Covered Bonds

The European Banking Authority (EBA) on Monday published the final draft of its Regulatory Technical Standards (RTS) on close correspondence between the fair value of an institution's covered bonds and the fair value of its assets. The document will put an end to an accounting trick that allowed banks to make their capital position appear better than it was.

NIBC has priced the first conditional pass through covered bond in line with guidance building a comfortably oversubscribed book. But whether other issuers will attempt similar deals remains to be seen.

Covered bonds from the Eurozone periphery, and from the weaker credits in particular, are likely to offer the best performance in the covered bond markets, said Deutsche Bank on Tuesday. The banks predicts that this group of credits will continue to offer the best performance in a market set for tighter spreads as it shrinks in size over the next three years.

The European Central Bank’s (ECB) clarification of the way in which higher haircuts are applied for retained covered bonds took effect on Tuesday. Crédit Agricole covered bond research praised the new framework for being less harsh than had originally been assumed.

A final decision on the timing of NIBC’s conditional pass-through covered bond will be taken on Tuesday morning when the outcome to the US political impasse over the state budget and Obamacare should be known. Political risks were also evident in Italy on Monday, though Italian covered bonds have so far held steady as the dearth of supply has kept spreads close to their tightest levels of the year.

An unprecedented €4bn blitz of new covered bonds in just 24 hours this week underscored the strength of investor demand but is unlikely to reverse the product’s slump to a decade low, writes Bill Thornhill.

Covered bonds will benefit from bank resolution proposals, but rating agencies must see the final wording before implementing new methodologies. By then it may be too late for bonds, already on the cusp of a sub-investment rating, from being downgraded to junk — a move that would prompt forced selling. But salvation is at hand.

If Spanish non-performing residential loans rise above 6% from their present level of 5.2%, then Fitch will review its probability of default assumptions for Spanish covered bonds, it said on Friday. The agency’s caution came after Moody’s earlier warned that a rising number of Spanish banks risk becoming increasingly vulnerable.

The covered bond market experienced a rare surge of activity this week, with five deals pricing within an extraordinarily tight 24 hour timeframe, and six deals over the week as a whole, making it one of the busiest periods of the year so far. Despite this, the longer-term picture is set to remain lacklustre.

While many German issuers have struggled to price deals through swaps this year, Münchener Hypothekenbank has been sailing through the storm. After pricing a €500m five year at 14bp through mid-swaps this time last year, it returned to the covered bond market on Thursday with a more generously priced and larger deal which, despite being this year’s tightest, still managed to offer some performance potential.

HSH Nordbank issued into a busy primary market on Wednesday and took no chances with its no-grow €500m five year deal, offering investors an eye-catching spread over other German Pfandbriefe to overcome any rating or reputational concerns.

France’s Caisse Française De Financement Local (Caffil) returned to the market for the second time this year to issue a 15 year euro deal — the fourth in that tenor of 2013 but the first from France. It offered a modest premium to the French curve and, being sufficiently different from a host of other covered bonds out at the same time, it was well received.