Covered Bonds

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.

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.

Barclays Bank re-opened the primary covered bond market on Monday by issuing a £1bn ($1.51bn) three year sterling benchmark, and was followed by a pair of Canadian borrowers.

Moody’s has asked the market to comment on a new proposal to change the anchor point for covered bond ratings from the issuer’s rating, to a new counterparty risk (CR) rating. The agency expects the proposal to have a net positive effect on covered bond ratings.

Bank of Nova Scotia has returned to the covered bond market for a second time this week, mandating leads for the first Australian dollar covered bond deal of the year.

Covered bonds were always likely to be eligible assets for Basel III’s Liquidity Coverage Ratio, but when the final wording appeared it turned out to be much better than expected for the product. The long term implications are positive for the asset class, but a near term surge in demand is unlikely, writes Bill Thornhill.

The Covered Bond Label Foundation (CBLF) has appointed Wojciech Zielonka, senior vice President of the Canada Mortgage and Housing Corporation (CMHC), as the Canadian national representative on its advisory council.

Westpac was set to price the first euro-denominated covered bond of the year on Thursday in a move that is likely breathe confidence into the market, following a disappointing end to 2014.

Canadian Imperial Bank of Commerce (CIBC) became the third issuer to price a sterling-denominated floating rate covered bond this week, launching its inaugural transaction in the UK currency on Wednesday. The Canadian issuer matched the spread achieved by Barclays, which priced a deal on Monday, and in greater size and with a slightly longer duration than Scotiabank, which tapped a deal on Tuesday.

A large part of a bank’s asset encumbrance is hard to measure and this may lead regulators to focus on one of the most visible and transparent components of encumbrance: covered bonds, according to a paper from the European Covered Bond Council published on Wednesday. The trade association urged European policy makers to take a holistic approach to assessing encumbrance and said a hard encumbrance cap should be avoided.

An updated Dutch covered bond legal framework, which took effect on January 1 this year, brings the law into line with the European Banking Authority’s (EBA) best practice guidelines and European regulations. But, since most issuers already comply with the amendments, the impact is likely to be limited, said analysts from Société Générale’s research team.