Covered Bonds

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.

Lloyds Bank issued the first sterling covered deal from a UK issuer in the home currency since May 2012 on Tuesday. Despite pricing at a fraction of the 170bp spread that Clydesdale Bank paid for the last UK sterling floating rate deal, Lloyds managed to achieve the highest level of demand for this format in local currency.

Nordea Finland and Sparebanken Vest Boligkreditt achieved the best results among the slate of deals that were issued by core covered bond issuers this week. Both transactions attracted among the highest level of over subscription, despite pricing at the tightest spreads.

Aareal Bank has mandated joint leads for a benchmark covered bond likely to be launched early next week. A number of other mainly core issuers are also eyeing next week’s market. But, with senior spreads still trading tight, most borrowers will probably defer covered bond deals until later in the year, said bankers.

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.