WaMu covered bonds rally, pass key investor test
Al Yoon
NEW YORK, Sept 26 (Reuters) - Covered bonds issued by Washington Mutual Inc jumped on Friday after U.S. regulators affirmed the supporting assets would be assumed by JPMorgan Chase & Co, easing investor doubts of how the securities may be treated in a bank insolvency.
Yield spread premiums on WaMu (WM.N) covered bonds narrowed as much as 500 basis points to 100 to 300 basis points above the six-month Euribor benchmark, a dealer said, noting thin volume.
The Federal Deposit Insurance Corp, after inquiries from dealers, told investors that covered bond assets would be included in the WaMu debt acquired by JPMorgan (JPM.N) after the troubled Seattle-based savings and loan institution was shuttered by regulators.
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Taking covered bond assets, while leaving unsecured creditors out, provides a much-needed precedent for U.S. investors who will soon be asked to buy more of the debt, analysts said.
Investors have been wary that they would be too exposed to the financial health of the issuer, which ultimately backs payments on pools of loans supporting covered bonds.
"It's clearly differentiating senior unsecured debt from the covered bond debt," said Tim Skeet, managing director and head of covered bonds at Merrill Lynch & Co. in London. "A lot of investors had been saying 'what's the difference between the two.' Here's the answer."
The precedent is important in the U.S. where the government is encouraging four large banks to foster a market in covered bonds to funnel cash to the housing market.
Covered bonds are supported by pools of loan that remain on the bank's balance sheet, whereas traditional securitizations issue mortgage-backed securities from off-balance sheet trusts.
WaMu pioneered the program in the U.S. with euro-denominated issues in 2006. Bank of America Corp. followed -- issuing euro- and dollar-denominated bonds -- but investors questioning how the debt was structured and regulated largely abandoned the U.S. market as the credit crunch set in.
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Covered bonds are a main source of mortgage funding in Europe, dating back to the 18th century.
It's "positive for the formation of a U.S. covered bond market," Michelle Bradley, an analyst at Morgan Stanley, said in a client note. "The treatment of WaMu covered bonds should be a huge source of confidence for U.S. investors" who are not as familiar with the market as European buyers, she said.
The strength of the bank backing the cover pool will still factor into the price of the bond, however.
According to Fitch Ratings, assets covering WaMu bonds as of July were about 20 percent payment-option adjustable-rate loans, products especially prone to foreclosure as they allow balances to rise as home values fall.
Fitch Ratings upgraded its ratings on WaMu's covered bond program to "AA-minus" from "BBB-plus," and placed the outlook on "rating watch positive." (editing by Gary Crosse)
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