Covered Bonds

Five issuers from France, Germany, Ireland, Austria and Italy have joined the covered bond pipeline. And, with the European Central Bank ready to consider further extraordinary liquidity measures, the conducive technical backdrop looks set to remain. Despite this, the longer term supply outlook remains uncertain and overall issuance, which is at the decade’s low, is not about to improve.

With market conditions still buoyant and the FOMC meeting and German elections now out of the way, there should be some new covered bond deals this week, bankers told The Cover on Monday. There is a good chance of a couple of deals surfacing as several issuers have finished roadshows recently and are ready to move.

Spain’s frequently criticised Cédulas framework has come under fresh scrutiny after reports that the European Commission believes it severely undermines senior unsecured investors by giving covered bondholders preferential claim to a bank’s entire mortgage portfolio. The news comes nearly a year after The Cover first reported that the law was being reconsidered.

Competition for the hottest venue was fierce in Barcelona last week as bankers got down to some serious revelling after The Cover’s annual awards.

A Dutch Mortgage Institute (NHI) that will issue a new type of government-guaranteed bond moved a step closer to fruition this week, after a high-level committee advising the Dutch government endorsed it as a way of reducing costs for mortgage borrowers. The initiative may lead to lower covered bond supply but the net impact will be minimal given very little is currently being issued and given doubts, expressed by Fitch, suggesting the scheme offers little material benefit for banks.

Moody’s has invited market participants to comment on a proposed adjustment to its cover bond rating methodology that, if put into practice, will lead to rating uplifts. The consultation reflects the European Union’s newly proposed Bank Recovery and Resolution Directive and comes just in time to prevent the covered bond programmes of two Italian banks from being downgraded to sub-investment grade — although Moody’s was at pains to point out the timing was a co-incidence.

ANZ New Zealand this week issued a €500m five year mortgage-backed covered bond through joint leads ANZ, Barclays, and UBS. In contrast to a recently issued deal from its parent bank, the transaction was comfortably oversubscribed, well prepared, offered an attractive new issue premium and was well timed.

Having been absent from the market since February 2011, Kommunalkredit Austria returned on Tuesday to launch a €500m five year public sector backed Austrian Pfandbrief through joint leads BNP Paribas, DZ Bank, Erste Group and Landesbank Baden-Württemberg. With its troubled history, the issuer could not afford to take any chances.

Banca Popolare Dell'Emilia Romagna Società Cooperativa, has mandated leads for a covered bond roadshow in the wake of the Federal Reserve’s surprise decision not to taper its bond purchasing programme. The Fed’s unexpected move should support spreads and issuance, especially for borrowers like the Italian bank that offer high yields, said bankers.

The Covered Bond Label Foundation has announced that the European Banking Authority has appointed Mr Lars Overby as its Observer Representative on the Covered Bond Label Advisory Council. The move should help improve the dialogue between industry stakeholders, regulators and the political establishment.

The covered bond ratings of Banca Popolare di Milano and Banca Carige are likely to be downgraded to junk. This will lead to a prohibitive rise in the bonds’ capital consumption, lowering the absolute return and increasing the risk of forced selling. This will be immensely frustrating for investors, given the high quality collateral and regulatory support. The move may highlight the merits of pass-through structures.

Providing collateral with a substantial cushion remains an important remedy to cross currency swap counterparty ineligibility, said Fitch in a note to clients on Wednesday. If collateral is not posted, the issuer becomes exposed to jump-to-default risk, and it can become impossible to replace or novate the swap in a timely manner, which would leave noteholders exposed to potential losses.