Covered Bonds

The covered bond market, including possibly a new Spanish name in the pipeline, will be looking to get back on track next week after BN Boligkreditt pulled its inaugural deal at the start of this week. However, there is some doubt as to with which name, and how early, the market could be reopened, given that it is now clear that there is a lack of clarity on market direction on Mondays.

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The US novelist Gore Vidal famously remarked: “Whenever a friend succeeds, a little something in me dies”. Whilst the covered bond market isn’t being read the last rites, it has endured a quiet week after being sabotaged by a chaotic equities market, and has been forced to look on enviously as a close relation managed to price a Eu1.5bn deal.

With the euro jumbo market closed in the short term and suffering supply pressures in the medium term, certain issuers have been sounding out the possibility of dollar transactions. Whether anything is possible in dollars is, however, questionable.

Fitch Ratings has delivered its verdict on the legal framework for Italian covered bonds (obbligazioni bancarie garantite) in a research report published today. The rating agency is satisfied by the cover asset segregation in one of the two issuance frameworks, with further information awaited on the second. However, there are concerns at the lack of definition of the Bank of Italy’s (BoI) role as regulator.

The wild swings in the equity markets this week remain a roadblock to covered bond issuance, but there was guarded confidence from market participants today that this would prove to be a temporary setback. A resilient performance from most covered bonds in the secondary market appeared to support that view this morning.

BN Boligkreditt bowed to the inevitable late yesterday (Monday) and took the decision to postpone its first covered bond, a planned Eu1bn five year issue with guidance of the 15bp area over mid-swaps, after the covered bond market was hit by the shockwaves set off by yesterday’s sell-off in equities.

There has been speculation that BankInter and its leads are still trying to execute a transaction for the Spanish issuer in spite of the torrid conditions, with several market participants saying that they understood BankInter to be under time pressures in launching its inaugural cédulas hipotecarias, but The Cover understands that this is not the case, and that like other issuers with mandates outstanding, the banks is simply on the look out for opportunities.

Covered bond spreads, which held up well in the face of yesterday’s equity market falls, widened several basis points today. At the tighter end of the spectrum French obligations foncières were said to be some 2bp wider, and Spanish and UK issues about 5bp softer. Weaker German names with recent headline risk attached, such as WestLB and Hypo Real Estate, were said to have suffered, too.

Like other issuers to have tapped the covered bond market so far this year, DnB Nor paid up to access the market last week, but Thor Tellefsen, senior vice president of investor relations and long term funding at DnB Nor, told The Cover today that the price was worth paying.