Covered Bonds

Having issued a A$900m 10 year last week, Westpac returned to the covered bond market on Monday to mandate its second US dollar benchmark of the year. It follows recent dollar deals from Royal Bank of Canada and NordLB and will be the fourth in that currency from an Australian issuer this year. The deal news came as Fitch launched an Asian covered bond publication.

There is an even chance that two deals could surface from Europe’s core and periphery next week, bankers said on Friday, but potential issuers have been perturbed by the performance of this week’s two deals, both of which have softened slightly. However, in both cases there were specific factors at work that are unlikely to impinge on prospective deals where there is high confidence of a strong reception.

Swedish banks depend heavily on market funding and are exposed to a structural liquidity risk, making them sensitive to disruptions in the financial markets, according to the country’s regulator. It may raise the risk weighting on mortgages loans to 25%, having already tripled it to 15% in May.

Sparebank 1 Boligkreditt became the first Norwegian issuer in over two years to fail to attract a fully subscribed book when it priced a €1bn long six year benchmark on Tuesday. The anaemic result was surprising in the context of DNB Boligkreditt’s earlier success, leading bankers to question the choice of maturity, the appetite for Norwegian risk and the enthusiasm for tightly priced Nordic deals.

Cajas Rurales Unidas (CRU) on Thursday extended its covered bond curve by two years but funded 20bp cheaper than its first three year deal issued earlier in the year. The result was all the more notable given that the programme had been downgraded to junk by Moody’s in the summer.

Westpac is set to price the second 10 year covered bond deal in Australian dollars, just three months after Australia and New Zealand Bank’s successful debut. This will be only the second Aussie dollar issue from a domestic bank this year, but the fourth in the currency, as Canadian issuers have also been prevalent.

After a seven year slump and a 50% price fall, the Irish housing market is finally stabilising, although a recovery is still some way off, Moody’s said on Thursday.

Cajas Rurales Unidas (CRU) extended its curve by two years but funded 20bp cheaper than its first three year deal on Thursday. There was enough demand for a larger deal, but with one eye on performance, it appeared to have prioritised higher quality accounts.

Covered bond investors are less sensitive to ratings, according to latest research from NordLB. They also expect spreads to narrow, especially in Germany. The majority would buy conditional pass through structures and some would even look at alternative types of collateral.

All eyes were on Barclays this week, as it brought the UK’s first additional tier one capital deal. The trade is expected to be priced on Wednesday afternoon and is another test for the nascent market, being only the fourth deal in the format. Elsewhere, the senior and covered bond markets continued their strong run as ravenous investors stampeded for paper in the run up to year end.

Cajas Rurales Unidas plans to sell a five year Cédulas Hipotecarias on Thursday, six months after making its covered bond debut. However, this is unlikely to herald a wave of Spanish covered bonds, said bankers. The issuer’s first deal had widened considerably following a Moody’s rating downgrade, but now trades well inside the reoffer.

Sparebank 1 Boligkreditt struggled to get investor traction on Tuesday morning for its €1bn long six year benchmark. The weak demand was in sharp contrast to last week’s €1.5bn five year bond from DNB Boligkreditt, with bankers away from the deal suggesting the long six year maturity may have been slightly too long for asset managers looking to shorten duration.