Covered Bonds

Lloyds Bank issued its third covered bond of the year on Tuesday and its second in sterling, paying a fraction of the premium seen in the senior unsecured market, despite the large deal size.

Covered bond investors have “had enough of tight spreads" said a lead manager. as demonstrated on Tuesday by the contrasting fortunes of deals from Lansforsakringar Hypotek AB (LF Hyp) and Aareal Bank. At the same time, the European Central Bank continued to scale back its order.

Aareal Bank mandated leads for a six year Pfandbrief on Monday, amid evidence that the European Central Bank has started to cut back orders for the covered bond purchase programme (CBPP3).

Deutsche Hypo followed other German lenders into the UK market to price its first covered bond in sterling on Thursday. The deal was priced just 7bp inside where SEB issued an unsecured FRN on the same day.

PKO Bank Hipoteczny may not have attracted the most overall demand in Thursday’s packed issuance window, but its covered bond was notable for having the highest spread and strongest subscription ratio of the five deals in the market.

Lloyds issued its first euro covered bond in almost two years on Thursday, helping to assuage Brexit concerns by pricing the €1bn seven year with a positive spread to mid-swaps.

BNP Paribas Fortis managed to attract decent demand for its €750m 10 year covered bond this week, despite a plethora of competing issuance scaling back of interest from the Eurosystem, and an increasingly picky and nervous investor base demanding ‘last looks’ in book building.

WL Bank was unable to secure much private demand for a €500m 10 year on Thursday, yet managed to get over the finishing line with much some help from the Eurosystem, though it was less than might have been expected.

The primary market was quiet on Wednesday, but activity looks set to improve as a trio of issuers from Poland and Germany mandated joint lead managers for benchmark covered bonds — to be issued in euros and sterling on Thursday.

The European Covered Bond Council (ECBC) and Association of German Pfandbrief Banks (VDP) have given a guarded welcome to the European Commission’s proposed covered bond directive, but analysts have raised a number of questions.

The preference share market has plummeted in value after Aviva told investors it might seek to cancel its instruments at par.

The eagerly awaited European 'Covered Bond Directive' was supposed to ring-fence the quality of covered bonds by clearly defining the assets that are eligible for the cover pool. But the proposal risks diluting the quality of the product.