Covered Bonds

South Korea’s Kookmin Bank has selected four banks to run a potential return to the covered bond market, but a source at the issuer said that due to unfavourable market conditions, there’s a possibility that the deal will not materialise.

Covered bonds issued this week from Lloyds and Bank of Nova Scotia were among the largest seen this year and attracted the biggest order books.

Five issuers from core Europe priced covered bonds this week but the standout success, which could have been priced without the European Central Bank’s help, was the first Austrian deal of the year from Erste Bank.

A trio of Spanish issuers launched the first covered bonds of the year from southern Europe this week but, with peripheral spreads widening sharply, conditions are not conducive to further supply.

The covered bond primary market was quiet on Thursday as weak credit market conditions prevailed, and with this year’s supply double the amount seen in the same period last year, indigestion has weighed on spreads. Though it is still early days, banks with this year’s largest market shares are quite distinct from those of 2015.

Deutsche Bank’s Spanish subsidiary launched a seven year deal on Wednesday, its second publically syndicated covered bond, but it had to compete for attention with Banco Santander, which decided to bring a new 10 year deal on the same day.

Raiffeisen-Landesbank Steiermark and Bayerische Landesbank issued Austrian and German Pfandbrief, respectively, on Wednesday. The fact that the Austrian deal was only just oversubscribed and the German deal was placed only with domestic investors reflected the pernicious influence of the covered bond purchase programme (CBPP3).

Spanish banks are becoming less reliant on the covered bond market, said Fitch, and as a consequence their balance sheets are becoming less encumbered.

Financial institutions have taken an early plunge into additional tier one bonds this week, as European and US investors show willing to take on risk and put cash to work.

Bank of Nova Scotia (BNS) became the third Canadian issuer to land a euro benchmark this year, launching a €1.5bn three year deal on Tuesday that quickly built momentum despite competing with three other deals for investors’ attention.

Bankia became the first peripheral covered bond issuer this year, offering a five year euro benchmark at a juicy premium to the Spanish sovereign.

Deutsche Bank SA, Kookmin Bank, BayernLB and RLB Steiermark have mandated leads for covered bonds to be issued on Wednesday.