Covered Bonds

It’s hard to fault the support the euro market has offered rates borrowers in the past week. Executions have been smooth, books well-filled and new issue premiums skinny. But, with ever more hawkish signals from the European Central Bank and steepening yield curves, the future does not look so rosy for borrowers. The balance of pricing power seems likely to shift in favour of investors.

Sparebank 1 Boligkreditt has mandated lead managers for a roadshow to market its first green covered bond. The move coincided with proposals from lawmakers in Luxembourg for a green covered bond framework.

NIBC, Raiffeisenlandesbank NiederÖsterreich-Wien (RLB NW) and BayernLB were easily able to sell 10 year covered bonds issued this week, thanks to their small size and European Central Bank demand.

DNB Boligkreditt and Canadian Imperial Bank of Commerce this week issued the first five year covered bonds of the year and found strong demand, even though there was a sensitivity around the final spread.

UK issuers propose to include their covered bond programmes within their ring-fenced entities, which is positive for their credit quality, said Moody’s.

The finance ministry in Luxembourg has published a draft covered bond law to finance renewable energy infrastructure loans. But there could be limited demand to use the framework, and much depends on new European rules coming later this year.

Canadian Imperial Bank of Commerce followed DNB Boligkreditt with the second five year covered bond of the year. The tenor, which appeals to the broadest audience and offers the best execution certainty, should become increasingly popular as tapering of central bank purchases and refinancing of the central bank liquidity takes effect.

DNB Boligkreditt differentiated itself in a crowded covered bond market on Tuesday by issuing the first five year deal of 2018, a strategy that paid off, given it was also the largest deal of the year.

NIBC and Raiffeisenlandesbank NiederÖsterreich-Wien (RLB NW) found solid demand for their pair of €500m 10 year covered bonds issued on Tuesday. But with the tighter Austrian deal extracting more demand at a tighter spread, investors clearly showed a preference for the hard bullet maturity.

Banca Popolare di Milano (BPM) successfully issued its first covered bond transaction since June 2016 with the high spread overcoming credit quality and volatility concerns.

BayernLB has issued the first of three 10 year covered bonds to be priced this week. With the European Central Bank stepping up its presence in the primary market compared to January 2017, forthcoming deals from NIBC and Raiffeisenlandesbank NiederÖsterreich-Wien (RLB NW) are assured of a smooth execution.

Price sensitivity is becoming a material theme in covered bond deals issued this week, and the first Canadian covered bond of 2018, issued by Bank of Nova Scotia on Friday, was no exception.