Covered Bonds

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.

DBS Bank is touted to bring Singapore’s first covered bond, possibly in the first quarter, bankers told The Cover on Wednesday, with Barclays and Deutsche Bank rumoured to be the lead managers. The Monetary Authority of Singapore cleared the way for banks to structure covered bond deals, when it updated its issuance rules on December 31.

Kookmin, Woori and Shinhan have large mortgage market shares according to Moody’s which gave a positive assessment of the country's new covered bond regulation. The rating agency also said Singaporean regulation was a positive despite shortfalls.

Aareal Bank and UniCredit Bank Austria priced successful euro deals in five and 10 year maturities on Monday, while Abbey issued a three year in sterling. All three priced at the tighter end of initial thoughts. However, prospective core borrowers with larger funding needs may need to offer more tempting spreads as the market softened on Monday.

Nine euro issuers took advantage of strong market conditions to raise €8bn in covered bond funding during the first week of the year. The issuers collectively attracted €17bn of demand spread over more than 900 orders, but the pick of the bunch were two borrowers from Spain and Portugal who attracted by far the highest levels of over-subscription over the broadest range of investors.

The public sector-owned French covered bond issuers, Caffil and La Banque Postale, returned to the covered bond market to issue two of the three 10 year deals seen this week. The deals were comfortably oversubscribed and provided exceptionally cheap funding for both issuers.