Covered Bonds

Reform of the US government sponsored enterprises (GSEs) has always been considered a necessary precursor to establishing a US covered bond legal framework. But with the Covid-19 crisis and November’s presidential elections diverting attention, dollar covered bond issuance will remain dominated by foreign banks, with near term supply prospects likely to be determined by the cross-currency basis swap.

Negative yielding covered bonds, which are trading close to their tightest-ever spread levels, could become less attractive to bank investors relative to European Central Bank (ECB) deposits, which may soon become more generously tiered, and government bonds, where an increase in supply is likely, said bankers on Wednesday.

Moody’s has proposed changes to its covered bond rating methodology, with an update to the framework for valuing commercial real estate (CRE) properties, and on Tuesday it published a request for comment. A small number of programmes are likely to be downgraded by one notch as a result of the proposals.

The German covered bond market is famed for its stability but S&P has drawn attention to the diversity of its borrowers' cover pools, suggesting that their performance will begin to differ. One major investor said he favours bonds secured on residential loans, rather than commercial ones, as a result of prevailing economic conditions.

NordLB has promoted two bankers to its FIG coverage and SSA teams, and plans to make further external hires soon.

Germany’s Federal Ministry for Economic Affairs has improved a scheme guaranteeing export credit agency (ECA) loans, which could help boost the moribund public sector Pfandbrief market.

Germany is calling for bids for state-owned Depfa Bank, the once prolific issuer of Irish and German covered bonds whose parent, Hypo Real Estate, was taken into public ownership as a result of the 2008 financial crisis. There is little chance, however, that the transaction could see the issuer return to the covered bond market.

The European Commission’s best practice guidelines for the financial sector in handling the coronavirus crisis may challenge the safety mechanisms embedded in covered bonds, which have become fundamentally overvalued — especially in countries like Italy where payment holidays have been widely taken up — thereby instigating a sell recommendation from analysts at Barclays.

Italy’s €178bn covered bond market comprises a wide variety of structural nuances that are likely to prove critical to understanding underlying risks, especially when it comes to the way swaps are used and the methodology for asset coverage (ACT) and amortisation tests (AMT), said Moody’s this week.

The GlobalCapital Covered Bond Awards survey is now open and market participants are invited to take a look at the voting shortlists before casting their votes for this year’s best lead managers, issuers and deals.

Fitch played down fears about the impact of payment holidays on UK covered bond pools this week, arguing that high credit quality would offer a strong line of defence against defaults.

GlobalCapital’s Covered BondMarker shows that the five highest scoring covered bonds this year were all issued by French banks. And, based on the Covered BondMarker League Table, ING has, on average, joint lead managed more high ranking deals than any other bank in the past 12 months.