Covered Bonds

Conditional pass-through bonds gained buyside support on Wednesday when a leading covered bond investor said they could help small, rating-constrained banks from Europe’s periphery. Henrik Stille of Nordea Investment Management was speaking at a panel at the ECBC plenary session in Barcelona. Vulnerable issuers could use the conditional pass-through structure to shore up covered bond programme ratings as the rating agencies are not going to move quickly on positive developments for covered bonds in the Bank Recovery and Resolution Directive.

Multi-Cédulas are enjoying some investor support, and RBS says they offer good relative value. However many of these Spanish multi issuer programmes face being downgraded to junk and are lagging the country’s government bond rally. Downgrades would spark forced selling, which the existing investor universe would not be big enough to absorb, Crédit Agricole has warned.

EUROWEEK: Asset encumbrance has been grabbing the headlines or a while now but I’m not sure it’s such a negative factor from a covered bond investors’ perspective is it?

EUROWEEK: Covered bonds are excluded from bail in, but there still seems to be a question over the residual unsecured claim and voluntary collateral?

EUROWEEK: How do spreads affect your asset

Once the domain of triple-A rated deals with bullet maturities backed exclusively by public sector or mortgage loans, covered bonds have morphed into a multi-faceted asset-class in which migration is now visible on many different planes. Investors and other key market players met in August to discuss the evolution of the market in a roundtable sponsored by Crédit Agricole CIB.

EUROWEEK: Does it concern you that we might soon be seeing a reining back of central bank liquidity?

With the covered bonds becoming increasingly heterogeneous, investors and other key market players met in August to discuss the market’s evolution.

EUROWEEK: Does the evolution of the housing market or employment trends in any parts of Europe give cause for concern?

EUROWEEK: There has been a fair bit of talk about green covered bonds but from my perspective it doesn’t seem to have amounted to much.

EUROWEEK: Bank deleveraging, a surfeit of central bank liquidity and falling loan production have affected the market, while regulations look likely to cement in a long term structural bid from the institutional side. How long can we expect this technically supportive backdrop to continue exerting its influence on spreads?

Cortazar, BBVA AM: We see little value in investing in the core covered bond markets as spreads have become too tight. Though spreads have come in a long way in Spain and Italy they remain quite wide versus Germany and core Europe. But reforms are on the way and they will be implemented, which means over the longer term that spreads still have room to perform versus the core. A lot of challenges lie ahead but I think the worst is behind us so I am relatively positive on Spain.