Covered Bonds

After a string of lacklustre covered bonds, the primary market found its mojo on Wednesday as Cassa di Risparmio di Parma e Piacenza (Cariparma) issued a larger and longer Obbligazioni Bancarie Garantite than its closest comparable. Despite a weak secondary market, the issuer was able to attract a book that was driven by private sector demand for its first public deal, because pricing was fair and was defined from the start of the bookbuild.

Cassa di Risparmio di Parma e Piacenza (Cariparma) has mandated leads for its inaugural Obbligazioni Bancarie Garantite, which is set to launch tomorrow following the roadshow which was finalised on Monday.

Covered bond issuance could rise to €150bn next year with 80% issued in euros, according to Barclays covered bond research analysts who published their 2015 outlook piece on Tuesday. This forecast represents an increase on the €137bn issued so far this year, but with redemptions of €173bn, the market will contract again.

The European Banking Authority’s consultation paper on the Minimum Requirement of Own Funds and Eligible Liabilities (MREL) suggests banks will continue to focus their liability structure on capital rather than funding. This will have the same negative influence on covered bond supply as the proposals set forth by the Financial Stability Board’s proposals on Total Loss Absorbing Capacity (TLAC).

Standard & Poor's upgraded the Ireland-based but German-owned Depfa Bank PLC to 'A-' from 'BBB' with a stable outlook on Monday. The state-owned bank can soon be considered a Government Related Entity (GRE) and will benefit from increased state support following a transfer of its ownership.

The once beleaguered multi-Cédulas sector may well be a safer asset class to invest in because, over the last year, overcollateralization (OC) ratios have increased, said Fitch.

NordLB research analysts have published their covered bond outlook for 2015, predicting €131.5bn in publicly placed benchmark issuance. This year to date they count €109.2bn, well ahead of 2013’s €93.7bn.

With a pall of misery hanging over the covered bond market, Cariparma’s debut covered bond, which could be launched next week, could be the final primary issue of the year.

After months of spread tightening and an unremitting stream of successful deals, the positive mood in the primary covered bond market finally broke this week. Amid a weakening secondary market, OP Mortgage Bank only just managed to get a deal away and AIB Mortgage Bank became the only covered bond issuer to postpone a deal this year.

WL Bank launched a covered bond into a weak secondary market on Thursday, pricing a five year close to where its 10 year had been trading. Screen prices give the illusion that spreads are holding steady, but in reality banks are scrambling to cut inventory and sales are being made below screen bids. But with primary activity likely to dry up, redemptions set to rise and ECB buying unlikely to slow down, the balance of flows will turn and spreads will tighten, said bankers.

AIB Mortgage Bank was the first issuer to postpone a covered bond this year, as conditions in the wider credit market deteriorated. The decision follows a string of other deferred deals in the senior unsecured and SSA space. With spreads historically tight and yields at record lows, investors would rather wait until there is more visibility on a potential sovereign quantitative easing before buying covered bonds, and especially those that trade through their government.

Daniel Loughney, covered bond portfolio manager at Alliance Bernstein in London, speaks to The Cover about the outlook for covered bonds.