Covered Bonds

A week of no new issues in the covered bond market has confused some market participants, coming straight after the second busiest week of the year. But at quarter end and with holidays around the corner, banks’ decisions over participation in the ECB’s targeted longer-term refinancing operations (TLTRO) programme — coupled with anticipation of a liquidity coverage ratio (LCR) announcement from the EBA — may be what is muting primary issuance.

Austrian covered bonds were steady on Tuesday after a swathe of Moody’s senior downgrades hit covered bonds, leading bankers to say its methodology has serious weaknesses. Separately, Standard & Poor's upgraded €27bn of multi-Cédulas in a move which analysts said would have little impact and could soon be reversed. The fact multi-Cédulas have outperformed Austrian covered bonds all year is due to the other factors.

A couple of issuers could be ready to launch covered bonds and the hope is they will do so before next week when Scandinavia is on holiday and many issuers head into blackout, said bankers on Tuesday. The focal point of primary chatter on Tuesday continued to be on Goldman Sachs’ new FIGSCO structure. In the secondary market peripheral covered bonds tightened, following in the wake of sovereign markets.

The covered bond market got off to a restrained start on Monday with syndicate bankers noting that some borrowers were looking at possible issuance this week, with a view to taking advantage of strong credit market conditions ahead of the summer break. Meanwhile, Goldman is on the road from Wednesday with its controversial hybrid FIGSCO issue.

Banks that have held a leading market share of the covered bond business are also dominant across all liquid fixed income markets. Being German helps, but those institutions that offer genuine added value in terms of trading and advisory services have performed consistently well. Bill Thornhill examines the driving forces between the winners and losers in covered bonds.

Goldman Sachs is selling a bond backed by a wide variety other assets, but fusing it with covered bond technology in a product that aims to put distance between it and the tainted collateralised debt obligations of the pre-crisis era. Investors in the triple A product will have recourse to a pool of fixed income assets that are valued and resized daily, as well as a claim on Goldman and Mitsui Sumitomo Insurance Group. The structure, which offers Goldman a way to fund its long term assets, could potentially be used by other banks that don’t originate consumer assets.

The covered bond market had one of its busiest weeks this year as six borrowers from five countries raised €5bn. With outright yields continuing to decline, and investors short of duration and scrambling to hit return targets, supply was slanted to the long end. Credit conditions are likely to remain strong in the week ahead and with net negative supply set to increase, covered bonds will remain a sellers’ market.

Westpac New Zealand issued the first legally enshrined covered bond from the country in euros this week in a move that is likely to have been closely followed by several other Kiwi issuers that will now be looking to emulate its extraordinary success.

The covered bond market had one of its busiest weeks this year as six borrowers from five countries raised €5bn. With outright yields continuing to decline, and investors scrambling to hit return targets, supply was slanted to the long end, where more yield was on offer. Even so, several deals offered coupons that set new lows.

Nationwide opened books on Wednesday for the first post-crisis UK dual tranche covered bond, and only the second in that format from any jurisdiction this year. The successful outcome may help to establish dual tranche syndication for those issuers looking to raise large amounts of cash without compromising execution.

Michael McCormick is set to join Credit Suisse next month to become head of covered bond origination, following the departure of market veteran Richard Kemmish in February this year.

Credit Suisse has hired a new head of covered bond origination from HSBC. HSBC has promoted John Millward to co-head of covered bonds.