Covered Bonds

Bank of Scotland is planning to make its return, after four years of absence, to the public UK RMBS market with a deal denominated in three currencies. Its parent company, Lloyds, has issued four covered bonds this year in sterling and euros.

SumitG bears some striking improvements to Figsco, a similarly structured triple recourse deal that never made it to the market. These include a simpler guarantee, better transparency, cleaner collateral and more of it, as well as more frequent third party checks. But ultimately investors may only need to take a view on its recourse to Sumitomo Mitsui Trust Bank’s €320bn balance sheet.

Royal Bank of Canada issued the first dollar denominated Canadian deal in three months at the widest spread this year, while Münchener Hypothekenbank supplied the only euro deal of the week.

Novo Banco and Bank of Cyprus have both restructured their existing hard bullet covered bond programmes into conditional pass through programmes.

Goldman Sachs and Sumitomo Mitsui Trust Bank are set to start marketing SumitG, a bond backed by a portfolio of RMBS, but secured by claims against both institutions. Goldman will be hoping to avoid the fate of last year's Figsco issue, a note with a similar structure which never made it to market. Bill Thornhill reports.

Moody's has assigned a provisional A3 rating to the conditional pass-through covered bonds of the good bank carved out of Banco Espirito Santo. A second rating could follow, and may potentially presage a deal.

SumitG, a triple recourse programme sponsored and guaranteed by Goldman Sachs Group and Sumitomo Mitsui Trust Bank, will be backed at first entirely by senior tranches of European and Japanese RMBS. Over half of the collateral will be rated triple A, and none of the bonds are below A minus. Despite this the deal gets no rating benefit from the collateral pool.

Royal Bank of Canada priced one of the largest dollar covered bonds on Wednesday and despite pricing at the widest spread this year, the deal achieved better execution than was available in senior unsecured or euro covered bonds. It also showed the limitations of an illiquid secondary market for price discovery purposes, but with the real clearing level now set, others should follow.

The secondary market began to stabilise on Wednesday, with sentiment improving following a rally in subordinated bonds, and covered bonds seeing marginally better central bank buying. Though dealer inventories are high, the improvement in relative value compared to sovereign bonds bodes well for the market’s longer term performance.

The European Commission’s plan to harmonise the covered bond market cannot minimise credit risks between different jurisdictions and prevent market fragmentation, as it hopes.

Münchener Hypothekenbank (MuHyp) achieved a typically tight spread for its €500m six year mortgage-backed Pfandbrief on Tuesday. But market conditions did not support a return to the heights of their last deal in July, one of the tightest deals to have priced this year.

Goldman Sachs and Sumitomo Mitsui Trust will commence a global marketing exercise to show investors a novel guaranteed secured obligation called SumitG from October 12. The programme offers important differences compared to Figsco, an earlier structure offered by Goldman Sachs that was never issued.