Covered Bonds

27 – 28 February Clifford Chance LLP, London

Key European investors have asked bookrunners on Caisse Centrale Desjardins du Quebec’s (CCDQ) debut euro covered bond for extra time to get credit lines in place. The Canadian bank will print early next week.

Primary market activity picked up on Wednesday as France’s BPCE took advantage of secondary demand at the long end of the French curve to tap its November 2023 issue by €500m taking the deal size to €1bn. After issuing a deal in December, the National Bank of Canada has returned to mandate the same group of leads as its previous deal for a European roadshow.

Ratings dominated the covered bond market on Tuesday as several Spanish deals were upgraded, while Austria’s Hypo Alpe-Adria Bank’s covered bonds were downgraded. A number of core issuers are monitoring the market, but are not yet ready to the pay the new issue premiums being demanded.

Spain’s rating upgrade from Moody’s has raised the sovereign ceiling rating from A3 to A1 and should lead to Cédulas upgrades, Crédit Agricole said on Monday. However dealers reported Cédulas profit taking and said the prospective upgrades were priced in.

LBBW returned to the covered bond market on Monday to issue a €500m 15 month deal from a €550m book. The exceptionally short dated funding was driven by asset liability matching needs and provided cheaper funding than the issuer could have found in the money markets.

BNP Paribas, HSBC and Société Générale have all had a good year so far in covered bonds, taking market share from Barclays, Crédit Agricole and Deutsche Bank, according to Dealogic’s latest data.

Bayerishe Landesbank’s covered bonds were unaffected on Friday by news on the wind down of Austria’s Hypo Alpe-Adria (HAA), which it partially owns. However, other Austrian covered bonds widened a few basis points after Austria’s finance Michael Spindelegger warned that unsecured bondholders might need to share in the bank’s losses.

Demand was still clearly skewed to the higher yielding peripheral markets on Friday, especially for second tier Italian banks, which offer double the spread of multi-Cédulas. And if peripheral spreads continue to tighten, the newly enacted Italian Obbligazioni Bancarie Collateralizzate, or Italian SME backed covered bonds, might eventually attract interest. But only when secondary legislation has been formulated and come into force which will take time.

Canadian banks are finally closing in on covered bond deals, having kept the market waiting for some time. They look set to price deals in euros soon after they emerge from blackout at the end of February.

Covered bond spreads are so tight that there is almost no scope for secondary performance, bankers have warned. “Core markets are in a zone of low oxygen,” one said on Tuesday, as KBC Bank priced a deal within a few basis points of Landesbank Hessen-Thüringen and Deutsche Kreditbank.

The covered bond primary market lived up to supply expectations this week with five issuers tapping the market in the first two days of the week. BNP Paribas stood out, showing the strength of its brand, and the market, by pricing the tightest French covered bond deal of the year.