Covered Bonds

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?

The European Commission (EC) may come to a compromise solution in regard to how covered bonds are classified in the liquidity coverage requirement (LCR). Banks may be able to invest up to 70% of their liquidity buffers in covered bonds, up from a maximum of 40% in current proposals, said DZ Bank research.

Capital requirement regulations (CRR) governing the level of transparency that must be provided by issuers to investors is not well defined and is being exploited, said LBBW research.

The Bank of Italy has published a consultation paper which aims to bring the Italian covered bond framework governing the issuance of Obbligazioni Bancarie Garantite (OBG) into line with the fourth iteration of the Capital Requirements Directive (CRD IV). This could broaden the number of Italian covered bond issuers.

On Thursday UBS issued its first covered bond since January 2012, capitalising on market momentum created by the Lloyds trade on Wednesday, which was the same size, tenor and rating.

Caisse Francaise de Financement Local (Caffil) mandated and priced a €500m tap of its October 2028 covered bond on Tuesday, doubling the size of the deal to €1bn.