Covered Bonds

DNB Boligkreditt showed this week that borrowers have a very good incentive to consider issuing green covered bonds, especially now that the European Central Bank has signalled its intention to reduce net buying of assets under the Covered Bond Purchase Programme (CBPP3) to zero by December.

A pilot scheme to assess the risk of mortgages on energy-efficient buildings, compared with those on standard properties, was launched on Thursday by the European Mortgage Federation and European Covered Bond Council (EMF-ECBC) under its Energy-Efficient Mortgage Initiative.

Investors believe core covered bond spreads have the scope to tighten. but the underlying mood is still fragile, investors lack confidence and are fearful that volatility will return, especially in the peripheral markets. There is also a risk that the European Central Bank proves to be more hawkish than expected at this Thursday’s policy meeting.

DNB Boligkreditt priced its inaugural green covered bond this week, paying a smaller new issue premium than core European names, but still attracting a large and granular order book in a short time frame.

Sparebank 1 Boligkreditt took advantage of a slight improvement in sentiment on Monday to issue a €1bn five year covered bond while Møre Boligkreditt issued a sub-benchmark deal. The two banks followed DG Hyp which issued a nine year benchmark.

DG Hyp issued a €500m nine year Pfandbrief on Friday with demand of €1bn and a concession of about 5bp. The deal follows an active week in covered bonds and comes ahead of what is likely to be another busy week before the European Central Bank meeting — partly reflecting continued execution uncertainty in the senior unsecured market.

NN Bank paid a generous premium this week to issue the first Dutch conditional pass through (CPT) covered bond of 2018. The deal emerged at the same time as Belfius Bank returned to the covered bond market with a 10 year.

Four Pfandbriefe got traction this week but the limelight was stolen by Commerzbank which issued its fourth covered bond of the year, its largest in four years and its first with a five year tenor since 2015.

Cajamar Caja Rural found good demand for a €500m five year Cédulas on Thursday, suggesting that investors are differentiating between Spanish and Italian bank risk, and with a further spread widening anticipated, peripheral issuers have every incentive to consider follow-on deals.

DG Hyp is set to become the fourth Pfandbrief issuer this week and has mandated leads for a €500m nine year mortgage-backed deal.

Commerzbank returned to the covered bond market for the fourth time this year to issue its first five year Pfandbrief since 2015, and the largest in almost four years. At the same time, Stadtsparkasse Muenchen issued a sub-benchmark Pfandbrief and Nordea Eiendomskreditt was set to issue a small five year sterling floater.

Spanish regulators are likely to introduce a wide range of essential revisions to the Cédulas law once the final version of the European Commission’s covered bond directive has been published. If carefully calibrated, the changes can be credit neutral. The biggest challenge is their implementation.