Covered Bonds

Wednesday’s sterling deal from Bayerische Landesbank came as welcome relief to supply starved investors but the paucity of supply has also been particularly marked in the euro market, where issuance volumes are half of last year’s shrunken levels. The technical mismatch is helping to spur demand in the secondary market where Spanish deals are once again in vogue.

Bayerische Landesbank followed Stadshypotek on Wednesday morning by issuing a £200m sterling FRN, which provided it with slightly cheaper funding to euros — a market in which issuance has fallen to half of what it was at this point in 2012.

The former Dexia Municipal Agency, now Caisse Française de Financement Local (Caffil), is considering whether to appeal against a French court judgement over three structured loans it made to a local authority. With as many as €10bn of similar loans in its €70bn collateral pool, the market is watching developments closely.

Changes to Spanish mortgage law will not lead to lower overcollateralisation, as the rules will only apply to new loans, Fitch said on Tuesday, contradicting an earlier statement from Moody’s.

Stadshypotek’s inaugural sterling covered bond not only achieved great investor diversification, but also provided exceptionally cheap funding, sending a strong message to other foreign issuers who may be looking for something similar.

Sweden’s Stadshypotek gave the primary covered bond market a surprise injection of liquidity on Monday morning when it opened books for its first sterling deal. In contrast to many covered bond issuers, it has diversified across a wide range of currencies in the last two years so the addition of a sterling deal was a natural progression.

The ABS and covered bond worlds have come closer together after Fitch had to explain its rating methodology for Commerzbank's SME structured covered bond programme. The rating agency will apply covered bond criteria to the pioneering programme, even though the bonds will have ABS like features. The news follows an upgrade of Banca delle Marche’s covered bonds after they were cross-fertilised with structured finance technology.

The Dutch Intervention Act, which grants wide-ranging powers to transfer assets to a third party, does not seem to have perturbed investors of SNS Bank’s covered bonds, which have performed 40bp since its nationalisation. Investors’ confidence may be based on the Dutch covered bond and contract laws. However, neither gives clear guidance on the uncommitted portion of collateral in the covered bond pool – of which there is plenty in the case of SNS Bank.

Spanish government bonds performed well on Friday but long term concerns about the outlook for Spain are spooking traders who are increasingly willing to consider leaving illiquid Cédulas shorts uncovered. In core markets, traders are focused on the Bund swap spread and suggested that a potential sell off could be accompanied by a spread tightening.

Korea Housing Finance Corp has broken the covered bond supply drought, mandating leads for its first dollar benchmark since 2011. The deal is set to come in February, following a roadshow, ahead of Korea’s plans to introduce a new covered bond law later this year.

The European Covered Bond Council’s Label Initiative already covers more than half the market, but more work is needed, according to ECBC head Luca Bertalot. Pfandbriefe remain a glaring absence.

Fitch placed the AA+ rated mortgage covered bonds of SNS Bank on Rating Watch Evolving (RWE) on Wednesday, a few days after Moody’s had downgraded them from Aa2 to A1. Despite this, the bonds rallied 40bp, underscoring investors’ belief that their rights are well protected.