Covered Bonds

European money market funds are beginning to buy covered bonds in the secondary market, according to analysts. Issuers are eager to tap the new investor base and are designing deals to suit the investors.

European money market funds are beginning to buy covered bonds in the secondary market, according to analysts. Issuers are eager to tap the new investor base and are designing deals to suit the investors.

The constructive covered bond constellation of conditions continued on Thursday as UniCredit Bank Austria took advantage of superlative funding conditions demonstrated in Swedbank’s deal on Wednesday to issue its third deal of the year. Despite pricing almost flat to the curve, the deal attracted one of the highest levels of oversubscription of any Austrian covered bond in two years.

Westpac has priced the first dollar-denominated benchmark covered bond of 2014. Though the cross-currency basis swap is unfavourable, the dearth of dollar issuance has caused spreads to tighten and the cost of funding was close to what it could have achieved in euros. The strong result is likely to have piqued interest in the market among Canadian and other Australian issuers.

Fitch has updated its criteria for analysing counterparty risks in covered bond programmes, but does not expect any rating changes to follow.

Swedbank looks set to price the tightest non-German euro seven year benchmark covered bond in over five years, and with a negligible new issue premium. The transaction’s success drew on a confluence of positive factors.

Covered bonds rated AA- or higher will be elevated to a Level 1 asset in Liquidity Coverage Ratio (LCR) according to an internal document being circulated at the European Commission. This backs up a press release from the Danish government last Friday. The improved structural bid is most likely to affect bonds lower rated bonds previously ineligible for the LCR, said analysts.

Depfa Bank plc will not be sold to an unrated entity, but will be transferred to the German government’s wind-down institution for Hypo Real Estate Holding, FMS Wertmanagement (FMSW). The issuer’s covered bonds tightened by around 60bp on Wednesday from Tuesday’s open as uncertainty over its future was removed.

The Norwegian Ministry of Finance on Tuesday defined what it considers a systemically important financial institutions, and said they should hold 2% more common equity tier 1 (CET1) than other Norwegian banks.

A prospective amendment to the German Pfandbrief Act will give the German regulator the authority to decide on the minimum level of overcollateralisation (OC) that Pfandbriefe issuers require. This will be decided on a case-by-case basis, could well be above the current legal minimum and will give stronger investor protection than private contractual commitments.

Many Portuguese covered bonds could have their ratings upgraded soon, after Moody’s raised the Portuguese sovereign rating last Friday. Banco Santander Totta’s most recent deal, which is a strong candidate for upgrade, was trading 8bp tighter from last week on Monday, but this was due to ECB rate cut hopes, and not credit upgrade hopes.

A new draft recommendation from the European Commission (EC) that appeared on the Danish government’s website on Friday says covered bonds which meet certain criteria can be considered extremely liquid assets and can fulfil up to 70% of bank liquidity buffers with a 7% haircut.