Covered Bonds

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 covered bond primary market maintained robust momentum on Thursday as another four issuers priced deals. The seven year tenor remains the firm favourite with two new trades on Thursday taking the total to eight this year.

Bank of Montreal (BMO) and Caisse Française de Financement Local (Caffil) respectively issued one of the shortest and longest covered bonds of 2015. BMO’s five year appealed to a wide audience enabling the borrower to issue a large €1.5bn deal. Though Caffil’s €500m 20 year appealed to a smaller audience, the very high quality investor base it appeals to bodes well for the deal’s long term performance.

Sekerbank is holding investor meetings for a covered bond which will be the bank’s first ever publicly syndicated deal targeted at investors in the private sector mainly in Europe. The deal takes advantage of the amended law which allows for greater use of derivatives in the cover pool.

Primary momentum kept up pace in covered bonds on Wednesday. Intesa, DG Hyp and ANZ New Zealand joined the seven other borrowers that have already launched euro benchmarks so far this week. The issuers launched deals in the seven and six year area and all enjoyed a solid reception thanks partly to generous new issue premiums.

Cajas Rurales Unidas is set to become the second Spanish issuer to launch a deal this week, having mandated leads for its third euro benchmark. The transaction is likely to offer the most attractive spread seen in covered bonds this year, and could reprice the issuer’s curve.

The European covered bond market kept up its momentum on Tuesday as four euro-denominated deals hit the screens and books were opened on another denominated in Australian dollars. The euro deals all offered a new issue concession of around 5bp and were comfortably oversubscribed.

The European covered bond market got off to an exceptionally strong start on Monday as LBBW, Compagnie de Financement Foncier (CFF) and BBVA launched euro benchmarks across a range of maturities, without a hiccough. The strong start bodes well for Tuesday when several more euro benchmarks including Bank of Ireland and BPER are due.

Lloyds has become the fourth issuer this year to fund in sterling covered bonds, a market that has so far provided €3.65bn equivalent, almost as much as has been issued in euro benchmark format this year.

Westpac successfully priced the first euro-denominated covered bond of the year on Thursday amid hopes that it will set a positive tone for next week — which is expected to be the busiest of the year. But with confidence still lacking following a string of underperforming deals issued at end of last year, there is still some trepidation that the supply glut will cause a further re-pricing.

Covered bonds above a size of €750m are considered liquid according to the European Securities and Markets Association (ESMA) but nearly three quarters do not meet the regulator’s own liquidity test which takes into account the frequency and volume of trades.

Several high level departures were seen in the covered bond market in 2014 as banks, grappling with the tough market environment, consolidated and focussed on 2015. Though covered bonds are set to remain the regulator’s friend, supply has fallen and this has hit fee income. Despite these headwinds, banks that are in poll position have maintained competency across the value chain, writes Bill Thornhill.