Covered Bonds

The primary covered bond market should pick up momentum next week, bankers told The Cover on Friday, with at least three deals already mandated and a further two possible. With many banks having emerged from blackout, and market conditions strong, there is a good chance that another mandate could be announced as early Friday afternoon for launch on Monday.

Standard & Poor’s put the BBB/A-2 ratings of German-owned but Dublin-based Depfa Bank on CreditWatch negative on Friday as it said the sale of the bank to a weaker credit had become more likely.

Norddeutsche Landesbank this week issued its second Flugzeug Pfandbrief at much tighter levels than its debut last year, but was unable to attract anything like the same scale of interest. The funding was a lot cheaper than aviation ABS backed by much stronger collateral, illustrating high confidence in the Pfandbrief framework.

Kommunalkredit defied conventional wisdom on Tuesday and priced the first covered bond deal of the year to come flat to its interpolated curve. Given earlier concerns over the lack of appetite for core covered bonds and difficulties surrounding the wind down of Hypo Alpe-Adria, even the leads were surprised by the extremely positive outcome.

Banco Popular Español was downgraded by Standard & Poor’s on Thursday and, though general market sentiment was clearly more risk averse, with Bonos underperforming Bunds, the borrower’s Cédulas was unchanged after recently being better bid. Meanwhile, Italian covered bonds remained well supported, even as renewed Italian political instability caused BTPs to sell off.

Nobody believes that Danièle Nouy, the chair of the European Central Bank’s new single supervisory board, will allow any European financial institution to fail. On Sunday she was reported to have said that this is what the market expects — but that couldn't be further from the truth.

The defunct multi-Cédulas sector has outperformed the rest of the covered bond market this year, with the price of some deals up by seven points. The sector, which was well supported on Wednesday, gained an extra boost this week when Fitch upgraded several bonds, said traders.

Norddeutsche Landesbank Girozentrale issued its second Flugzeug Pfandbrief at much tighter levels than its first deal. But in the face of competing agency demand and less performance potential, it was unable to attract anything like the scale of demand of its first deal.

Kommunalkredit defied conventional wisdom on Tuesday and priced the first covered bond deal of the year to come flat to its interpolated curve. Given earlier concerns over the lack of appetite for core covered bonds and difficulties surrounding the wind down of Hypo Alpe-Adria, even the leads were surprised by the deal’s extremely positive outcome.

Cash held in segregated accounts for the benefit of Italian covered bondholders, could be bailed in, in the event of an issuer and servicer default, Fitch said on Tuesday, following recent changes to Italy’s covered bond and securitisation law.

Regulatory treatment, sovereign risk and the health of the banking sector are investors’ main concerns, according to a survey conducted by Fitch that was published on Tuesday. They would also like to increase their holdings of Canadian, Australian and UK covered bonds.

German covered bond investors are reticent on the outlook for peripheral markets and most are underweight on southern European covered bonds, a survey at LBBW’s covered bond forum has revealed.