Covered Bonds

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

Banco Sabadell mandated leads for a five year Cédulas Hipotecarias on Thursday and said it is exploring the possibility of a 10 year. Ambiguity over whether a long dated tranche will emerge or not reflects the view that indicative pricing on the longer bond looks ambitious.

DG Hyp printed the second German Pfandbrief of this week on Thursday, proving the market is very much open to German borrowers. But the success of the deal does not guarantee an easy reception for Banco de Sabadell, the first peripheral name to mandate since Bank of Ireland on April 29.

Sparkasse KölnBonn broke the three week supply drought with its €500m seven year Pfandbrief on Wednesday. The deal was an undoubted success and bodes well for further issuance, but negative headline risk and the fear of volatility means issuers should take a cautious approach to pricing – as demonstrated in the senior unsecured market

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.