Covered Bonds

Coventry Building Society (CBS) has set up a second covered bond programme that is secured exclusively on the mortgages originated under its buy-to-let Godiva platform, which had previously been funded through its Mercia RMBS programme. Although the covered bonds require more collateral to reach the same rating, they offer greater funding flexibility as they can be pledged for repo and are eligible for the liquidity coverage ratio.

The Monetary Authority of Singapore (MAS) has substantially increased its covered bond issuance limit which had stood at 4% of assets on an issuer’s balance sheet. This, along with very strong market conditions, should help to induce the country’s borrowers, which have not printed in euros for more than two years, to make an appearance before the year is out.

Aareal Bank issued a short six year Pfandbrief on Wednesday at a deeply negative yield and with a negative concession. Investor demand was impressive, illustrating that Pfandbriefe, twinned with Aareal’s loan origination standards, were sufficient to offset any concern over the hotel and retail exposures in its collateral pool. At the same time DZ Hyp has mandated leads for an eight year Pfandbrief.

A proposed change to the Pfandbrief law introducing a soft bullet maturity is designed to harmonise Germany’s covered bond regime with the rest of Europe’s, as envisaged under the EU’s Covered Bond Directive. However, it could highlight the vast differences in how soft bullet covered bonds are repaid following extension triggers.

The impact of Covid-19 lockdowns on the hotel and retail loans securing German Pfandbriefe is likely to present serious challenges. But conservative lending and high interest rate coverage ratios provide solid protection, so managing a prospective rise in risk-weighted assets will likely be the bigger challenge for certain issuers, said bankers on Tuesday.

The technical outlook for covered bonds had always been supportive, but after it emerged that newly mandated EU bonds were trading sharply higher in the grey market on Monday, traders were even more confident, especially for deals in the ultra-long end of the curve, such as CFF’s transaction issued on Monday.

Compagnie de Financement Foncier (CFF) was able to raise €500m of 15 year funding flat to its curve on Monday. But, in anticipation of the EU's 10 and 20 year dual tranche mandate, announced the same morning, investors of the first negative yielding 15 year covered bond showed a degree of price sensitivity.

Despite the Eurozone covered bond market’s huge size, its inherent liquidity is dwarfed by much smaller sectors outside the trading block — effectively meaning ‘the market’ is slowly but surely becoming impotent.

FIG borrowers may be well funded, but rates are low and market conditions are good enough to support opportunistic issuance — as was shown this week by a slate of deals across the capital structure. Given a volatile end to 2020 is likely, issuers will need to stay alert and take advantage of funding windows as they arise, write Frank Jackman and Bill Thornhill.

The European Commission has unveiled bold plans to promote the renovation of existing housing stock in a bid to improve energy efficiency and so cut EU’s carbon footprint and provide a much-needed stimulus to the economy. At the same time, the European Covered Bond Council is implementing its energy efficient mortgage plan that aims to improve the supply of collateral securing green covered bond issuance.

After an extensive marketing period, done with the intention of issuing a benchmark sized deal, Bausparkasse Schwäbisch Hall’s first Pfandbrief, issued on Thursday, attracted more demand, at a tighter spread and a longer duration than a Pfandbrief its compatriot building society, Wüstenrot Bausparkasse, issued this week.

Bausparkasse Schwäbisch Hall (BSH) mandated leads for its debut covered bond on Wednesday. The benchmark sized deal will take advantage of the strong demand seen for Tuesday’s Pfandbrief from German building society peer, Wüstenrot Bausparkasse.