Covered Bonds

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.

Royal Bank of Canada sealed its place as a global issuer when it returned to the dollar market for the second time in three months to raise $2bn of five year funding, its longest SEC registered deal in the currency so far. This was its fourth benchmark covered bond deal of 2013, making RBC by far the most prolific borrower with the broadest global reach.

Sweden’s central bank highlighted the refinancing risk between the duration of assets and covered bond liabilities in a financial stability report this week. It is also concerned about the high proportion of bonds that banks are holding for liquidity purposes. Analysts welcomed the report and the bank’s pre-emptive and prudent approach.

German issuers have struggled to price deals much through swaps this year, but if there was one issuer that could, it was always likely to be Münchener Hypothekenbank. 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.

The covered bond market has exploded this week, with four euro deals launched on Wednesday, following one in US dollars on Tuesday. Bank issuance overall is back with a bang, after Fed tapering uncertainty was pushed aside, for the time being at least, and investors got the German election outcome they wanted. There has been strong supply in bank capital and senior unsecured, while UK issuers have returned to ABS after a long absence.

HSH Nordbank and Raiffeisenlandesbank Niederösterreich-Wien joined the rush of issuers bringing deals on Wednesday, selling five year and seven year no grow €500m benchmarks, respectively. While RLB NW continued the price tightening trend for Austrian landesbanks, HSH Nordbank offered a generous spread to make sure any rating or reputational concerns among investors were cast aside.