Covered Bonds

HSBC UK Bank plc has set up a UK covered bond programme which, in contrast to its previous one, sits inside its ring-fenced entity and is likely to be used for distributed issuance.

The financial markets’ stance on climate change has taken a stride forward as 43 asset managers with $23tr of assets including some of the biggest such as BlackRock and Vanguard have joined the Net Zero Asset Managers’ Initiative. A critical mass of investors is now committed to reducing carbon emissions in their portfolios to zero, meaning that companies can be in no doubt which way they have to go if they want to maximise their potential investor base.

The polite world of sustainable finance has collided with the ugly reality of politics in the past week, as open strife has broken out over the European Union’s sustainable finance legislation, especially the Taxonomy. Conservative and progressive elements are battling over a host of issues, above all whether gas power should ever be classed as sustainable, and the validity and even legality of the Taxonomy is being called into question.

Financial institutions bond bankers are hoping to build back better in April after coping with a tumultuous end to the first quarter. They say the holiday season and a recent back-up in yields will combine to create the perfect conditions for a long-awaited credit rally.

The final text of the European Commission’s draft Taxonomy of Sustainable Economic Activities has been described as a positive compromise. But one funding official has described it as untenable and unable to promote green covered bond issuance.

Julius Baer ventured into the Swiss franc market this week to sell its debut operating company bond, raising Sfr260m ($276.9m) in an investor diversification exercise. It was joined by Pfandbriefzentrale, which saw demand skewed to the long and short ends of its latest multi-tranche covered bond offering.

The European Union’s final draft Taxonomy of Sustainable Economic Activities came in for heavy criticism from a European bank's head of funding on Thursday, who said that the compromise wording would torpedo the market for green covered bonds.

The Covid pandemic has delayed a lot of progress in the capital markets, but bankers say the industry is still on track to meet Libor transition deadlines. Investors have consented to the Bank of Nova Scotia transitioning the basis of its sterling covered bond from Libor to Sonia, while Westpac is seeking consent.

Axa Home Loan SFH issued the only covered bond of the week on Wednesday, when it surfaced with a €250m tap of an old 15 year deal. The transaction underscores the impression that a flood of retained issuance used for central bank funding is negative for distributed supply. Yet, there is still hope that the situation will improve in the second half of the year.

A transition of the Spanish covered bond regime should be done in one fell swoop akin to a "big bang", argued delegates at GlobalCapital's virtual covered bond roadshow on Tuesday.

Tagging assets to liabilities is a critical exercise for covered bond issuers, particularly when it comes to their ESG paper. Start-up mortgage lender Perenna is working with Tao Solutions to create a verifiable audit trail with technology that automatically matches green covered bonds to the appropriate mortgage loans.

Europe's high grade corporate bond investors are becoming more sensitive to price, as inflation and European lockdown worries rattle nerves. Orderbooks have fallen away during the pricing process, making it more difficult for issuers to tighten far from initial price thoughts.