Covered Bonds

The German Finance Ministry and BaFin, the local regulator, are working on a draft amendment to the Bausparkassen Act that will enable these credit institutions to issue German covered bonds, said LBBW’s research team in a note to clients on Friday.

The covered bond market showed its value this week as it enabled a wide range of banks to borrow in choppy conditions, across a range of tenors. But spreads are artificially tight and the sooner the market can normalise, the better. The ECB’s announcement that it can now buy up to 33% of each public sector bond in its QE programme, from 25% previously — suggests it now has the flexibility to taper covered bond buying.

The covered bond market is likely to remain active over the first two days of next week with more than a handful of deals on the table, but activity will then tail-off as participants head for the Euromoney/ECBC conference and The Cover Awards in Barcelona. Excluding German issuers, the intermediate part of the curve is still favoured over the long end.

Caja Rural De Castilla-La Mancha, UniCredit Italy and Banca Popolare di Milano named leads for prospective euro covered bond benchmarks. The two Italian deals are likely to emerge next week but the Spanish deal will not follow until after a roadshow.

The covered bond market showed its value this week as it enabled a wide range of banks to borrow in choppy conditions, across a range of tenors.

Commerzbank, Caisse Francaise de Financement Local (Caffil) and Bayerische Landesbank (BayernLB) invigorated the long end of the covered bond market this week with 10 year deals, a duration which had not been seen for over four months.

UniCredit Bank Austria (Baca) returned to the covered bond market on Tuesday to issue the first Austrian Pfandbrief since the country’s Financial Markets Authority (FMA) announced a debt moratorium on bonds issued by Heta Asset Resolution AG (HAR).

Covered bonds proved their worth this week as, despite difficult market conditions, 10 borrowers were able to collectively raise more than €8bn at levels that looked attractive compared to senior unsecured financials.

The brisk pace of euro covered bond supply, which has amounted to €11.5bn since the end of August, is expected to slow next week as participants head to Barcelona for the annual Euromoney conference and The Cover awards. However, as the market is open, deals will emerge soon afterwards, which will probably include new names and new programmes from existing names.

Bayerische Landesbank (BayernLB) issued the third 10 year covered bond of the week on Thursday precisely matching Commerzbank in size and spread. With the European Central Bank expected to maintain an accommodative bias at this afternoon’s press conference and global deflationary forces back in play, duration could be back in vogue.

Activity in the covered bond primary market continued at a brisk pace on Wednesday as RBC, DG Hyp, Caffil and Erste Bank priced transactions, taking the deal count this week to 10. Despite mixed receptions, issuers have been able to raise over €7bn, with over €3bn issued on Wednesday, and at levels that look attractive compared to senior unsecured financials.

The European Banking Authority said it has been asked by the European Commission to conduct further analysis on the Net Stable Funding Requirement (NSFR) and Leverage Ratio. The European Covered Bond Council had previously stated the NSFR proposal was unhelpful to the covered bond industry.