Covered Bonds

Core covered bond deals sized at €1.5bn have had mixed success so far this year. Tuesday’s five year from Crédit Mutuel CIC SFH was only moderately oversubscribed but was well placed, trading stably at end of the week.

WL Bank priced the shortest fixed rate euro denominated covered bond of the year on Tuesday, at the tightest spread of any transaction since November 2012. Bankers off the deal questioned why any investor would pay such a tight price, while those on the deal said the cheap funding reflected the issuer’s high quality appeal.

The covered bonds of French issuers that are backed by relatively weaker collateral are trading at the tightest spreads, while French deals backed by higher quality collateral are trading at wider spreads, according to DZ Bank covered bond research.

There was strong secondary market interest in the long end of the peripheral market, and especially Italian bonds, on Thursday. In contrast, core covered bonds came under greater selling pressure, partly due to switching interest from Wednesday’s deals. The flows were counter-intuitive to the wider macro backdrop, where the flight to safety bid has resumed.

The covered bond market is taking the limelight this week, with five borrowers from Germany, France and Italy issuing deals at vastly different funding levels, and with very different outcomes. Senior was slower to start, after last week’s sell-off, and while capital deals are promised, they have yet to materialise.

Intesa Sanpaolo brought forward a 12 year deal on Wednesday, after witnessing the extraordinary demand for UBI Banca’s 10 year. Intesa’s book was less spectacularly oversubscribed, but its long tenor should ensure a high proportion of quality interest, boding well for its performance.

The primary covered bond market sprang into life on Wednesday with four deals from Germany, France and Italy. Pride of place went to Unione di Banche Italiane, the only one to have publicly mandated a deal the previous day. It was oversubscribed about five times based on the unreconciled book and may have pushed Intesa Sanpaolo into bringing forward its own issuance plans (see other story).

Moody’s and DBRS have upgraded the Series 1 covered bonds of Portugal’s Banco de Investimento Imobiliario (BII) after they were restructured using a pass through mechanism. The notes will be retained and are designated purely for central bank funding. Parent bank, Banco Comercial Português (BCP), is monitoring the market and, if it were to issue a publicly syndicated deal, it would use its existing programme structured with a soft bullet maturity, said bankers.

WL Bank was set to price the shortest fixed rate euro denominated covered bond of the year on Tuesday, at the tightest spread of any transaction since November 2012. Bankers off the deal were surprised that any investor would pay such a tight price, while those on the deal said the cheap funding was a reflection of the issuer’s high quality.

Norddeutsche Landesbank Girozentrale has mandated joint leads to organise a roadshow for its second aircraft Pfandbrief and said a new deal is expected to follow.

Despite renewed emerging market volatility and, to a lesser extent, European peripheral sovereign weakness, the covered bond market was steady on Monday. Secondary market volumes have collapsed, but bankers were encouraged by the market’s stoic response to wider credit woes.

Turkey’s updated covered bond law is credit positive, Moody’s said on Monday, after the country’s Capital Market Board announced the changes last week. However, the timetable for the first Turkish euro denominated mortgage backed benchmark has been pushed back after the lira hit new lows.