Covered Bonds

It might seem unbelievable now, but when Abba went on their inaugural European tour in 1974 a lack of demand meant that their first German concerts were not sold out. But Sweden’s four euro jumbo covered bond issuers faced no such problems last week, with German investors applauding their harmonious approach.

The euro market has been closed to US issuers since the subprime crisis struck and European issuers have stayed at home after their successful transatlantic visits in early 2007. But the turmoil has made the US authorities look again at the merits of covered bonds and the noises coming out of Washington are encouraging.

Tight pricing, liquidity, security — the covered bond has never had a problem convincing the market of its benefits. But in the post-crisis capital market these virtues are even more important. With the capitulation of securitisation, and RMBS in particular, and higher costs in the senior unsecured market, a rush of new issuers is expected, as long as the bitter disagreements over market-making can be resolved.

The performance of Ireland's mortgage asset covered securities during the past few months backs up the view of OSFI Canada’s Gilbert Ménard that legislation is not enough to guarantee that a jurisdiction trades at the tight end of the covered bond market, even if it initially appeared to be.

The German financial supervisory authority, BaFin, said at last Thursday’s European Covered Bond Council plenary session that it is very much against the introduction of aircraft Pfandbriefe, according to Deutsche Bank research.

The covered bond market found a rare moment of unity this morning, with market participants joining their voices in chorus to describe their fears, with the market set to go from “bad to worse” according to many. The fall of covered bonds as one of the last funding strongholds is set to spark a flight to quality from investors and further widen spreads.

The Investment Management Association has welcomed the final version of the UK’s Regulated Covered Bond framework, which came into force yesterday (Thursday). Its call for HM Treasury to rethink the initial draft was a key driver in the delay in implementation from the original January 1 target and its rewrite.

SEB AG priced its Eu1bn two year public sector Pfandbrief at 7bp through mid-swaps this morning, but some syndicate officials involved warned that similar issuers should not follow the bank’s example of using the retention format, particularly if the turmoil elsewhere in the covered bond market finally infects the German product.

“Do we have a near future?” Not the response we normally get when asking if there will be any issuance in the near future, but this unique answer summed up sentiment in the market this morning.