Covered Bonds

Goldman Sachs and Sumitomo Mitsui Trust showed on Tuesday that it is possible to place bonds in the market backed by other rated debt with recourse back to the issuer – and that it was possible to do so at an advantageous spread to a differentiated group of investors. Though abhorred by some covered bond stalwarts, the deal suggests a potentially new funding avenue and a new source of highly rated debt for investors.

Korea Housing Finance Corp has announced a roadshow for the second legally enshrined covered bond from Korea.

Few lenders deemed it wise to launch new trades at the beginning of this week, but inaction owed more to caution than market deterioration, as bankers suggested that conditions are ripe for trades to come.

Korea Housing Finance Corp is gearing up to issue its first covered bond in more than two years and is set to meet investors from next week.

Banks may have become safer places to invest, but investors in senior unsecured bank debt have been shunted down the capital structure. However, senior spreads do not reflect this new credit risk, especially compared with covered bond spreads.

Covered bond ETF outflows are on course to reach their highest level in five years even though spreads are at their most attractive for over a year, according to Markit. However, the spread widening should ultimately attract investors that have been lost over the past year.

Banco Sabadell attracted exceptionally strong demand for its second covered bond of the year. Higher-rated Cédulas have rarely offered a spread over Spain since 2011, but this deal did, which made all the difference.

Skandinaviska Enskilda Banken (SEB) issued a €1bn seven year Swedish covered bond on Monday and attracted enough interest to tighten pricing, something that few issuers were able to do recently. However, even with double the concession DNB paid, the Swedish borrower attracted much less demand than the Norwegian one. SEB’s curve has been marked 2-3bp wider following the deal.

TSB Bank is in the market with Duncan 2015-1, its first UK prime RMBS which is a securitization of legacy assets inherited from Lloyds Bank. Meanwhile Belfius will soon be ready to move ahead with Penates 5 which has a special interest rate cap that replaces the swap and reduces rating agency induced counterparty risk.

Primary covered bond activity is expected to moderate next week with anywhere between four and eight deals possible, following 10 this week. Though spreads are wider now than before the covered bond purchase programme (CBPP3) was announced, investors are not taking advantage of the bargains on offer because liquidity is so poor.

Covered bonds worth almost €7bn were issued this week but, by virtue of its size, oversubscription ratio and breadth of demand, Nationwide Building Society’s €1bn deal stood out.

Covered bonds issued this week from banks in Italy and Portugal were a roaring success from the sellers’ point of view. But none could have been done without the European Central Bank’s help.