A brief look at what’s on International Treasurer’s radar screen. 

Several issues came out of the International Treasurer weekly editorial meeting. These include a continued look at Greece and the possible fallout if it leaves the eurozone, covered bond use, and a look at the resurgence of CSAs.

Greece.
As part of a recent presentation at the Treasurers’ Group of Thirty-2 Spring Meeting, meeting sponsor Deutsche Bank cautioned the group to watch for the next major Greek headline sometime in June as the results from the next election become known. As most observers know, the results from the most recent elections were much more negative than expected, with nearly 70 percent of voters choosing “anti-austerity” as their preferred route to recovery.

The two main incumbent parties experienced significant losses with both PASOK (Socialist) and New Democracy (Conservative) getting only 32 percent  of the vote, compared to 77 percent in 2009. Therefore the anticipated outcome of the coming elections points to the possibility of a surge in the popularity of the left wing anti-austerity Syriza party, which is likely to force a renegotiation of existing treaties, and a significant increased risk in Euro-exit. 

Whether any one of the “new” parties can build a legitimate government and drive Greece through the necessary steps of debt restructuring and/or modified austerity programs to bring Greece back to economic and financial stability?  Many believe the legitimacy of the new government will continue to be a source of significant global volatility for many months to come. 

Covered bonds. Some companies are beginning to explore whether to allow covered bonds in their portfolios. Covered bonds, what the FT recently called a “centuries-old mainstay of the European markets,” were just recently given a boost after the Securities and Exchange Commission loosened restrictions on who can buy the debt. It was part of a response to the Royal Bank of Canada, which wants to start issuing them in the US.

“The Bank believes that covered bonds would provide an attractive investment alternative in the United States, and therefore believes that conducting a covered bond offering on a registered basis would greatly facilitate the introduction of the product in the United States,” the bank’s representatives wrote in a letter to the SEC.

A covered bond offers the holder dual recourse. Under normal circumstances a bond is backed by one of two ways, collateral or by a guarantee from the issuer. A covered bond on the other hand is backed by both. For example, a covered bond issued by a bank is backed by mortgages on that bank’s balance sheet, as well as by the solvency of the bank itself. If the bank goes under, the covered bond holder has a claim to the mortgages. If the mortgages then fail, the bond holder has a claim on the bank.

Prior to the latest SEC action, sales of the bonds in the US had been restricted only to qualified institutional investors under SEC rule 144A, which governs securities sales and places a cap on demand for the debt.

For those companies that already do use covered bonds, many take a very conservative approach and apply certain credit rating criteria as well as issuer limits. Companies also have done their research on the various and differing rules around Europe concerning covered bonds. We’ll take a look at how (and whether) these assets may or may not work in US corporate portfolios. 

CSAs.
Many treasurers across a variety of sectors within The NeuGroup universe have been implementing CSAs or tightening the thresholds on their existing CSAs. This has been a result of the post-crisis (read post-Lehman) environment that has often threatened the solvency of many banks. The renewed interest in CSAs has also been driven by changing pricing methodologies for existing and new swaps with uncollateralized counterparties. Also accelerating the CSA trend is that those methodologies will be heavily influenced by coming regulation (Basel 3 capital requirements, etc.), which will add additional costs on derivative execution for banks.