Covered Bonds

A bigger bank is not necessarily the same as a stronger bank, which is why the Bank of Italy’s draft proposal redefining which borrowers can issue covered bonds should be applauded.

Caisse Francaise de Financement Local (Caffil) mandated and priced a €500m tap of its October 2028 on Wednesday. The benchmark sized increase, which doubled the size of the transaction, was driven by reverse enquiry, and despite lopping a quarter off the spread versus where original deal came, it was comfortably oversubscribed with high quality real money demand.

On Wednesday Lloyds Bank issued its first euro issuance since January 2012, and the UK’s first euro benchmark deal of 2014. The €1bn no-grow seven year transaction was both the tightest and most oversubscribed UK deal issued in the last three years.

On Monday, Aktia Bank launched and priced its second euro covered bond benchmark. Despite some investor concerns over Finland’s relationship with Russia that were encountered during the investor roadshow, the deal exceeded the issuer’s pricing and distribution expectations.

Covered bond investors agree with survey evidence that covered bond floating rate note (FRN) issuance has plenty of potential, as the format is a perfect way to secure an extra yield without being concerned about exposure to duration, which can be particularly harmful in times of volatile interest rates.

The South Korean cabinet approved the country’s covered bond law on Tuesday, after it was passed by Parliament in December 2013. Five issuers with €921bn of assets on their balance sheets could issue up to €70bn of covered bonds after the law comes into effect on April 15.

A flurry of issuance from banks has led to a positive outlook for the Italian covered bond market, as financial institutions — old and new — move away from central bank liquidity.

Covered bonds earn a preferential risk weight, even though they are not subject to the same tight standards of transparency and harmonised regulatory frameworks as ABS, said the European Central Bank’s executive board member Yves Mersch on Monday.

UniCredit Bank Austria issued its second €500m benchmark and the group’s fourth covered bond of the year on Monday. The long five year transaction took advantage of excess demand that was identified in core covered bond deals that priced the previous week, but offered a juicier pick up.

Late on Friday the Bank of Italy published a consultation paper which aims to bring the Italian covered bond framework into line with the fourth iteration of the Capital Requirements Directive (CRD IV), and which could potentially broaden the number of Italian covered bond issuers.

The closer the EU’s bank resolution rules come, the better for the covered bond market, as it is excluded from any possible bail-in plans. But despite the assurances that covered bond investors will escape a bail-in, nobody knows exactly how. Uncertainty remains over covered bonds and liquidity too, with increasingly strident briefing and counter-briefing on whether to count covered bonds in the top class of regulatory liquidity.

Moody’s announced a positive rating action on CaixaBank on Friday, reflecting declining asset-quality pressures, and an improvement in its earnings. The news comes as its most recent deal has performed well, and amid growing expectations that the worst is behind for the Spanish economy. With the interest rate outlook likely to remain constructive and Cédulas likely to stay technically squeezed, the sector’s performance outlook has not looked this good in years.