Covered Bonds

After a weak open covered bond market sentiment began to improve on Monday as sovereign markets showed signs of stabilising. Though the outlook could remain unsettled until this Thursday's European elections, the longer range picture is constructive and the natural bias of flow is to the buy-side, bankers told The Cover on Monday.

Landesbank Hessen-Thueringen (Helaba) mandated leads for a dual tranche triple-A rated public sector Pfandbrief on Monday, for launch on Tuesday.

Spanish bank Kutxabank took advantage of improving conditions after a dismal open on Monday to issue the country’s fourth covered bond of the year. Following Swedbank and Bank of Austria last week with a seven year tenor, the deal is the first such tenor from Spain this year and a clear indication of where the sweet spot on the curve lies.

The covered bond industry looks set to achieve its aim of having highly rated bonds counted as Level 1 assets in the Liquidity Coverage Ratio (LCR). However, the newly drafted rules set a minimum single A rating for Level 2 assets. That will mean peripheral banks are unable to use many of their domestic covered bonds for liquidity purposes. They will therefore be forced to increase their sovereign risk.

With a sizeable portfolio of variable rate mortgages, it makes sense for Stadshypotek to issue floating rate covered bonds, as this minimises interest rate risk and swap costs. Though the investor base for floating format covered bonds is still in its infancy, treatment of the asset class in bank liquidity buffers could soon be improved, and since FRNs are better suited for bank liquidity books, this is a market that could potentially deliver a substantial stream of demand.

Five Portuguese covered bond deals were upgraded on Friday by Moody’s, in a move that had been widely anticipated following the sovereign upgrade. But the upgrades came against an increasingly volatile credit backdrop which saw some peripheral covered bonds soften as their respective sovereign markets came under pressure.

Issuers have started to respond to a shift in asset allocation approaches from money market funds, with highly rated borrowers selling sub-one year covered notes and lower rated names contemplating entering the commercial paper market.

Westpac has priced the first dollar-denominated benchmark covered bond of 2014. On Wednesday the issuer opened books for a five year deal and a three year senior unsecured after mandating Bank of America Merrill Lynch, Citigroup, HSBC and JP Morgan.

Swedbank priced the tightest non-German euro seven year benchmark covered bond in over five years on Wednesday and paid virtually no new issue premium.

Bank Austria opened books on Thursday morning for its third covered bond deal of the year, a €500m seven year public sector Pfandbrief. Despite pricing flat to its curve the deal received one of the highest levels of oversubscription for any Austrian deal in the last two years.

A leaked European Commission document shows that covered bonds will be granted privileged status in new bank liquidity rules, in defiance of Basel standards, but in line with pressure from the Danish government and the European Banking Authority's own research.

Depfa Bank's covered bonds tightened by around 60bp on Wednesday as it emerged that it will not be sold to an unrated entity, but instead transferred to the German government’s wind-down institution for Hypo Real Estate Holding, FMS Wertmanagement (FMSW).