Covered Bonds

Initial price thoughts are a useful price discovery tool in illiquid markets. But in core markets where liquidity is high, they can obfuscate how successful a deal has been. It is time to consider doing away with them where possible.

Aareal Bank and Bank Austria on Monday each raised €500m in covered bond funding at competitive levels, attracting oversubscribed order books, even as spreads widened in the secondary market.

Turkey's Sekerbank is considering issuing its debut Eurobond this year, covered bonds and it is increasing the size of a rolled over syndicated loan. The funding is being done to support the 15%-20% growth of the bank it expects this year.

ABN Amro returned to the covered bond market on Thursday, issuing a €1.5bn 10 year deal with an attractive new issue premium. However, with the long end now saturated with supply and the secondary market still looking soft, questions continue to linger.

UniCredit’s decision to issue a three year floating rate tranche in benchmark size was a response to the new regulatory environment and could pave the way for a new market sector, Waleed El Amir the bank’s head of long term funding, told The Cover on Thursday. The new format may help improve funding opportunities for other issuers, particularly in Europe’s periphery.

A phenomenal amount of new supply since the start of 2014 meant the FIG market was bound to suffer some indigestion eventually. It did so on Tuesday, after Intesa Sanpaolo struggled to find traction with an eight year senior trade on Monday. Bonds widened on Tuesday and the market took a breather, but things seemed to be back on track on Wednesday.

The Turkish covered bond law will be updated any moment now, paving the way for the first publicly syndicated euro denominated, mortgage backed covered bond. VakıfBank, Işbank, Ziraat Bank, and Akbank are in the frame, but the odds-on favourite to bring the first benchmark sized deal is Garanti Bank, which may surface in the first quarter.

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. If structured with a soft bullet, the uplift above the issuer’s rating would be limited, Fitch said on Tuesday. However, bankers said the prospective bonds would be more likely to use a pass through structure.

Good news has been hard to come by in the covered bond market of late. Three years of declining volumes has left the market a shadow of its former self. But with €444bn of supply posted with the ECB, there is tremendous potential for substantial growth, especially since the senior unsecured funding is likely to become more expensive. But issuers will need to pay careful attention to encumbrance as regulatory scrutiny will only increase.

Italy’s UniCredit showed that the covered bond market is wide open for the right name and spread with a strong reception for its dual tranche fixed and floating rate covered bond on Wednesday. The deal will shore up sentiment for peripheral markets, but means little for core issuers whose bonds have recently softened, said bankers.

Deutsche Pfandbriefbank (Pbb) issued 2014’s second Pfandbrief deal on Tuesday but despite a highly supportive technical backdrop, a generous new issue premium and small deal size, it was unable to muster a convincing level of demand. The anaemic reception was due to the odd choice of an eight year tenor, said bankers, but it also raised concerns over supply indigestion.

National Australia Bank is expected to sell the first international covered bond in the Swiss franc market on Monday afternoon, its debut in the currency. While Australian issuers are generally popular with Swiss investors, bankers away from the deal have speculated that an unsecured bond may have been a wiser choice for the issuer.