Bond holders fear new debt forms

BOND investors are worried about the surge in banks issuing secured funding such as covered bonds, which push other securities down the creditor pecking order, a survey by ratings agency Fitch has found.

Almost 90 per cent of managers responsible for an estimated £2.4 trillion of fixed income assets are concerned that their existing debt will be structurally subordinated due to the increasing popularity of asset-backed loans.

Around 71 per cent of those surveyed said they were “moderately concerned” by the prospect, with a further 16 per cent “very concerned”.

Banks have rushed to issue regulator-friendly securities such as covered bonds in recent months in order to de-leverage their balance sheets.

Covered bonds are particularly secure, as their underlying assets remain on the issuer’s balance sheet, giving the creditor access to the pool if the selling bank hits trouble.

The combined value of covered bonds issued in Europe passed £1bn in the first-quarter of the year.