Covered Bonds

The German issuer has mandated leads for a mortgage backed Pfandbrief with a nine year maturity which is expected to price on Thursday.

If rating agencies want to build market share, they don’t necessarily need to offer the best rating but just have a method that can be easily understood and communicated. This week DBRS proposed a refreshingly straightforward approach to rating covered bonds, and one which contrasted quite vividly with all the market leaders, and particularly Fitch.

Six of the 10 programmes with the lowest loss assumption modelled into their rating by Moody’s are German public sector backed Pfandbriefe. This suggests that, despite previous concerns related to their exposure to the Austrian bad bank Heta Asset Resolution, German public sector covered bonds are backed by standout high quality collateral.

Ratings are getting more complicated, as agencies struggle to reflect regulatory changes to bank capital structures. But sometimes, simple is best.

The covered bond market is open for business and Sparkasse KölnBonn has announced it will go ahead with a deal on Wednesday, the first euro benchmark in over three weeks. Though there is also a possibility that another core issuer could soon emerge, borrowers are in no rush as they fear that the generous new issue premium they may need to pay will re-price their curves.

DBRS has requested market participants to comment on its new covered bond rating methodology which takes account of the Bank Recovery and Resolution Directive (BRRD). In contrast to the other main agencies the proposed approach is refreshingly straightforward, transparent and easily explained.

The covered bonds of Banca Monte dei Paschi di Siena (BMPS) rallied by 20bp on Friday as speculation mounted that Fitch would not downgrade the bonds to sub-investment grade, as had been feared.

It will take a courageous issuer to re-open the euro benchmark covered bond market, despite notable improvements in rates and a reduction in volatility. Whoever comes will have to start the pricing process with a generous new issue concession and though many issuers are monitoring conditions, no one has pulled the trigger yet.

Fitch downgraded the ratings of 45 European banks on Tuesday, after it stripped out its assumptions of sovereign support, leaving three Italian banks below investment grade.

The European Central Bank has expressed concern about extreme rates volatility. But until it stops buying and allows the private sector to become re-established, its true mission as liquidity provider of last resort will remain in conflict with its determination to expand its balance sheet.

NordLB reopened a four year public sector backed Pfandbrief on Wednesday in a move which locked in exceptionally cheap funding. But because the deal was largely placed with captive German savings banks, it offered little clue about the state of demand for euro covered bond benchmarks.

The dollar market hosted benchmark covered bond issuance this week as Australia and New Zealand Bank and DNB Boligkreditt issued deals under 144A documentation, in the same size and tenor and at the same spread.