Covered Bonds

Investors lapped up Axa Bank Europe’s €250m tap of a 15-year Obligations Foncieres on Monday and showed that demand for ultra-long dated paper is back on the table. And, being considerably longer than the funding offered by the European Central Bank, the transaction should give a boost to the primary market, despite downbeat supply expectations.

The UK covered bond market may be about to shrink. Deals maturing this year could well be refinanced at the Bank of England, while issuers could see their mortgage pools shrink as a result of the lockdown.

French covered bond issuer Compagnie de Financement Foncier (CFF) ventured into unexplored territory at the end of last week to print the longest ever covered bond.

Mortgage payments deferred under national payment holiday schemes, designed to help homeowners through lockdowns, are adding risk to the covered bond market. Concerns were brought into sharp relief this week when Banco BPM amended programme documentation to include such loans, writes Bill Thornhill.

The covered bond market continued to perform well on Wednesday with the ultra-long end of the Dutch curve posting the strongest performance, albeit on no trading flow. French and Canadian deals are also performing well, even as bids were hit in good size. But one major investor said he was aghast at the poor overall liquidity and blamed central bank policy.

Banco BPM’s has amended its covered bond documentation to include loans affected by Italy’s mortgage moratorium in the asset coverage test (ACT), highlighting the challenge to transparency caused by discrepancies between issuer's programmes — even within the same country.

Luca Bertalot, secretary-general of the European Mortgage Federation-European Covered Bond Council (EMF-ECBC), speaks to GlobalCapital about the covered bond market living up to its reputation, the ECBC’s Covid-19 task force and monitoring report, transparency enhancements, the scope for a revival of the public sector market, and how green European Secured Notes (ESNs) and covered bonds secured on energy efficient mortgages could be flagships in Europe’s economic recovery.

Investors were "hugely receptive" to Hypo Noe’s seven year Pfandbrief issued on Tuesday, suggesting it is only a matter of time before another borrower tests demand further along the curve with a 10 year covered bond — which would be the first since early March, before the coronavirus pandemic disrupted markets. Reopening such long dated funding would provide a compelling alternative to using central bank liquidity.

An abundance of cheap central bank funding has negated the need to issue short dated covered bonds but access to competitive funding at the long end would provide a compelling reason for issuers to return to the primary market, said bankers on Monday. A seven year transaction mandated by Hypo Noe on Monday is likely to provide a test of investor appetite.

HSBC Canada issued the most oversubscribed dollar-denominated Canadian covered bond in years on Thursday, and still managed to price 28bp tighter than the Canadian heavyweights.

NN Bank has announced plans to set up a soft bullet covered bond programme, which is likely to result in a considerable saving in the cost of funding relative to its existing conditional pass three (CPT) programme and enable it to access long term funding with maturities beyond 10 years which, until now, are tenors that have not been available.

Mortgages in covered bond pools that fall 90 days past due typically then become ineligible for inclusion and are replaced. But, the unprecedented volume of mortgage moratorium initiatives and other forbearance measures introduced in response to the coronavirus pandemic means the market must now offer a degree of latitude, which it is planning to do with the launch of new transparency measures.