Covered Bonds

Pfandbrief borrowers rarely issue sterling deals of more than £250m, so when LBBW priced a £750m transaction with demand of £1.4bn this week, alarm bells were ringing. The astounding wall of money chasing the safest of safe assets may say as much about the state of the market as it does about the value of the deal itself.

Next week will be the first and only full business week of the month. With spreads having stabilised, a broad range of issuers are expected to take advantage of the funding window, not least because of some concerns that credit conditions could deteriorate later in the year.

At £750m, the debut sterling covered bond issued by LBBW on Wednesday was by far the largest ever of its kind sold by a European bank, with the trade attracting demand that was off the scale compared with anything that had previously been issued in the currency.

Covered bond investors say that, in isolation, their market looks in good shape. The trouble is, US equities and Treasuries are looking overvalued and a sell-off there could well spark a rout in global credit markets which will invariably hit covered bonds.

Covered bond deals issued on Tuesday by Deutsche Bank and Hypo Oberösterreich offered concessions of less than 2bp, illustrating that spreads have stabilised. With supply likely to remain low over the next few weeks, the more supportive backdrop should persist.

The European Banking Authority has been granted a two month extension to complete its assessment of the case for European Secured Notes (ESNs).

Bank of China (BoC) plans to play to its strengths by deploying its balance sheet and providing liquidity to parched investors. With syndicate and trading operations in place, it has hired Tim Skeet as head of Western European origination.

Raiffeisen Landesbank-Steiermark attracted strong demand for the most generously priced 15 year Eurozone covered bond of the year, and the first from an Austrian lender in this tenor. The level of excess demand suggests market conditions may have begun to improve.

Raiffeisen-Landesbank Steiermark is expected to open order books on Thursday for a €500m 15 year Austrian Pfandbrief, LBBW is planning a UK roadshow with a sterling Pfandbrief in mind and Aktia Bank has announced plans for a euro covered bond roadshow.

April 2018 was one of the heaviest Aprils in the last decade for covered bond supply, and with the Eurosystem buying less in the primary market, offers are still easy to find. But with near term supply expected to moderate and the Eurosystem potentially becoming more active in the secondary market, bankers are hopeful that spreads will stabilise.

Caja Rural Navarra’s fruitful return to the covered bond market last week was underpinned by several important elements, not least its decision to update and improve its sustainability framework. In the context of the European Central Bank’s diminishing support, the bank’s efforts offer a salutary guide to other borrowers, who will soon be obliged to compete harder for investors’ attention.

The Covered Bond Investor Council (CBIC) has responded to the European Commission’s (EC) proposed covered bond directive, requesting a more precise definition of eligible assets among a number of other recommendations.