Covered Bonds

The primary FIG markets are finally winding down in the run up to the Christmas holidays, with no new deals being launched this week. A mystery capital issuer postponed its deal until the new year, while UBS and Yorkshire Building Society closed liability management exercises — but the only real activity is among regulators.

The ICMA Covered Bond Investor Council is the latest body to support the promotion of covered bonds to the top tier of bank liquidity buckets in the Capital Requirements Regulation.

Covered bonds look set for improved ratings from Fitch, as it plans to amend its rating criteria to take into account their exemption from bail-in. The news comes after Moody’s said covered bonds could be upgraded in 2014.

A better macroeconomic outlook and more transparency were two reasons why Moody’s chose to upgrade the ratings of a dozen Spanish covered bond programmes. The move presages spread tightening in the New Year when liquidity returns, traders said on Monday, with second tier Spanish covered bond programmes set to move closer to those of the country’s national champions.

The exclusion of covered bonds from the impending bail-in regime will strengthen covered bonds’ credit quality and could lead to the first ratings upgrades next year, Moody’s said in its outlook for 2014.

Banca Carige’s residential mortgage covered bonds have lost their investment grade status after Moody’s downgraded them by three notches.

BBVA has brought forward the repayment of a retained €2bn Cédulas Hipotecarias to next week. It will give BBVA’s covered bond programme some breathing space after its eligible over-collateralisation reached the 125% limit by the end of the third quarter. The freed-up collateral will also allow it to adjust its use of cover pool assets while it indexes its house price valuations.

ABN Amro has become the second bank this year to remove a clause in its covered bond documentation that, in an issuer insolvency, stipulated pro-rata distribution of overcollateralisation (OC) to cover asset-liability mismatches for maturing bonds. As a result, the bank has lowered the amount of OC needed for a triple-A rating, making its programme more collateral efficient.

National Bank of Canada got a €1bn five year covered bond safely away on Tuesday, its first deal under the new Canadian covered bond law, after paying a healthy new issue premium to counter falling liquidity.

BBVA has brought forward the repayment of a retained €2bn Cédulas Hipotecarias to next week. It will give BBVA’s covered bond programme some breathing space after its eligible overcollateralisation reached the 125% limit by the end of the third quarter. The freed up collateral will also allow it to adjust its use of cover pool assets while it indexes its house price valuations.

With tentative signs of economic growth in some parts of Europe, and with the stigma of central bank funding starting to rise, a brighter outlook is emerging for covered bond deals in 2014. Bill Thornhill reports.

A single resolution regime, a single supervisory regime and a single fund, should, in theory, mean that southern Europe’s banks become delinked from their sovereigns.