sector is very important for the economy,” he said.
Commerzbank, Germany’s second-biggest lender, issued 500 million euros ($661 million) of the five-year bonds with an interest rate of 47 basis points more than the benchmark mid- swap rate. Barclays Plc, Credit Agricole SA and UniCredit SpA helped Commerzbank manage the sale.
Jozef Prokes, a London-based fund manager at BlackRock, said that SME-backed notes may not be true covered bonds. Timo Boehm at Pimco in Munich said investor appetite for the Commerzbank deal would suffer if they’re not included in indexes benchmarking the debt.
The bonds are likely to be rated Aa2 by Moody’s Investors Service, its third-highest credit grade, and an equivalent AA by Fitch Ratings, said a person with knowledge of the deal, who asked not to be identified.
More than 75 percent of the SME loans backing Commerzbank’s notes will be high-yield debt, according to a presentation for the 5 billion-euro program set up to issue the bonds in December. The issuer guarantee that’s a feature of covered bonds helps the securities obtain their investment-grade ratings.
The deal received “positive feedback” from investors, Karsten Swoboda, a spokesman for Commerzbank in Frankfurt, said before the issue was completed. The pricing ranks between that for a Pfrandbrief issue, or German mortgage-backed covered bond, and a Commerzbank unsecured note, he said.
Covered bonds started in 1769, when Prussia’s King Frederick let aristocrats, churches and monasteries raise money by pledging their estates as security. Denmark followed suit after the 1797 fire that destroyed Copenhagen.
Fitch Ratings said that “at least two other issuers” are considering SME loan-backed covered bonds, without naming them.
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