Covered Bonds

NordLB Covered Finance Bank (NORD/LB CFB) has mandated leads for a European roadshow to sell its first benchmark sized covered bond under the recently amended Luxembourg legal framework. Though this deal will be backed by public sector assets, the law allows for a much wider pool of movable assets, suggesting there is potential for more innovative deals to follow.

The European Commission wants credit ratings left out of financial regulation — a great move, if it can find something good to replace them. But it’s making the right decision for the wrong reason.

Portugal’s Caixa Geral de Depósitos (CGD) issued a €1bn seven year covered bond, the longest seen from any Portuguese issuer in four years. And at 1% it was also the lowest coupon ever paid by a Portuguese covered bond issuer. The comfortably oversubscribed deal offered a new issue premium of 3bp to 4bp. However, rival bankers said the spread looked unattractive relative to government bonds which are should benefit from prospective central bank buying.

After raising €1.5bn of five year funding last week, Bank of Montreal returned to the covered bond market on Tuesday to issue a sterling three year floater, the third in this format from a Canadian bank so far this year.

Investors showed continued appetite for seven year paper, as Commerzbank and National Bank of Canada issued benchmark covered bonds in that maturity on Monday. However, leads said momentum was slower to build than last week. At the same time Portugal’s Caixa Geral de Depositos mandated leads for a deal ahead of this weekend’s Greek elections.

On January 17 the European Commission published a delegated regulation on the liquidity coverage ratio (LCR) in the “Official Journal of the European Union,” and the rules will become binding by October 2015. In December 2015, a further report will set out alternatives to credit ratings with the aim of deleting any reference to them in the LCR in five years. The European Covered Bond Council’s (ECBC) Label initiative could help but may need to be strengthened.

The Swiss National Bank’s decision to dispense with the currency peg between the Swiss franc and euro is credit negative for Austrian covered bonds, said Moody’s on Monday. The agency identifies the pools of UniCredit Bank Austria, Vorarlberger Landes-und Hypothekenbank and Hypo Alpe Adria Bank as having the greatest exposure to Swiss franc assets.

Covered bond issuers from outside the Eurozone launched deals this week denominated in sterling and Australian dollars. But a bigger proportion were from the Eurozone where borrowers launched deals in the single currency in maturities that ranged from four to 20 years. The transaction were priced generously and enjoyed a solid reception, with central banks taking a back seat.

The covered bond market enjoyed its busiest week in the last three years as 16 borrowers launched benchmarks with a nominal value of €13.5bn ($15.70bn) across a range of currencies and tenors. But investors clearly showed a preference for the seven year — of which there were seven deals, accounting for half of this week’s supply.

The euro covered bond market is expected to regain momentum on Monday, as several issuers are looking to price deals ahead of potential volatility following the European Central Bank meeting on Thursday, and Greek elections on the following weekend.

A paper released by the European Parliament this month promotes the idea that the covered bond market is ripe for expansion. At the same time, BBVA research has published a report suggesting the possibility that dual recourse instruments could be backed by infrastructure project loans, cash flows derived from Spanish electricity tariff deficits, or even be utilised for contingent capital purposes.

Covered bond issuers from outside the Eurozone launched deals this week denominated in sterling and Australian dollars. But a bigger proportion were from the Eurozone where borrowers launched deals in the single currency in maturities that ranged from four to 20 years. The transaction were priced generously and enjoyed a solid reception, with central banks taking a back seat.