Covered Bonds

Two or three core issuers have deals lined up for next week, bankers told The Cover on Thursday morning. The market has successfully absorbed the surge in supply following the ECB announcement on June 5, and deals issued just before the ECB have tightening drastically, following the rest of the fixed income market.

Westpac New Zealand paid the tightest spread, the lowest coupon and drew one of the most granular order books for one of the largest ever covered bonds from the region. Jim Reardon, who is head of funding at the bank, told The Cover on Thursday that the success of the deal was driven by the new legislative framework — a fact that other New Zealand issuers will want to take advantage of.

Nationwide opened books on Wednesday for the first post-crisis UK dual tranche covered transaction, and only the second from any jurisdiction this year. The success of the deal may establish dual tranche syndication as a benchmark for those issuers looking to raise size without compromising execution.

The European Banking Authority’s effort to harmonise covered bond frameworks by defining best practice on behalf of the European Systemic Risk Board may prove to be pointless, or even impossible, as anything that that can be said to be best practice in one market isn’t likely to be particularly useful in another.

Germany will not accept the latest iteration of the European Commission’s discussion on the liquidity coverage ratio (LCR) calling for a minimum A- rating for eligibility into the putative class 1B. Non EEA issuers of bonds rated AA- or higher may get into level 2A. LCR talks will be extended, but not the implementation date.

BBVA announced that it will amortise two floating rate note retained Cédulas Hipotecarias on Wednesday. The move will increase overcollateralisation (OC) in its cover pool and could potentially result in a rating upgrade to the AA area with Standard & Poor’s, said Crédit Agricole analysts.

Mauricio Noé has left Deutsche Bank, where he was managing director of global markets.

Westpac New Zealand tapped the covered bond market for the first time since 2011 on Tuesday. The €750m five year was the most oversubscribed antipodean deal of 2014 and the most granular from the region. Around half the investors were new to the name.

Nationwide has mandated leads for the third UK covered bond in euros this year. Though a firm decision on structure and tenor has not been taken, the issuer is testing appetite for a dual tranche offering that could involve the longest dated issuance seen in euros for years, to be launched Wednesday.

Berlin Hyp opened books on Monday for a deal which gave a positive litmus test on the condition of the core Pfandbrief market. The issuer may have been able to price a €500m deal at flat to Euribor but opted for a more liquid size at 1bp over mid-swaps in a move that was applauded but which shows resistance to sub-Euribor pricing has yet to be broken.

BPCE, Muenchener Hypothekenbank and Belfius Bank all launched 10 year covered bonds on Monday, underscoring the impression that investors are confident European yields could keep heading lower. Where once long end demand was dominated by real money, banks are now more dominant, a change that has been driven by the improved status of covered bonds in the liquidity coverage ratio.

Covered bonds maintained primary market momentum this week, but issuers adopted very different pricing strategies and delivered contrasting outcomes. But in all cases issuers paid record low coupons, despite growing uncertainty over the outlook for long term rates and duration risk.