Covered Bonds

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.

Aktia Bank launched and priced its second euro covered bond benchmark on Monday, in a deal that exceeded the issuer's pricing and distribution expectations despite investor concerns over Finland’s relationship with Russia.

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 much juicier pick-up.

The opportunity to invest in covered bonds that offer a triple digit spread over mid-swaps are few and fast disappearing. It was therefore likely that Banca Monte dei Paschi di Siena, which sold a €1bn seven year bond this week, would attract one of the highest oversubscriptions of any covered bond for a deal of its size.

The tightest and most oversubscribed UK covered bond in three years could signal the start of banks releveraging in Britain and elsewhere in Europe, according to analysts. The €1bn Lloyds Bank deal — the country’s first in euros this year — should also tighten the UK covered curve, particularly with growth rebounding, writes Bill Thornhill.

On Thursday UBS came to market with its first covered bond since January 2012, but the third Swiss deal of the year following Credit Suisse, which issued in January and March. UBS aimed to capitalise on market momentum created by the Lloyds trade on Wednesday which was the same size, tenor and rating.

Covered bonds that can be bought in size and with a triple digit spread over mid swaps are a rare commodity, so it was perhaps unsurprising that Banca Monte dei Paschi di Siena (MPS) attracted one of the highest oversubscriptions of any covered bond of this size this year. But twinned with its recent senior issuance, the deal shows that the bank can easily access to capital markets, which can only help underpin confidence ahead of its capital raise.

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.