Covered Bonds: Soft-Bullet Maturities Emerge in Spain
In January 2023, two of the top three Spanish covered bond (CB) issuers, placed benchmark CBs that benefitted from a 12-month maturity extension (soft bullets).-- These issuances confirm the trend observed during the second half of 2022, when all CB issuances placed by Spanish banks included this extension feature, at that time a novelty in the Spanish CB market.
-- DBRS Morningstar’s assessment of soft bullets is credit positive when the extension applies to all outstanding issuances.
-- However, the combination of soft bullets with hard bullets in a CB programme, together with the legal uncertainty about the liquidity required to maintain for these soft-bullet structures, may pose some risks.
“An extension period of a soft-bullet bond may be reduced if a hard-bullet bond matures within this period as the latter becomes due and it cannot be repaid earlier,” observed Tomas Rodriguez-Vigil Junco, Vice President of European RMBS and Covered Bonds at DBRS Morningstar.
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