Covered Bonds

Risks including regulation, monetary tightening and the rise of the senior preferred asset class are touted as threats to the covered bond market. But participants on the opening panel of the Euromoney/ECBC Covered Bond Congress remained relatively unfazed.

Even though central banks continue to regularly buy up to 40% of covered bonds, borrowers are remarkably stoic about spread prospects even after the European Central Bank’s purchase programme (CBPP3) has ended, delegates at the ECBC/Euromoney covered bond congress heard on Thursday.

The Spanish covered bond legal framework is so vastly different from the rest of the world’s that it is likely to face the most severe challenges in trying to implement a harmonised European covered bond directive, delegates at the European Covered Bond Council’s plenary session heard on Wednesday.

ECBC speakers lauded the global popularity of ‘very trendy’ covered bonds, while general secretary Luca Bertalot evoked Christopher Columbus as a model for the European market.

Mortgage industry bodies are pressing ahead with a pilot scheme to collect data on mortgages on energy-efficient homes, which could eventually help promote issuance of green covered bonds and mortgage-backed securities.

Extendable maturity covered bonds are looked on more favourably by issuers and rating agencies than they used to be. But some think issuers should have limited power to extend maturities at their discretion.

Many covered bond programmes are still falling short of new European Central Bank disclosure requirements. Unless issuers improve the timeliness and content of their disclosures, affected covered bonds could soon become ineligible for ECB repo, which would widen spreads.

The Brazilian Monetary Authority (CMN) has published a covered bond regulatory framework which paves the way for the country’s five largest lenders to press ahead with deals. Though the move is credit positive for banks, they are unlikely to issue in euros in the near term.

The European Banking Authority’s recommendation that an issuer should have defaulted before a covered bond maturity can be extended could set a “perilous path” for Danish covered bonds warned DBRS in a note to clients. But the EBA said its recommendations are compatible with Danish law.

Rates markets have barely reacted in the aftermath of Thursday’s European Central Bank meeting, and covered bond issuance conditions are likely to remain constructive. Despite this, vigilance is required as the positive situation can easily lead to complacency.

Debut benchmark covered bonds issued this week by Banco di Desio e della Brianza and Nykredit were preceded by Danske Hypotek’s inaugural deal, and with new names expected to follow later this year, the number of active issuers should reach new heights.

Aareal Bank turned to the dollar market on Wednesday to issue a $625m three year Pfandbrief to fund its dollar assets, thereby avoiding the need to swap proceeds back to euros.