The credit crunch continued to take its toll on the financial world yesterday as two French banks were forced to buy out a monoline bond insurer and concerns reverberated about the unprecedented shutdown of the $2.8trn (£1.4trn) covered-bond market.
Banque Populaire and Caisse d'Epargne, which control the French lender Natixis, will inject about $1.5bn into CIFG, Natixis's monoline insurer, to shore up its credit rating.
The credit crunch has threatened the survival of monolines, which provide guarantees for the structured securities whose losses triggered the market crisis. If the credit ratings of CIFG and other monolines were downgraded, the securities they guarantee could have their ratings cut, triggering a fresh sell-off of the assets.
Moody's and Fitch are reviewing other top-rated monolines to see if they have enough capital to justify their ratings. Without the guarantees the monolines provide, $2.4trn of securities could fall in value and some issuers would be unable to find buyers.
The monoline rescue came as industry sources said the closure of the market for covered bonds – intended to allow stability to return – could have the opposite effect. Traders and issuers of the bonds, which are backed by mortgages, have shut the market until Monday after pricing became unsustainable. They hope the closedown will allow stability to return. The European Covered Bond Council, which represents traders and issuers of the securities, has for the first time advised banks not to trade, after rates demanded by buyers rose to the highest for at least 12 years.
An industry source said: "It is not necessarily disastrous, but the securitisation market has closed and this is another leg gone. To have a commission that is responsible for trading in a market to suspend it for such a long time is pretty much unprecedented. Suspension of a market could endanger confidence in that market."
Covered bonds, which are securities backed by assets such as mortgages, originated in Germany and are the main source of finance for mortgage banks in continental Europe. A version of the bonds has become increasingly popular in the UK in recent years after HBOS issued the first British covered bonds in 2003.
Investor appetite for covered bonds had held up until this week, three months after the market for securitised assets shut when the credit crunch hit. Unlike securitised assets, covered bonds remain on a bank's balance sheet, allowing the buyer to claim against the issuing bank but still ring-fencing the underlying assets if an issuer goes bust.
The market had continued to trade after others froze up in August because covered bonds were bought by a different group of investors who viewed them as more like bank debt. But fear has spread through the market and buyers of the bonds were demanding uneconomically high returns to take on the risk.
Investors are steering clear of securities linked to mortgages because of fears of losses caused by infection from the US sub-prime crisis. The trigger for the shutdown in covered bonds was Abbey National's scrapping of an offering on Tuesday, the third cancellation in a week. The others were an arm of Allied Irish Bank and an investment unit controlled by Spanish savings banks.
UK banks, including Northern Rock, have used the bonds to raise capital. Other British _issuers have included Bradford & Bingley and Lloyds TSB.
The Commons Treasury Committee is to hold a series of sessions to grill players in the credit crunch, starting on 4 December.Reuse content