Covered Bonds

The covered bond primary market is likely to experience an increase in activity next week, with a handful of deals expected. Though conditions are broadly constructive and have improved from two weeks ago, the secondary market still looks precarious suggesting issuers that move early will have an advantage.

Three issuers launched covered bond benchmarks in euros this week, down from nine in the previous week, as borrowers anticipated an improvement in market conditions and lower new issue concessions.

Fitch will soon release an exposure draft focused on its treatment of foreign exchange (FX) risk in covered bond programmes with open FX positions, along with a number of other proposals that seem positive for covered bond ratings.

NordLB Luxembourg Covered Bond Bank issued a €500m three year Lettres de Gage Publiques on Thursday. The deal offered a 24bp premium to where NordLB Germany trades, and therefore attracted a comfortable level of oversubscription despite its lack of compliance with the capital requirements directive (CRD) covered bond definition and its split rating.

Belfius Bank became the first Belgian ABS issuer to return to the public securitization market since 2006 on Wednesday, pricing an €800m RMBS deal. The size, spread and oversubscription ratio was impressive.

Banks may have become safer places to invest, but investors in senior unsecured bank debt have been shunted down capital structure. Senior spreads do not reflect this new credit risk, especially compared with covered bonds not eligible for the covered bond purchase programme (CBPP3).

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.