Covered Bonds

The new Danish covered bond law, which comes into effect on April 1, is a more complicated structure where a maturity extension is possible under limited circumstances. Because the new bonds carry a higher risk compared to the existing legacy bonds, issuers looking to sell bonds face increased execution risk. The Cover spoke to various buy and sell-side market participants to gauge their thoughts.

Covered bond issuers from Canada, Sweden and Australia gathered together in March as participants in The Cover’s roundtable to discuss their markets. Borrowers still have plenty of issuance capacity but their plans for supply are likely to remain steady. 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.

House prices have risen 300% in the last decade in Norway, an unsustainable trend that is likely to lead to a correction, said Standard & Poor’s on Wednesday. But even if prices fell by 30%, covered bond investors would remain well protected, as the bonds are sufficiently collateralised to hold their top rating.

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

There was never much doubt that Banco Santander Totta’s first deal since the bailout of the Portuguese government would be a success. The choice of maturity and alluring spread made it an easy choice for the risk-averse and yield hungry. Totta’s first funding in four years attracted one of the largest oversubscriptions and most granular books for a deal of its size.

South Korea and Singapore will extend the covered bond market’s global reach this year, with deals from both countries expected in the first half. Korea, having enacted a covered bond law, seems to offer greater potential for issuance than Singapore.

Sweden’s Stadshypotek returned to the covered bond market on Monday to price the sixth five year benchmark in euros issued in March and the 19th in that tenor issued so far in 2014. Aside from robust demand from banks in the five year area, the Swedish issuer takes advantage of a favourable currency basis swap that was identified two weeks ago by its Swedish peer, Länsförsäkringar Hypotek.

After a four year absence, Portugal’s Banca Santander Totta mandated leads for a three year euro covered bond to be launched on Tuesday subject to market conditions. The short three year tenor was applauded by bankers, who wondered whether the issuer might be able to fund with a double digit spread pick-up over mid-swaps.

Some of France’s biggest banks are set to give the country’s meagre RMBS market a boost this year as they set up programmes in response to regulator pressure to free up capital.

The European Banking Authority's (EBA) draft guidelines for encumbrance reporting leave out vital disclosures such as emergency liquidity provided by central banks, said Fitch late on Thursday. Unencumbered assets that have been disclosed may not actually be available.

Covered bonds are finishing the week tighter with demand spurred after Bunds softened, allowing investors to hit absolute yield targets. Traders reported investors looking to extend maturities, though selective sales of long-dated Norwegian bonds have raised speculation of primary activity next week. Core to peripheral convergence is still broadly evident especially in Ireland, but signs of fatigue have become evident in long dated multi-Cédulas and selective short-dated single name Cédulas.

NIBC Bank and Aktia Bank mandated leads for European roadshows this week, and the issuers are expected to launch covered bond deals sometime in early April.