Covered Bonds

The European Central Bank (ECB) has introduced a new field to its asset eligibility function which shows more detail on whether a covered bond is compliant with the capital requirements directive. Despite some teething problems, it is likely to prove helpful in showing covered bond holders whether their investment is eligible for preferential regulatory treatment.

The regulatory herding of investors into covered bonds and away from the high quality end of the ABS market may soon be about to end. The Bank of England and European Central Bank joint report on securitization, published on Friday, suggests that the two central banks are going to even the regulatory playing field between the two not-so-different asset classes.

The covered bond supply outlook is set to improve next week, but with the European Central Bank (ECB) possibly set to embark on targeted asset purchases, covered bond analysts have become more guarded on the medium term supply outlook.

Lloyds Bank announced a tender for three short-dated covered bond deals denominated in euros and sterling on Tuesday in its second liability-management exercise in covered bonds within the past year.

The primary covered bond market is set to pick up next week, with deals from issuers in the UK, Germany and New Zealand in the offing. Yorkshire Building Society announced its intention to go on the road and bring its first euro deal in five years, Westpac New Zealand has said it also launch a roadshow next week to market the first covered bond since the country enacted a legal framework and Dexia Kommunalkreditbank is set to return with its first deal since 2011.

Veneto Banca and Rabobank have mandated leads for RMBS. The deals offer a generous pick up to what investors could expect in covered bonds given their comparably low risk.

A spate of Turkish senior unsecured deals this week has raised hopes that covered bond issuance will soon follow, especially since two banks have now registered mortgage programmes. However, the cost of the cross-currency swap is too high and must fall further if banks’ mortgage loan books are to be funded through euro covered bonds on a sustainable basis. In contrast, because SME assets are higher yielding they can bear the cost of swaps, suggesting that a euro SME-backed Turkish covered bond is more likely to be seen first.

The outlook for primary market is set to pick up with UK, German and New Zealand deals in the offing. After the Yorkshire Building Society announced its intention to go on the road and bring its first euro deal in five years, Westpac New Zealand has said it will go on the road next week to market the first covered bond since the country enacted a legal framework.

The improving quality of the mortgages which back Australian covered bonds means they require less collateral than in the past to sustain a top rating, said Moody’s in a report on Wednesday. The assessment comes a few days after Fitch’s quarterly overview, which showed a sustained increase in investment mortgage lending. — But this higher risk lending is correlated to Australian house price growth which, since the year 2000, has exceeded both Spanish and Irish house price growth, according to data from The Economist.

Royal Bank of Canada could be ready to return to the euro covered bond market for the first time this year after emerging from blackout last week. It is one of only two Canadian borrowers that has not issued a euro benchmark this year, while Danske Bank’s research team believes Canadian issuance is set to pick up.

Bank of Scotland and Lloyds Bank announced a tender for three short-dated covered bond deals denominated in euros and sterling on Tuesday. This will be the borrower’s second liability management exercise in covered bonds undertaken within the past year.

Bankers reported better buying at the long end in peripheral covered bonds on Friday, while core markets were technically well supported. Despite improved signs of stability, the Street is long of inventory in the periphery and less able to absorb selling flows if they re-emerge, particularly at the long end.