Covered Bonds

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).

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.