Covered Bonds

EUROWEEK: Tell me about the pass-through

EUROWEEK: What’s your view on price discovery during bond syndication and pricing?

Eichert, CA-CIB: Covered bonds should be anchored to the issuer rather than the unsecured rating. The link to the issuer exists because covered bonds need a sponsor that is there to support the programme. With bail-ins of senior unsecured becoming possible we could have the situation where senior is bailed in but the bank continues to support the covered bonds. Unsecured is therefore not the correct starting point anymore. Rating agencies will have to rethink the way they award bank ratings with de-linkage between senior and issuer rating, and covered bonds being linked to the issuer rating.

EUROWEEK: SME covered bonds don’t seem to be accepted as the real thing by many traditional covered bond investors but Fitch rated the Commerzbank SME deal as if it were a covered bond. Why is that?

EUROWEEK: How do we feel about other non-traditional forms of collateral such as shipping or aircraft loans?

EUROWEEK: In what way are proposed covered bond regulations affecting the market?

EUROWEEK: Senior unsecured spreads have tightened considerably versus covered bonds but is this sustainable?

The conditional pass-through covered bond structure will be the key focus of debate at Wednesday’s plenary session of the European Covered Bond Council’s plenary session, at the Caixa Forum in Barcelona. Investors are likely to baulk at the structure’s inherent extension risk, but the sell side will counter that traditional bullet structures could become pass-through as documentation is not specific and they have never been properly tested.

This week’s French covered-bond supply was the highest in the year so far as three issuers collectively raised €3bn on demand of €5.5bn over nearly 300 orders. Though the sell side predictably claimed all deals were a success, investors conspicuously exercised a high level of discrimination.

Banco Popular Español returned to the covered bond market for the second time this year and reduced its reliance on retained issuance to bring a four year Cédulas that was increased from €500m to €750m. Despite being barely oversubscribed and overly reliant on the domestic bid, the book was granular.

AIB Mortgage Bank issued its second covered bond of the year, extending its curve and pricing tighter than where the Bank of Ireland had issued. However, the scale of demand was a third of its peer’s and the breadth of investors that took part was almost halved as big investors were not ready to increase their country limits.

This week’s French covered-bond supply was the highest in the year so far as three issuers collectively raised €3bn on demand of €5.5bn over nearly 300 orders. Though the sell side predictably claimed all deals were a success, investors conspicuously exercised a high level of discrimination.