Covered Bonds

The vitality of the covered bond market was in no doubt over the first quarter of 2016 as volumes reached their highest level in five years.

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

Rabobank has announced the sale of a €1bn portfolio of mortgages in a move that has pre-positioned the bank for tougher Basel IV regulations. By the time the rules are in force in Europe though, they may look different, especially for countries that are heavy users of covered bonds.

Bankers have yet to be convinced that the merger between Italy’s Banco Popolare Società Cooperativa (BPSC) and Banca Popolare di Milano (BPIM) will be especially positive, though Moody’s says it is good news. The borrowers recently issued covered bonds have tightened in line with the rest of Italy, but they have not outperformed and still trade wider than reoffer.

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.