Covered Bonds

Sterling covered bonds offer an attractive spread pick-up compared to euros according to Pimco’s covered bond portfolio manager, Timo Boehm, who took part in the Crédit Agricole covered bond round table, Living With A Covered Bond Shortage and The Big QE Squeeze. The French bank’s research analysts agree, and said this week that sterling offers among the best returns in the covered bond market.

Fitch has put the £1.1bn of covered bonds issued by Clydesdale Bank on Rating Watch Negative (RWN) after its parent National Australia Bank said it intended to proceed with a sale of its subsidiary.

The European covered bond market was relatively quiet on Wednesday with one deal emerging from newcomer Natixis Pfandbriefbank. Meanwhile, Moody’s rated the covered bonds of another newcomer, Norway’s SR-Boligkreditt. But neither issuer is likely to offer benchmark sized euro issuance, the outlook for which remains contingent on the rates market.

Bund-ageddon may be striking fear into the hearts of traders and investors across Europe. On paper, the price moves are brutal but calm is called for.

The long end of the French, Belgian and Dutch covered bond market is effectively closed for primary issuance because the rout in government bonds has made them too expensive. But bankers are hopeful that, with careful consideration of tenor and pricing, benchmark issuance should eventually return in shorter tenors, though probably not until June.

Kreissparkasse Koeln (KSK Koeln) has named lead managers for an eight year covered bond. The bank has issued two previous covered bonds, but this is the first time it is targeting investors outside of the German savings bank network. The deal is expected in the near future.

Moody's recent negative rating action on Pfandbriefbank, Hypo Vorarlberg, Hypo Tirol and Hypo Noe has failed to have any impact on their covered bonds. After coming under severe pressure three weeks ago most Austrian covered bonds have rebounded beyond levels that were seen just before negative headlines first appeared. But Komunalbank’s euro deals have not and could still perform.

Sparkasse Koelnbonn is meeting investors from May 18 for what is becoming its annual €500m bond issue. While the deal will only go live subject to investor feedback and market conditions, bankers are expecting a five to seven year transaction the week after next.

Ålandsbanken is lining up to price a €250m covered bond and is meeting investors in Europe from May 5 – 12. This will be the Finnish bank’s largest covered bond to date.

Bernd Loder has resigned from Barclays where he had worked as a director on its sovereign, supranational and agency syndicate desk in London.

The sharp rise in Bund yields has caused huge mark-to-market losses, effectively wiping out the lifetime coupon payments of any seven to 10 year fixed rate covered bonds bought in recent weeks. Markets appear to have temporarily stabilised, but underlying uncertainty may temper demand for fixed rate bonds suggesting the floating rate market could offer a better alternative.

Covered bond bankers and investors reacted with scepticism to the European Covered Bond Council (ECBC)’s proposed new dual-recourse bond structure. The lack of standardisation across SME reporting means that using them in the collateral pool will be problematic. In addition, even if these concerns are ironed out, issuers will have to pay up for the product, something which makes little sense in such a low cost environment.