Covered Bonds

Covered bond bankers have swept aside a series of negative reports on the outlook for the mortgage market from the European Banking Authority, European Central Bank and rating agencies, arguing that covered bonds will remain unassailable, come what may.

Santander UK has requested investors’ consent to alter the terms of four sterling covered bonds from referencing Libor to Sonia. The borrower will use the same method it used when converting its additional tier one notes for the fixed rate deals, while changing the floating rate notes will be a simpler task.

The first move has been made to consolidate the alphabet soup of industry bodies that try to raise standards in corporate reporting on environmental, social and governance issues — an essential feedstock for responsible investing. More mergers are likely as the private sector races to strengthen its influence before regulators take control.

Spanish pharmaceutical bank specialist, Bancofar and its parent, Banco Caminos, which provides finance to civil engineers, have set up small covered bond programmes that have been assigned an Aa1 rating by Moody’s.

Covered bond traders are paring back inventory as they approach the end of the year, though there are a few sectors of the market where they intend to hold positions. High redemptions in the first half of the year will support spreads but January’s issuance glut may not see a rise in new issue premiums.

The outlook for Asian covered bond supply will have improved slightly in the wake of Tuesday’s deal from United Overseas Bank, particularly among Singaporean lenders. But issuance from Australia and New Zealand is expected to be more limited, reflecting their banks' priority to get ahead with regulatory funding.

After a decade of slumber, the market for euro-denominated Hungarian covered bonds could be poised to reopen. Hungary covered bonds may have a low country ceiling credit rating but the market is well protected and could offer positive yields.

United Overseas Bank revitalised the moribund Singaporean covered bond market on Tuesday with the first euro deal in two years and the largest from a Singaporean issuer. The bonds attracted record demand and were priced inside UOB’s curve, showing the extraordinarily receptive state of the market.

As the UK approaches the end of its Brexit transition period there are growing expectations that a trade deal will be struck with the EU. It is hoped that that will contribute to the factors driving spreads tighter on UK covered bonds.

United Overseas Bank has mandated leads for the first euro covered bond benchmark from a Singapore lender since September 2018. The deal takes advantage of the Monetary Authority of Singapore’s (MAS) recent decision to increase covered bond issuance capacity.

Dutch issuers are warming towards soft bullet covered bonds, with several having already launched deals with the structure this year, as part of a move away from conditional pass through (CPT) issuance.

Rabobank sold the largest 20 year covered bond of the year at the tightest spread it has ever achieved in that tenor on Thursday, illustrating superb market conditions.