Covered Bonds

A group of issuers and investors came together in February to discuss Nordic covered bonds in relation to housing, asset encumbrance, the approach to new markets, funding needs, transparency and the outlook for spreads.

Just a year ago, peripheral borrowers were locked out of the covered bond market. But encouraging signs in some of Europe’s economies have brought investors out of their bunkers — helped along, occasionally, by more esoteric buyers.

Net euro denominated covered bond supply has dropped to the lowest level since the euro begun. And with a surfeit of central bank liquidity alongside continued balance sheet shrinkage, this trend looks set to continue, suggesting that the already measly supply forecasts for the year could be revised lower.

Standard & Poor’s brought a ray of sunshine to the world of Cédulas ratings this week, when it upgraded NCG Banco’s bonds because of improvement in the quality and maturity profile of the bank’s loan book.

The perceived safety of the covered bond asset class was highlighted this week in the wake of renewed volatility following the bail out of Cyprus. In the eurozone’s higher risk periphery there was a marked outperformance of the asset class relative to unsecured debt.

Since UniCredit’s groundbreaking covered bond deal last year, a plethora of issuers have priced inside their sovereign. This new financial order has led to a re-examination of how covered bonds are priced and whether sovereign risk has much bearing on covered spreads anymore.

UBS and Swedbank closed dollar benchmarks at the tail end of last week, funding at more competitive levels than if they had issued in euros. And the dollar market is wide open for further issuance, bankers said.

Banco Santander Chile is planning to launch the first transaction from the country’s new covered bond framework, a funding official at the issuer has told EuroWeek. After starting with a domestic deal, the borrower could approach international accounts in the future — but the Chilean model has several quirks that could flummox foreign buyers.

Kiwibank sold a debut Swiss franc covered bond this week, drawing healthy demand at a price that tightened slightly from guidance. A lack of competing supply, along with an attractive spread over domestic Pfandbriefe issuers, allowed the leads to close books quickly on the oversubscribed trade.

A group of issuers and investors came together in February to discuss Nordic covered bonds in relation to housing, asset encumbrance, the approach to new markets, funding needs, transparency and the outlook for spreads.

The prospect of pass-through covered bonds would once have been instantly slapped down as heresy, but a much more challenging ratings environment has forced the covered bond market to give them consideration.

Covered bonds are one of the main drivers of asset encumbrance, according to the European Banking Authority (EBA), which singled the asset class out for special attention in a new asset encumbrance reporting plan.