Covered Bonds

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.

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.