Covered Bonds

Covered bonds and RMBS share important similarities which both the European Central Bank and Bank of England acknowledged last year in a discussion paper. As the two asset classes evolve, their vastly different regulatory treatment should become more difficult to justify. A comparison of Rabobank’s Storm 2015-1 RMBS, originated by its Obvion subsidiary, to a forthcoming conditional pass through covered bond to be issued by Van Lanschot Bankiers shows that regulation remains a more important determinant of price than fundamental credit risk.

Lloyds Bank plc returned to the sterling covered bond market for the second time this year to issue the first fixed rate deal in the UK currency since 2012 on Friday. Following the long run of three year floaters the issuer priced a seven year, which benefitted from new ICMA guidelines, applied for the first time to sterling covered bonds.

Toronto Dominion Bank became the fifth borrower this year to issue a dollar covered bond and the second from Canada. The spread it achieved was tighter than previous deals and cheaper than it could have achieved in the euro market.

Swedbank became the seventh issuer to price a sterling three year covered bond FRN this year, launching a £500m deal on Wednesday.

Three borrowers in Germany, Spain and Finland issued a collective €2bn of covered bonds this week with two choosing the long end only to find a bad case of investor indigestion.

Covered bonds from outside Europe could be forced to meet onerous swaps rules while those from Europe escape, unless the Basel Committee and European regulators can forge a consensus.

The Netherlands has become the first country to comply with best practice guidelines proposed by the European Banking Authority last year, and on Thursday the Dutch Finance Ministry had the opportunity to showcase its covered bond regime at the European Covered Bond Council’s (ECBC) plenary meeting in Amsterdam. The ministry took the opportunity to stress the importance of maintaining diversified sources of funding and the need for consistent regulatory treatment between the covered bond and securitization markets.

WL Bank can usually be counted on to succeed where others are less fortunate but on Wednesday the German issuer tempted fate with its decision to price a 12 year benchmark. With this deal seven of the last 10 covered bonds have had maturities of 10 years or longer, where demand is more limited and more sensitive to price.

Swedbank became the seventh issuer to price a sterling three year covered bond FRN this year, launching a £500m deal on Wednesday. This is the third transaction from an overseas covered bond issuer in sterling and shows the attractiveness of the basis swap, particularly after the surprise reate cut in Sweden.

Earlier this month the Bank for International Settlements (BIS) released a document suggesting that covered bonds would not be excluded from two way swap agreements. The policy document was completely at odds with earlier regulation from Europe’s Market Infrastructure Regulator (EMIR) and the European Banking Authority, which allow one way covered bond swap agreements. The different outcomes suggest that, unless a global consensus is reached, the swap carve-out may only apply to European covered bonds, bankers told The Cover on Tuesday.

Aktia Bank Finland priced its Aaa-rated €500m no-grow deal on Tuesday, in what can only be described as a straightforward well prepared transparent process. In contrast, Banco Popular Espanol came to market with a less prepared €1bn, Baa1-rated offering in an over supplied part of the curve, just as peripheral sovereign volatility spiked higher. Nevertheless, with an attractive concession, the Spanish issuer got a fair result.

The euro/dollar exchange rate’s correction following last week’s Federal Open Market Committee meeting provided an ideal opportunity for LBBW to tap its March 2018, Reg S dollar benchmark on Monday. In the meantime, Aktia Bank announced plans to open books on Tuesday for a €500m seven year, which is expected to benefit from Moody’s recent change in its rating methodology.