Covered Bonds

Some bank treasury teams are weighing up whether to access the primary market ahead of first quarter results, with bankers suggesting they could take advantage of growing demand amid falling supply.

Mortgage payment holidays and falling residential and commercial real estate prices will likely lead to a deterioration in the credit quality of the collateral pools securing covered bonds. But those programmes have other protective measures that will keep investors well insulated. And, if they need more protection, issuers can easily assuage their and rating agency concerns by adding collateral.

Canadian banks should be applauded for funding themselves in public with deals bought by real investors in a range of currencies at actual market clearing levels — astonishing though that may be for the many entitled European issuers that have shamelessly become accustomed to central bank funding.

Covered bonds easily deliver the most competitively priced funding for banks, but the real value for issuers lies in the long end which, for the time being, is too expensive.

A measured reopening of the primary bond markets in the last month has left banks in a good place to launch new deals after first quarter results, according to FIG DCM officials.

A recent European Central Bank working paper may have underestimated the part a sovereign’s credit plays in the covered bond’s credit risk. But this relationship plays a very important role, a Moody’s analyst said on Monday, referring to a report by the agency assessing how the pandemic will affect covered bond credit quality.

Covered bond spreads have begun to stabilise with the help of European Central Bank secondary market purchases and a few bank investors. Although the market is still offered, secondary spreads are falling into line with where recent primary deals are trading. And, following the ECB’s decision to improve capital treatment of market risk, there are hopes bid side liquidity will improve.

Having recently completed a series of investor meetings, and armed with an Aa1 rating from Moody's, Bluestep Bank will soon print the first Swedish covered bond secured on near-prime mortgages. The transaction emerges as aggressive quantitative easing by the Riksbank has resulted in a considerable tightening of covered bond spreads.

Santander and Deutsche Bank in Spain have structured the first Cédulas deals to be issued under the Cédulas de Internacionalización legal framework designed to finance export finance loans. The deals are likely to be retained for central bank repo purposes and emerge amid a huge expansion in retained covered bond volumes after the European Central Bank recently cut repo valuation haircuts.

Royal Bank of Canada on Wednesday became the fourth Canadian bank to issue an Australian dollar covered bond in April, pricing considerably tighter than its compatriots and in the largest size yet. The success the Canadians have enjoyed in Kangaroos is in stark contrast to a sterile sterling market.

The private placement market has provided a valuable source of funding in both covered bond and senior unsecured format, German issuers told GlobalCapital on Monday in the wake of a Moody’s report that highlighted the limited use of Pfandbrief for funding commercial lending.

Bank of Nova Scotia was set to price a €1.25bn three year covered bond tap 25bp wider than indicative secondary levels on Thursday, its third foray in euros this year and the 19th Canadian covered bond to be issued globally in 2020. The deals are in keeping with an exceptional volume of cheaply priced Canadian public ssector bond issuance and highlight a unique set of challenges for the country's borrowers, related to sinking oil prices, an inflexible central bank and the impact of Covid-19.