Covered Bonds

Perceived Italian political risk may have started to decline for now, but with volatility certain to return, the covered bond market is one of the safest places to be invested in. GlobalCapital interviewed a major covered bond asset manager for his view on the market in the wake of this week’s extraordinary events.

Royal Bank of Canada followed Toronto Dominion into the sterling covered bond market this week, pricing its first deal of the year at the same spread as its peer. Given a relatively high number of covered bond redemptions this year, RBC could well return.

Toronto Dominion Bank issued the only two covered bond benchmarks in what was otherwise a desolate week for the FIG sector. Despite exceptionally volatile market conditions, the euro and sterling transactions went well leading a syndicate banker to conclude that TD "owns" the covered bond market.

Toronto Dominion Bank issued the largest sterling covered bond from a non-UK bank on Thursday. The transaction, which follows the issuer's successful euro covered bond on Wednesday and comes amid a dearth of FIG issuance, demonstrates the strength of the product and TD’s name.

Toronto Dominion took advantage of a brief respite from volatility in the European government bond market to issue a €1bn seven year transaction on Wednesday.

DNB is preparing to issue its first green covered bond, the proceeds of which will be used to fund the most energy efficient residential mortgages in Norway. The prospective deal has been structured in line with the Green Bond Principles and will be endorsed by Sustainalytics.

In the face of rates volatility Toronto Dominion has decided against an intraday deal execution and has instead mandated for a covered bond that should be launched on Wednesday.

Oberbank was comfortably subscribed on Tuesday for its debut covered bond, which was priced in line with a recent French benchmark despite being only €300m in size, having a tricky 15 year tenor and arriving amid increasing volatility in credit markets.

The European Banking Authority will soon publish outline proposals setting out the case for European secured notes (ESNs), which according to Moody’s may not necessarily be any riskier than traditional covered bonds.

The seven year area of the covered bond market is in danger of becoming over-supplied after a series of deals around that tenor this week. But with the pace of supply expected to slow and technical conditions still positive the overall health of the market still seems good.

Five year covered bonds issued this week from a trio of issuers got the best executions with the most generously priced Canadian deal from the Fédération des caisses Desjardins du Québec (CCDJ) earning the most praise.

The covered bond market enjoyed one of its most active weeks this year, with as many as eight transactions launched, even as other markets struggled. However, while most issues were well received, the two longest dated deals dragged and showed investor concerns over duration.