Covered Bonds

Credito Emiliano priced a covered bond at a double digit margin on Tuesday, the first time in four years that second tier Italian bank has done so. The scale of demand and level of funding illustrated that spreads between peripheral and core markets are reverting to historical norms, and that Spanish borrowers have been shrewd to postpone issuance plans.

Covered bond spreads are so tight that there is almost no scope for secondary performance, bankers have warned. “Core markets are in a zone of low oxygen,” one said on Tuesday, as KBC Bank priced a €750m five year deal, having mandated Deutsche Bank, DZ Bank, ING, KBC and UniCredit as joint lead managers on Monday.

Eika Boligkreditt, formerly Terra Boligkreditt, has named leads for a deal roadshow and Deutsche Kreditbank has named lead for a euro benchmark, while two more covered bond deals could yet be mandated later on Monday for issuance on Tuesday.

The covered bond primary market lived up to supply expectations on Monday as two €1bn five year deals were priced amid talk of a further three to come on Tuesday. BNP Paribas showed the strength of its brand and the market by pricing the tightest French covered bond deal of the year.

Landesbank Hessen-Thüringen (Helaba) opened books for a public sector Pfandbrief due February 2019 on Monday, having announced the mandate last Friday. At €1bn, the deal was twice the size of any other German deal issued this year. It was priced with a generous, though not unusual, new issue premium but attracted the highest oversubscription for a Pfandbrief this year.

Belgium’s KBC Bank and Italy’s Credito Emiliano have added their names to Deutsche Kreditbank and mandated joint leads for deals that should all be launched on Tuesday. Despite the high number of covered bond transactions that will compete for investors’ attention at the same time, the small deal sizes and their diversified appeal should ensure that the trio enjoy a solid reception.

Four covered bond programmes will disappear within weeks and as many as 23 more are set to go in the future, Commerzbank research revealed this week, highlighting the parlous state of the market. New programmes are in development in Asia but these alone are unlikely to compensate for the losses.

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.