Covered Bonds

The arrival of the first US issuer, Washington Mutual, has opened a new era in the covered bond market. So far it is only one deal — but already market participants are looking forward to a much bigger and broader market, with more demand from US investors, possibly new kinds of collateral, and a potentially limitless supply of US mortgage assets.

Two landmark deals at the end of 2006, by HBOS and Washington Mutual, marked a turning point in the history of the covered bond. After months of speculation and anticipation, finally the covered bond — a cornerstone of the European debt capital markets but virtually unknown in the US — had broken into a new and potentially vast investor base. While the outlook is positive, concerns of market fragmentation and conflicts with the existing US investor base for mortgage backed securities means there is much work to do to fully capitalise on this fledgling market.

Nationwide launched the largest ever UK covered bond this week, a Eu4bn issue split into equal five and 15 year tranches that attracted Eu11bn of orders, while an ABN Amro Bank Eu1.5bn 10 year deal generated Eu5.7bn of demand.

Merrill Lynch is understood to have hired Sabine Winkler from ABN Amro in Frankfurt as banks compete for what is becoming an increasingly scarce resource: experienced covered bond analysts.

Commerzbank has tightened the reins on its subsidiary Eurohypo and Hypothekenbank in Essen, of which it owns 51%, by creating a capital markets committee to coordinate the funding of group members.

The covered bond market faced its biggest test of the year this week, with the launch of six issues totalling Eu8bn, but proved more than up to the challenge as each transaction sold out rapidly.

The euro covered bond market took a back seat to the dollar market this week, but supply will pick up next week as Achmea Hypotheek, Hypothekenbank in Essen and IM Cédulas 10 hit the market.

HBOS crossed a watershed in the relationship between covered bonds and the dollar market this week, by selling 78% of a $3bn 10 year mortgage covered bond to US investors.

Landesbank Baden-Württemberg underlined the strength of the covered bond market this week with the launch of what is believed to be the tightest ever jumbo, a Eu1.25bn four year public sector Pfandbrief priced at 7.5bp through mid-swaps.

Achmea Hypotheekbank plans to launch its first structured covered bond in February, making it only the second Dutch issuer after ABN Amro Bank.

DnB NOR could finally open the Norwegian covered bond market in April, with primary and supplementary legislation now expected to be in place by then.

The Swedish Covered Bond Corporation launched its third euro jumbo issue in as many months this week as conditions in the market continued to tempt issuers into launching opportunistic transactions.