Covered Bonds

Covered bonds have had a great start to 2016, in terms of supply, spread performance, and participation in the market from real money investors, but this trend is unlikely to hold. Central bank action, once again, will corrode the market from both supply and demand sides.

Euro denominated supply has been strong this year with as much as €66bn issued until last week according to Dealogic. However as the market heads into the second quarter, it is almost certain that volumes will fall — potentially quite sharply.

The Cover wishes its readers a happy Easter. The next publication will be on Tuesday March 28.

The vibrancy of the covered bond market was in no doubt as the first quarter of 2016 started to draw to a close, as volumes reached their highest level in five years. Many new names were seen, a few old names returned and further expansion seems likely. But even though the covered bond market enters the second quarter on a high, several factors may undermine sentiment.

Covered bond primary activity slowed this week with just two €500m seven year trades emerging from banks in the Netherlands and Italy.

Following approval of its demerger plan, Nordea has managed to get the consent of bondholders to transfer the assets and liabilities affecting 31 of its Finnish covered bonds to a new entity with a new guarantee. However, it does not yet have investors’ consent on six remaining deals.

EAA Covered Bond Bank Plc (EAACBB), an Irish covered bond issuer and subsidiary of Erste Abwicklungsanstalt, which was formally a part of WestLB Ireland, has been given the authority to proceed with its sale.

Banco Popolare Sondrio returned to the covered bond market for its second ever deal on Wednesday. The substantially oversubscribed transaction was priced close to fair value reflecting a concern that peripheral supply could dry up.

Regulations that have heavily favoured covered bonds over the European securitization market, and that have little foundation in prudential risk, are storing problems for the future. A report published on Tuesday by the Dutch central bank illustrating the regulatory desecration of the securitization market shows that nothing has changed.

Covered bonds have become a larger source of funding for Dutch banks than securitisations, according the Dutch central bank.

Crédit Agricole reported on Tuesday that it had bought almost as many covered bonds as it sold in last week’s dual tranche issue, and has therefore kept its funding structure stable.

Van Lanschot Bankiers managed a smooth execution for its second ever covered bond deal on Tuesday, a transaction that was at risk of being postponed after attacks in Brussels.