Covered Bonds

The European covered bond market was well supported on Monday by a combination of technical and fundamental factors. Negative net issuance is set to increase, this week’s Federal Open Market Committee (FOMC) meeting is expected to be supportive and the outcome of this September’s German elections is looking more certain.

Not content with pricing the first regulated Canadian covered bond in euros and the first regulated benchmark in US dollars, the Royal Bank of Canada is now marketing its first Australian dollar covered bond benchmark.

Just days after re-opening the dollar covered bond market for Canadian banks last week, Royal Bank of Canada has surprised investors by re-opening the euro covered bond market. On Thursday it issued the first euro denominated benchmark from a Canadian borrower in five years.

Bank Austria opened books for its inaugural €500m five year mortgage backed deal on Tuesday, attracting a book subscribed by more than three times from a wide range of investors. The bank was ready to do the deal weeks ago, but held back on expectations that a downgrade of Italy would hit its ratings.

Hungarian legislators have stepped back from making a retroactive change to foreign currency mortgage loan contracts. The government will now consult with the country’s banking association before taking any action, it said on Wednesday. Bankers had feared that such a move would have severely destabilised markets, potentially hitting covered bonds.

Renewed speculation about a potential merger between Spain’s Caixabank and Banco Popular Español could lead to Cédulas spread convergence, analysts told The Cover on Friday. Caixabank’s five year Cédulas saw plenty of buying interest this week, but BPE’s recently issued Cédulas remain unloved and are bid around 100bp wider than its peer.

Hungarian legislators have stepped back from making a retroactive change to foreign currency mortgage loan contracts. The government will now consult with the country’s banking association before taking any action, it said on Wednesday. Bankers had feared that such a move would have severely destabilised markets.

Just days after re-opening the dollar covered bond market for Canadian banks last week, Royal Bank of Canada has surprised investors by re-opening the euro covered bond market. On Thursday it issued the first euro denominated benchmark from a Canadian borrower in five years.

The secondary covered bond market remains well supported, with real money profit taking being easily absorbed, dealers told The Cover on Wednesday. Peripheral national champions are in hot demand and even weaker credits like Cajas Rurales Unidas have stabilised, they added.

The explicit rating link between a covered bond and its issuer is becoming increasingly tenuous. The rating of a covered bond can never be entirely immune from its issuer. But the connection is now less material than it ever was. This is because Europe’s draft bank Recovery and Resolution Directive explicitly excludes covered bonds from a bank’s resolution process.

Bank Austria opened books for its inaugural €500m five year mortgage backed deal on Tuesday, attracting a book subscribed by more than three times from a wide range of investors. The bank was ready to do the deal weeks ago, but held back on expectations that a downgrade of Italy would hit its ratings.

Fitch will not change its covered bond rating methodology while Europe’s new bank directive remains in draft form, it said on Tuesday. The draft directive has made it explicitly clear that in the event of a bank’s resolution, its covered bonds would be protected from being bailed in. However, this has not yet been reflected in covered bond ratings.