Covered Bonds

Covered bonds maintained primary market momentum this week, but issuers adopted very different pricing strategies and delivered contrasting outcomes. The degree of hesitancy that had been evident in the run up to last week’s European Central Bank meeting disappeared with a robust bid returning for higher yielding bonds. In contrast, low beta deals that offered a negligible spread were only just subscribed.

The European Banking Authority (EBA) believes covered bonds should keep their preferential risk weighting in principle, but that the market needs reform. It wants covered bond frameworks to converge to a common standard in certain important areas, and it may need this within a two-year time frame.

The preferred regulatory status of covered bonds is not about to be withdrawn but, in light of recent comments from the European Central Bank’s executive board member, Yves Mersch, it is likely that regulators will increase their scrutiny of the product. His remarks dovetail with the European Banking Authority’s initiative to set a definitive standard for all covered bonds.

A draft document circulated by the European Commission suggests that banks will need to sell a representative sample of their covered bond liquidity portfolio as a condition for their eligibility into the top rank of the liquidity coverage ratio (LCR). The clause is likely to be welcomed by dealers but is not fit for purpose because it will not demonstrate liquidity in times of stress.

Royal Bank of Canada opened books on Thursday for its keenly anticipated inaugural covered bond of 2014. The deal builds its euro curve and establishes RBC as the benchmark Canadian issuer in euros. Though wider than its last five year, the 0.75% coupon was 0.5% below its last funding in this duration and shows the impact of the ECB's recent action.

Deutsche Kreditbank (DKB) opened books on Wednesday on an Aa1-rated €500m 10 year mortgage-backed Pfandbrief, its second deal of the year and the third 10 year print to come out of Germany in 2014. A lead banker on the deal described the reception as tepid — a further indication of investor frustration with slender coupons offered by second tier Pfandbrief issuers, particularly on longer tenor bonds.

The European Banking Authority (EBA) believes that the preferential risk weighting for covered bonds is warranted in principle. However as covered bonds issuers can fail, covered bond frameworks should converge to a common standard in certain important areas, and this may need to be implemented within a two year time frame, said the regulator on Tuesday.

Credit Mutuel CIC Home Loan SFH mandated and issued a €1bn 10 year deal on Tuesday. Despite a minimal new issue premium and the lowest 10 year coupon from a non German issuer, the borrower still managed to attract a comfortably oversubscribed book.

Barcelona

Mediobanca was the sole issuer to put its head above the transaction parapet on Tuesday morning following Mario Draghi’s speech on Thursday. Offering a €750m five-year trade to a supply-hungry market, the deal priced at least 3bp through fair value, according to a lead banker on the deal — a clear signal that the periphery tightening story is not over yet.

Deutsche Kreditbank has mandated leads for its second deal of the year and the third 10 year issued from Germany this year. Meanwhile, there is speculation that several Canadian issuers could return to the euro market.

The European Banking Authority will hold a public hearing on covered bonds on Tuesday with a view to establishing best practice in the market. The hearing could ultimately lead to a level of standardisation being imposed in order for covered bonds to continue to receive preferential regulatory treatment from European authorities.