Covered Bonds

Portuguese and Spanish issuers, Caixa Geral de Depósitos and Banco Mare Nostrum launched deals on Wednesday that, despite being aggressively priced, were heavily oversubscribed. The deals showed demand is clearly skewed to higher yielding credits, boding well for second and third tier peripheral issuers who are looking to cut central bank funding dependence.

ANZ and La Banque Postale attracted good demand for their covered bonds on Wednesday, following solid investor endorsements for deals from core Europe on Tuesday. But in contrast to the periphery, where performance is more assured, core names offer limited performance potential and issuers are more likely to need premiums to get their deals away, said bankers.

The European Commission must ignore the counsel of the European Banking Authority, which has called for covered bonds to remain as level 2A assets within Basel III’s Liquidity Coverage Ratio. It must instead base its decision, due by June 30, on the EBA’s analysis that covered bonds are as liquid as sovereign bonds and good enough for Level 1 of the LCR.

The year’s first batch of covered bond issues have been easily absorbed by a wide range of investors producing comfortably oversubscribed books. The first peripheral deal mandate has come from Portugal and another from Spain is expected shortly.

Italian insurer Generali and UK lender Abbey National have both mandated leads for euro senior deals with more issuers expected to follow later this week, once several European countries return to work after Monday’s Epiphany holiday.

Four issuers from Finland, France, Australia and the UK are set to price covered bonds on Tuesday and Wednesday. Market conditions are broadly constructive, especially for higher yielding names, said bankers, but core issuers might have to offer concessions to tempt investors in a busy start to the year.

Changes to Italy’s covered bond law improve the segregation of cover pool assets and are good for the market, according to Moody’s.

South Korea and Singapore are all looking to drive covered bond issuance this year with new frameworks.

The European Banking Authority wants covered bonds to stay in the second tier of asset classes that can count as liquid assets for European banks, dashing market hopes that it would back up its own recent findings that covered bonds were nearly as liquid as sovereign debt.

Banks in the Netherlands are expected to finally prepare to print additional tier one capital in 2014, after the country removed the final barrier to issuance by ruling that AT1 instruments will be tax-deductible from January 1. The country’s banks are expected to be joined by Italian names in debut AT1 issuance — but Germany is still yet to resolve the tax issue.

The European Banking Authority wants covered bonds to stay in the second tier of asset classes that can count as liquid assets for European banks, dashing market hopes that it would back up its own recent findings that covered bonds were nearly as liquid as sovereign debt.

Issuers will enjoy an even more benign market backdrop when they return in January, covered bond bankers said on Thursday, after markets took the first piece of tapering from the US Federal Reserve in their stride. The bigger challenge for core issuers will be to work out how much of a concession will be required to offset tight spreads and attract big order books, bankers said.