Covered Bonds

Covered bond issuers from Canada, Sweden and Australia gathered together in March as participants in this GlobalCapital roundtable to discuss their markets. Borrowers still have plenty of issuance capacity but their plans for supply are likely to remain steady rather than spectacular over the foreseeable future. Issuers are conserving their covered pool collateral in case unsecured access becomes more constrained due to increased market volatility. Local currency issuance complements US dollar issuance, but for Australians and Canadians, the euro market offers more depth, especially at the long end of the curve. But for many issuers, and especially the Canadians, the cross-currency swap only became attractive in the summer of 2013. Fortunately, this coincided with local legislative programmes becoming operational. Australian, Canadian and Swedish covered bond issuers all benefit from solid senior ratings, stable real estate markets and they all present a great diversification tool. And, with a very limited amount of bonds outstanding in euros, investors have plenty of credit line availability.

Amid pressure to revive Europe’s economy by supplying credit to small and medium-sized enterprises, covered bond issuers are coming up with innovative ways to pool SME assets. In the hunt for better ratings, they are looking to pass-through structures but as the definition of covered bonds broadens, Will Caiger-Smith examines what dangers lie in wait for investors.

Berlin Hypothekenbank AG mandated joint leads on Monday for a euro Pfandbrief and a roadshow to explain its forthcoming ownership structure, in which it will be directly owned by the savings banks and become an affiliate of Landesbank Berlin rather than its subsidiary.

The bastion of the covered bond market is imposing greater transparency requirements on issuers, but the greater immediate challenge for banks is smooth deal execution in a stiflingly tight spread environment.

Sweden’s Stadshypotek returned to the covered bond market on Monday, pricing a five year deal with the tightest spread in at least three years for any covered bond issuer outside of Germany.

Amid pressure to revive Europe’s economy by supplying credit to small and medium-sized enterprises, covered bond issuers are coming up with innovative ways to pool SME assets. In the hunt for better ratings, they are looking to pass-through structures but as the definition of covered bonds broadens, new risks lie in wait for investors.

A handful of covered bond issuers are monitoring conditions, and could launch deals at short notice, but the only firm business for next week is NIBC bank’s second pass-through, which controversially received investor plaudits recently. Meanwhile, recent deals have all performed despite pricing tightly, underscoring the impression that conditions are conducive to issuance and covered bonds spread compression continues.

Amid pressure to revive Europe’s economy by supplying credit to small and medium-sized enterprises, covered bond issuers are coming up with innovative ways to pool SME assets. In the hunt for better ratings, they are looking to pass-through structures but as the definition of covered bonds broadens, Will Caiger-Smith examines what dangers lie in wait for investors.

The European Commission outlined on Thursday its plan to meet the long-term financing needs of the European economy, and said it wishes to improve the environment for covered bonds. A separate draft document makes it clear that the viability of an integrated European covered bond market is under consideration.

Bank of Nova Scotia’s inaugural legislative covered bond, issued this week, is unlikely to offer much performance and is not eligible for bank liquidity buffers, but it offered genuine diversification to a hungry market. At 9bp the deal was priced on the tight side of expectations with little scope for performance.

The European Banking Authority’s effort to improve transparency on balance sheet encumbrance has come to nothing. The draft guideline, which will be finalised by June, is practically useless because it doesn’t include emergency central bank liquidity which is the largest and most important source of encumbrance. But that’s probably just as well, for if this disclosure became public knowledge, it would create just the sort of negative feedback loop that brought down the UK’s Northern Rock.

Commerzbank has decided not to pursue a second deal from its newly established SME covered bond programme. The issuer’s faster-than-expected pace of deleveraging has freed up more liquidity than it expected.