Covered Bonds

The new Banque de France SME funding vehicle could be used for ECB quantitative easing, says BBVA. The Spanish bank’s research team say that, given the ECB’s new readiness to fund SME assets through QE, the Banque de France programme could be the ideal vehicle to channel these funds.

The European Banking Authority has proposed that covered bond swaps should be exempt from the central clearing proposals set out as part of the European Market Infrastructure Regulation (Emir). In so doing it has provided the market with a fillip, but there is a risk covered bonds will lose appeal if issuers' swap obligations become too onerous to fulfil.

After mandating leads for a roadshow at the end of March, Berlin Hypothekenbank (BHH) opened books on Monday for a €500m seven year Pfandbrief. Though the deal had been widely anticipated, bankers said Ukrainian headline risk could have derailed its timing.

Société Générale returned to the covered bond market on Tuesday after a four month absence to issue the sixth French covered bond deal of the year and the third from France with a 10 year maturity. By limiting the deal size, leads were able to price flat to its curve, and with barely any premium to the French government.

The European Banking Authority proposed this week that covered bond new issue swaps should receive special treatment, ending months of uncertainty over derivatives proposals that could have delivered a fatal blow to the covered bond market.

Bank of Montreal’s (BMO) covered bond programme was recently signed off by the Canadian Mortgage Housing Corporation (CMHC), giving rise to speculation that it could return to the covered bond market after Easter with a newly set up programme and a legally compliant covered bond deal. A still-favourable cross currency swap suggests it could become the fourth Canadian bank to issue in euros this year.

Standard & Poor’s downgraded nine multi-Cédulas from investment grade to sub investment grade on Tuesday, along with a further 11 downgrades, five upgrades and three affirmations. The actions, which were driven by the agency’s CDO methodology, and affect €49bn of securities, were flawed, say bankers.

Deutsche Postbank AG announced it has entered into a voluntary commitment to maintain nominal overcollateralisation (OC) of its mortgage cover pool above the statutory legal minimum. The commitment was triggered by Fitch’s negative rating action on its covered bonds, which will quickly be remedied, the agency told The Cover. However, whether voluntary overcollateralisation will be there for investors in the event of an issuer’s insolvency under new regulatory arrangements is an open question.

Société Générale returned to the covered bond market on Tuesday after a four month absence to issue the sixth French covered bond deal of the year and the third from France with a 10 year maturity. By limiting the deal size, leads were able to price flat to its curve, and with barely any premium to the French government.

After mandating leads for a roadshow at the end of March, Berlin Hypothekenbank (BHH) opened books on Monday for what bankers believe could be the one and only covered bond issue of the week. Though the deal had been widely anticipated, bankers said Ukrainian headline risk could have derailed timing.

The latest Basel proposals regarding the net stable funding ratio (NSFR) have been relaxed, in a move possibly motivated by the political will to ensure lending to the real economy, said Standard and Poor’s in a report published on Monday. Bankers said that covered bonds can provide a useful tool for banks to extend the average duration of their liabilities, helping to meet their NSFR target.

With redemptions set to exceed issuance for a year or two longer, Pfandbrief spreads are expected to remain tight. But as regulatory uncertainty dissipates, both mortgage and public sector backed supply should begin to take off again. Could this be the start of a new era for this, the most revered and established of all covered bond sectors?