29/05/2015 02:00 AST
Credit markets in Europe are so distorted that investors are demanding assurances they won’t have to pay borrowers for lending money after key benchmark interest rates turned negative.
Debt issuers from Volkswagen to a subsidiary of Rabobank are inserting clauses into their deal documents to protect creditors from having to pay if rates on their investments fall below zero. The euro interbank offered rate, which is dropping, is a benchmark for a notional amount of more than $180tn of debt including asset-backed securities, corporate loans, floating-rate bonds and exchange-traded derivatives, according to the European Money Markets Institute.
The European Central Bank’s unprecedented stimulus measures are warping credit markets and causing confusion for investors. While holders of Banco Popular Espanol’s asset-backed bonds weren’t asked to make a coupon payment in April after rates dropped below zero, Stockholm-based Nordea Bank said this month it plans to charge investors on some new mortgage bonds should that happen.
“The concept of an investor paying rather than receiving a coupon is unprecedented and illogical,” said Tracy Chen, a Philadelphia-based money manager at Brandywine Global Investment Management, which oversees $66bn of assets. “Investors want to know if they will have to raise cash to make this payment.”
Volkswagen has packaged leases on its cars into bonds for the past 19 years and inserted a clause safeguarding investors for the first time last month. The Wolfsburg, Germany-based automaker’s 1.03bn euros of asset-backed bonds included terms stating holders won’t ever be required to pay interest.
Euribor fell below zero this year for the first time since Bloomberg started collecting the data at the end of 1998. The three-month rate crossed the threshold in April and is at a record-low of minus 0.013%, while the one-month gauge is at negative 0.054%, according to the European Money Markets Institute.
“We want to give investors comfort about what’s going to happen,” said Stefan Rolf, head of asset-backed securities at Volkswagen Financial Services in Braunschweig, Germany. “That’s why we included a clause for first time to make clear that we will never ask investors to pay us interest.”
In Denmark’s covered bond market, Europe’s second largest, investors in new deals may not be protected. Nordea said last week it plans to charge buyers of new adjustable-rate mortgage bonds should their interest rates drop below zero, while Danske Bank’s mortgage unit said it plans to “eventually go down the same path.” Mortgage notes issued by Nordea before May 19 will be protected by a zero-rate floor, the bank said.
The six-month Copenhagen interbank offered rate, a reference rate for covered securities in the country, went negative for the first time in February, before turning positive again in March. The rate was 0.0267% on May 26, according to data compiled by the Danish central bank.
BMW added a provision for the first time to protect investors when it sold 400mn euros of bonds backed by car leases on May 13.
“We believe that a zero-coupon floor is currently needed to successfully place an ABS transaction and will become more and more common in such transactions,” Nikolai Glies, a Munich- based spokesman for BMW, said in an e-mailed response to questions. “Given the current negative short-term interest rate, investors were demanding such a floor.”
Rabobank included similar clauses in four Dutch residential mortgage-backed securities it helped arrange since September, according to Mirjam Bos, who focuses on securitisation as an executive director in the lender’s markets division in Utrecht, Netherlands.
“Outstanding deal documents are not clear about what happens when the floating coupon is negative, so we’ve have had some questions about that from investors,” Bos said in a telephone interview.
Bloomberg
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