Covered Bonds

BES again demonstrated, covered bonds survive, whether it be by the resolution directive or by the support of regulators for the covered bond brand. Richard Kemmish writes about the importance of brand recognition in covered bonds.

European covered bonds extended their good run of solid trading with decent buying of the weakest names reported on Friday, in stark contrast to subordinated debt. Though traders and investors have been more unsettled of late following news of an escalation in military tensions in Ukraine, covered bonds have proved their mettle as investors factor in an expected surfeit of central bank liquidity and an even more favourable regulatory environment.

The Pfandbrief market is in a state of flux with as many as five mortgage lenders looking to be sold to new owners. But the fact Düsseldorfer Hypothekenbank has managed to find a buyer, despite Fitch’s assertion earlier this week that the German mortgage bank model was under severe pressure, shows that it’s possible for such institutions to attract interesting bids.

Few covered bond issuers are rushing to bring the first deal of September, traditionally one of the busiest issuance periods of the year. There are an unusually high number of regulatory and macroeconomic factors to consider this year, making a slow start likely.

Nearly a year after registering its covered bond programme with the US Securities and Exchange Commission, Canadian issuer Bank of Nova Scotia filed its prospectus. The move could well be a precursor to a dollar benchmark issue, of which there have been only two so far this year.

A €500m covered bond tap from National Australia Bank this week attracted unexpectedly vigorous interest from European bank investors on speculation that, despite coming from outside the European Economic Area (EEA), it will be eligible for inclusion in liquidity buffers. The deal will have been closely watched by other non-EEA issuers wanting to take advantage of demand before final regulatory guidelines are published at the end of September.

European inflation, as well as expectations for inflation, are continuing to fall and the European Central Bank is likely to announce a quantitative easing (QE) programme in December, economists told The Cover on Thursday. With core yields set to tumble the allocation of real money demand to the periphery will accelerate and pricing of core covered bonds could become established at sub-Euribor levels, The Cover believes.

National Australia Bank (NAB) looked set to tap a deal by double the minimum it had expected at less than half the spread the deal was originally offered at only three months ago. The increase comes after draft rules suggested covered bonds issued by banks outside the European Economic Area (EEA) will be eligible for inclusion in the liquidity coverage ratio, boding well for more supply from issuers outside Europe.

At The Cover we are currently undertaking a significant technical overhaul of our priced deals database in order to give our subscribers the ability to view and manipulate our comprehensive proprietary deal data in exciting new ways.

Bankers are returning to their desks this week, but with liquidity aplenty and regulations likely to tilt demand even more in favour of sellers, few issuers are rushing to bring the first deal next week — traditionally one of the busiest issuance periods of the year.

Secondary covered bond market flows have started to improve this week compared to last, though activity is more focused on the supra sovereign agency sector which traders say offers greater relative value to core covered bonds.

Nearly a year after registering its covered bond programme with the US Securities and Exchange Commission, Canadian issuer Bank of Nova Scotia filed its prospectus. The move is a likely precursor to a dollar issue.