Covered Bonds

The stream of French covered bond deals was interrupted on Wednesday when KBC Bank returned to the market for the first time in more than two years to issue a long five year, priced slightly inside its own curve. The oversubscribed order book, reflected investor anxiety about the supply drought.

Mediobanca frontloaded regulatory issuance and completed its funding plan before the coronavirus crisis struck. While its corporate loan book has increased, deposit inflows have also improved which means the bank is in no hurry to return to the public market according to head of group treasury, Carlo Masini, and head of funding, Paolo Labbozzetta.

Michael Sansen, a trader specialising in public sector and covered bonds, has joined Citi after spending his entire career at ING.

Covered bond investors wasted little time in placing big orders on Tuesday for the largest ever green deal issued in Swedish kronor — a five year floating rate transaction secured on energy efficient mortgages from Sparebank 1 Boligkreditt (Spabol). At the same time, Credit Mutuel Arkéa issued a long 10 year with blow-out demand, reflecting a material concern that covered bond supply, net of central bank purchases and redemptions, will be deeply negative this year.

Lloyds Bank decided to tender some of its covered bonds in three major currencies this week in what it called a “prudent approach” towards its liquidity base. The move could prompt more issuance in the asset class this year in an effort to refinance some of the tendered securities, but it could also decrease liquidity at the short end of the curve, given the cheaper refinancing alternatives open to banks.

Bank balance sheets are set to expand and Intesa's will be no exception. It will mean an an increased reliance on central bank funding. But apart from this, the Italian bank's mix of funding is likely to remain unchanged from February with the emphasis on regulatory capital. But as Alessandro Lolli, head of group treasury and finance told GlobalCapital, the bank has great flexibility in navigating its capital raising during the pandemic.

The gush of central bank repo-eligible supply in the covered bond market has reduced collateral protection by more than 50 percentage points, in some cases. And with a precipitous drop in the pace of mortgage production likely to follow, investors will be obliged to discriminate between issuers that commit to maintaining minimum levels of overcollateralisation (OC) and those that don’t.

LHV Pank has mandated leads for its inaugural deal and the second ever to be launched under the newly established Estonian covered bond legal framework.

Unlike many banks, NordLB had been actively reducing its balance sheet well before the coronavirus crisis hit, so its need for funding is more modest than most. Though it seems likely Pfandbrief issuance will eventually return, German borrowers are hesitant to come to market, especially when there is cheap, plentiful central bank funding available. And, while Pfandbrief investors are well protected, it seems likely that a slow recovery in the commercial real estate market and a more questionable outlook for SME lending, will take its toll on lenders’ business models.

Nykredit tapped its 1% callable covered bond due 2050 on Wednesday to take it up to Dkr100bn (€13.4bn), making it the biggest long-dated covered bond ever publicly issued in Europe and highlighting the availability of long-dated funding for banks looking for alternatives to the glut of central bank liquidity made available to fight the economic effects of the coronavirus pandemic.

BPCE attracted more demand from more investors than any other French covered bond issued in at least eight years when it launched its first green covered bond on Tuesday. The outcome sent a strong signal to other borrowers seeking cost-effective, long term funding that central banks do not offer.

Unlike many other banks, ANZ has had no need to draw on central bank emergency liquidity lines during the coronavirus pandemic. Its risk-weighted assets have grown but this has been offset by greater retail deposits. And, as head of funding Mostyn Kau revealed, what subordinated debt issuance it does have to do will be for regulatory reasons rather than to do with Covid-19 crisis funding.