Covered Bonds

Bank of America was meeting covered bond investors this week ahead of its debut issue, which ABN Amro, Banc of America Securities Ltd and Deutsche Bank are expected to launch in the next fortnight.

Westfälische Landschaft Bodenkreditbank launched its first pot-style jumbo Pfandbrief, a Eu1bn seven year public sector deal.

Depfa ACS Bank showed just how fast US demand for covered bonds is developing this week, by issuing a $1.25bn 30 year deal — the first significant 30 year covered bond in dollars — and placing 88% of the paper with US investors.

Sweden is unique in having two covered bond markets — the large domestic bostadsobligationer market and the brand new, internationalised säkerställda obligationer. The euro denominated market has got off to a flying start since October, helped by investors' urgency for credit diversification and a favourable basis swap.

Thanks to HBOS and Washington Mutual, the dollar market has become a genuinely deep source of capital for European covered bond issuers. With 50 US investors joining HBOS's $3bn 10 year bond in February, America is now the place to go when roadshowing deals.

Thanks to Caisse de Refinancement Hypothécaire and BNP Paribas, the French obligation foncière market now has some competition in the shape of structured covered bonds. Some have applauded the arrival of the technique to France, saying that it brings more flexibility to issuers. However, others have derided these moves, claiming that they merely make France the most complex jurisdiction in the world.

Achmea Hypotheekbank was a pioneer of structured covered bonds, but its original structure missed the mark and only reached high single-A ratings. At the beginning of this year it unveiled a new, all-singing, all-dancing triple-A structure. The first issue found overwhelming demand.

The importance of the rating agencies to the covered bond market — directly, through their ratings, and indirectly through the crucial role they have been given under Basel II —means they remain the most powerful and relevant arbiters of credit quality and structuring technology in the market.

One unknown that has made forecasting how much issuance there is likely to be of jumbo covered bonds in euros in 2007 more of an art than a science is the dollar market.

Portugal's covered bond market is always going to be one of Europe's smaller ones — but the country's issuers are determined that it should be seen as perfectly formed. Legislation took years to come to fruition, but since Caixa Geral de Depósitos began issuing in November, investors have been able to try out for themselves what the Portuguese say is a state-of-the-art framework.

Can 2007 match 2006, a vintage year for covered bonds? With the technique spreading around Europe and, of course, the US, expectations at the beginning of the year were high that 2007 would be the biggest yet. However, supply in the first few weeks of the year has disappointed, forcing market participants to scale down their forecasts.

While Spain's cédulas hipotecarias are issued under a statutory framework, the country's legislation has been regarded as the weakest among the major covered bond markets since the product's internationalisation began in 1999.