Covered Bonds

Senior bonds subordinated to other senior liabilities will no longer be eligible as collateral when financial institutions borrow from the European Central Bank (ECB), the organisation has announced.

Nykredit found strong demand for its five year floating rate euro denominated tap. Demand for the deal was boosted by the fact that euro denominated Danish bonds with a bullet maturity are issued rarely.

After declining this year, analysts at LBBW research expect covered bond supply will weaken again in 2018 largely driven by a steep fall in redemptions. Their forecast is broadly in line with analysts at Commerzbank and UniCredit, but more pessimistic than forecasts made by analysts at Société Générale, Crédit Agricole and JP Morgan.

Covered bond primary volumes are likely to grow steeply in January, as issuers take advantage of a sizeable amount of cash that investors will want to return to the market because of soaring redemptions.

Policymakers and market participants are divided over a proposal to lower bank capital requirements for green assets, after the European Commission said this week that it was considering new measures to promote sustainable finance.

Issuance of green covered bonds and conditional pass through (CPT) deals is likely to improve next year, and European Secured Notes are expected to receive regulatory support, Moody’s has said in a report on the outlook for covered bonds in 2018.

The Basel Committee on Banking Supervision’s (BCBS) has formally recognised covered bonds for the first time. With the introduction of a global preferential risk weight, supply and demand should be boosted, along with the market’s global expansion to new jurisdictions.

Alpha Bank has structured a newly rated covered bond programme in soft bullet format. The move is in contrast to its Greek peers, which have all recently issued from conditional pass through (CPT) programmes.

The European Commission has published a waiver allowing issuers to collateralise their cover pools with more than 10% mortgage-backed securities. Although the carve-out is theoretically permanent it could well be superseded by a covered bond framework, which is due in the first quarter 2018.

More than 90% of Fitch-rated covered bond programmes have a stable outlook due to the considerable rating cushion between issuers and their covered bonds, or because they are secured on a substantial amount of excess collateral.

LBBW came to the market with its first green bond on Tuesday, hoping to reach new investors. It plans to issue at least one to two benchmark green trades a year in the senior unsecured or covered format.

The covered bond purchase programme (CBPP3) could well contract in December, but the European Central Bank will easily have scope to rebuild its portfolio in January which will support spreads. However, a rise in November's secondary market purchases shows real money investors are taking profits and leaving the asset class, boding poorly for the longer term spread outlook.