Covered Bonds

With €95bn issued so far this year, covered bond supply has exceeded expectations. Several analysts now suggest spreads will widen with issuance for 2018 set to reach at least €130bn.

The European Banking Authority’s final report on European Secured Notes (ESNs) was published on Tuesday. It should pave the way for the European Commission to consider setting up a legal framework for the product, which may emerge at the same time as the covered bond directive in February 2019.

The constructive trend in covered bond ratings that began three years ago, and remained in place last year, is set to continue through this year said Standard & Poor’s.

A survey conducted on behalf of the European Commission suggests European Secured Notes (ESNs) would have to offer investors appealing value relative value to covered bonds — even if they had exactly the same regulatory treatment. The survey comes amid speculation that the EC may opt to save time by including the ESN legal framework with the covered bond directive (CBD).

The European Commission is expected to redraft two articles of its proposed covered bond directive (CBD), pushing back the legislation, and if there are any more hold-ups the directive could be delayed until 2020 or later, said analysts at Crédit Agricole.

Banco Popolare di Milano (BPM) attracted a bit more demand for a covered bond it issued this week than the previous two Italian deals, as the relative value compared to Italian government bonds was more attractive.

National Bank of Canada went to the euro market on Tuesday for funding levels that it would not have been able to match in dollars, joining a string of other North American issuers looking to benefit from cheap financing conditions in the currency.

Covered bonds from Italian banks underperformed those from lenders in Spain and Greece last week, although this may have partly been down to recent new issues offering significant concessions to investors.

After a strong start to the year, covered bond supply is widely expected to beat expecations. Prospects for the second half of the year will depend on how credit markets behave and how issuers consider refinancing central bank term liquidity. Given these large variables, supply this year could yet prove exceptionally high.

National Bank of Greece (NBG) won an investment grade covered bond rating this week, showing the way for European Central Bank (ECB) repo eligibility to other Greek banks. Along with a more stable fiscal and political backdrop and an imminent exit from its bail-out programme, Greek covered bonds have a good chance of outperforming Italian versions.

Commonwealth Bank of Australia (CBA) took advantage of a 40bp spread differential to senior dollar funding this week to issue its first dollar covered bond in three years.

Three covered bond deals issued by Italian banks in recent days have elicited a mixed reaction from investors, particularly with respect to their value compated to senior unsecured debt.