Covered Bonds

Türkiye Vakiflar Bankasi (Vakifbank) brought a slew of new faces to its investor base when it issued Turkey’s first publicly syndicated euro benchmark covered bond — at an extremely low cost of funding.

The German lender paid no premium for its sub-benchmark sized Pfandbrief, issued on Tuesday.

Compagnie de Financement Foncier took advantage of strong market conditions to issue a long eight year on Monday. Its third covered bond of the year was priced tighter than the previous two and comes as the European Central Bank has become more active in the secondary market.

Covered bonds will help Virgin Money achieve its stated aim of optimising funding costs and extending tenor, especially when taking account of its latest Gosforth RMBS, which gave funding that was both short and more costly compared to covered bonds.

The Italian parliament approved a new law earlier this month that is expected to help finance a broad range of assets. Investors of the secured bonds have recourse to the underlying asset pool as well as an unsecured claim against the issuer.

The soft bullet maturity extension currently being considered for introduction into Germany’s Pfandbriefe law would lower the chance of a payment interruption and could mean issuers need to set aside less collateral to achieve the same rating, said Fitch. Soft bullet bonds would also not be subordinate to hard.

Capital markets were roaring this week, but despite increasing signs of frothiness, the euphoria looks set to persist for some time longer.

Covered bond activity slowed this week with only three deals emerging, half the number seen in the prior week, with Canadian issuers at the fore.

Several covered bond issuers have removed the swaps in their covered bond programmes in the face of onerous regulatory obligations. This has improved their funding efficiency and given investors a less risky, more transparent and potentially higher yielding product. Others should follow.

Vakifbank will issue the first euro denominated mortgage backed Turkish covered bond next week, a deal other Turkish banks are set to follow. And being the first of its kind, it should send a strong signal to other borrowers in the emerging markets, such as Brazil. With market conditions set to stay strong and the search for yield undiminished, investors are likely to be receptive.

The German association of mortgage banks (VDP) has suggested a potential change in the Pfandbrief law that could result in a change in the maturity structure from hard to soft bullet.

HSH Nordbank found little difficulty finding demand for its €500m seven year issued on Wednesday, and despite its relatively low credit standing, international demand for the bonds was strikingly high.