Covered Bonds

Depfa was little changed in the secondary market on Tuesday, despite having delayed its sale, while dealers reported that the general market had stabilised after earlier weakness.

Covered bond ratings stabilised over the final quarter of 2013, according to Standard & Poor’s. Country risk will continue to influence ratings this year, it predicts, while covered bonds will still play a big part in bank funding, as credit conditions remain negative.

Belfius Bank has mandated joint leads for a deal to be launched on Tuesday. Meanwhile, secondary market spreads have stabilised, and Irish bonds have outperformed following the country’s rating upgrade. Despite a mixed secondary market tone, investors are bullish on core prospects at the long end due to the curve’s steepness and impact of roll down.

The Italian government is poised to amend the country’s covered bond law to allow issuers to use SME collateral for a new type of dual recourse bank bond, or Obbligazioni Bancarie Collateralizzate, writes Bill Thornhill.

Core covered bond issuers risk triggering a sell-off in the product by attempting to lure deserting investors back with fatter premiums, bankers warned this week as German new issues mostly struggled, writes Bill Thornhill.

The conditional pass-through mechanism and SME structured covered bonds were the market’s big innovations last year and more issuers in more regions should adopt these pioneering developments in 2014, while Spanish banks are considering a brand new covered bond structure.

The outlook for covered bond supply remains quite good but issuance could start to taper off next week. The 20bp rally in Bunds this year has hit demand and has caused some issuers to wait. They hope for a weaker Bund and higher yield which is expected to revitalise demand and issuance, bankers told The Cover on Friday.

Core covered bond issuers risk triggering a sell-off in the product by attempting to lure deserting investors back with fatter premiums, bankers warned this week as some new issues struggled.

Commonwealth Bank of Australia added to the trend for sterling floating rate covered bonds on Friday, issuing a £350m four year deal. It followed the recent three year sterling deals from Lloyds Bank and Abbey. Given, CBA’s lack of repo eligibility with the Bank of England, a smaller issue was expected. Meanwhile, Deutsche Hypothekenbank also issued a floater, bringing a €250m two year Pfandbrief.

UK’s Abbey returned to the sterling covered bond market for the first time since February 2012 with a three year floating rate deal. The transaction benefitted from unfulfilled demand from Lloyds Bank's earlier deal, and both were driven by changes to the UK's Funding for Lending Scheme (FLS).

UniCredit’s decision to issue a three year floating rate covered bond in benchmark size alongside a 10 year fixed rate deal was a response to the new regulatory environment and could pave the way for a new market sector. The new format may help improve funding opportunities for other issuers, particularly in Europe’s periphery.

ABN Amro returned to the covered bond market on Thursday, issuing a €1.5bn 10 year deal with an attractive new issue premium. The deal showed that, for the right name and spread, the market is still receptive to core issuers. However, with the long end now saturated, questions are growing over the market’s outlook.