Covered Bonds

Spain is expected to issue the third highest amount of covered bonds in 2016 but with redemptions considerably above that level, the country also faces the highest net negative issuance of any jurisdiction. With the economy set to grow at almost double the pace of Italy and Portugal, the credit and spread outlook will remain positive, unless there are any political surprises.

The European Covered Bond Council (ECBC) has published a draft response to European Commission’s consultation proposing harmonisation of the covered bond market. It says that a combination of a recommendation and a principle-based directive will ensure that national markets continue to function smoothly, while protecting the prominent role of covered bonds.

A record number of covered bonds are on positive outlook said Fitch in its 2016 covered bond outlook. With sovereign ratings now more stable, covered bond ratings should also become more stable.

France is expected to issue the second highest volume of covered bonds next year after Germany, but with redemptions exceeding supply, the overall size of the market will contract again in 2016. House prices are expected to stabilise next year after falling since 2011, but new loan origination will remain subdued, according to a range of predictions made by covered bond analysts.

The credit outlook for covered bonds has not looked this good since 2007, said Moody’s in its covered bond 2016 outlook.The majority of banks are on a stable outlook and regulations have led to an improvement in the resilience of covered bond ratings.

Germany is expected to lead the way in covered bond supply in 2016, with research analysts estimates’ ranging between €23bn and €30bn. Growth in mortgage lending, high redemptions and a weak private placement market are the main drivers of growth. And, in the event the European Central Bank scales back covered bond purchases, Pfandbrief spreads should be the most stable.

Pfandbriefbank, the Swiss mortgage lender, printed a dual tranche covered bond on Friday, drawing strong demand from local insurance companies and pension funds for the longer tranche of the deal.

The Bank for International Settlements (BIS) published its second set of proposals for gauging risk and capital charges under the Standardised Approach on Thursday. It has recommended dropping the debt service coverage (DSC) ratio for mortgages, in favour of relying on the Loan to Value (LTV) ratio, a decision that is expected to hit Dutch banks in particular.

Leads Citi and Bank of America Merrill Lynch have priced the Trinity Square 2015-1 UK non-conforming RMBS deal for Kensington Mortgage Company, landing £1.5bn after the offering was initially sized at £1bn.

Nearly €150bn of euro benchmark supply is forecast next year, based on the average of predictions from analysts at seven firms. But breaking it down by region shows the size of the variation, suggesting the number could be as much as €25bn either side.

Canadian Imperial Bank of Commerce took advantage of a back-up in three year euro swap yields following the European Central Bank meeting last week to issue a covered bond of the same tenor.

Intesa Sanpaolo issued a €1.25bn 10 year covered bond on Wednesday, a transaction that did not initially seem to be an obvious trade, but which in the end proved very successful.