Covered Bonds

Stadshypotek’s jumbo transaction this week offers several lessons for the market and provides a clear indication of investor sentiment, as well as potential pitfalls on strategy and spread that core issuers would do well to avoid.

Draft proposals for new covered bond counterparty swap arrangements are being discussed. The talks could help to clear a big source of rating uncertainty, bankers told The Cover.

CaixaBank launched its first euro benchmark covered bond in over year on Tuesday, pricing a five year transaction well inside the sovereign curve. A limited spread concession relative to its better-rated peers put some investors off, but many more leapt at a deal offering yield and a spread with the potential for performance.

Sweden’s Stadshypotek ended a long absence from the euro covered bond market on Tuesday morning, approaching investors with a single digit spread for a new 5.25 year deal. But competing supply from other issuers and asset classes with more attractive starting spreads slowed demand, and the borrower was forced to revise guidance sharply upwards.

Fitch has rated Kiwibank’s newly set up covered bond programme AAA. Kiwibank can issue covered bonds up to NZ$3bn ($2.47bn) under the programme.

Italian covered bonds have traded steadily following Fitch’s downgrade of Italy late last week. Despite the sovereign downgrade, Fitch affirmed the AAA rating for the Pfandbriefe of UniCredit’s German subsidiary on Monday.

Deutsche Pfandbriefbank (Pbb) got the covered bond market off to a strong start on Monday, shrugging off weakening sentiment to launch a seven year mortgage backed Pfandbrief.

The market is awash with liquidity which continues to dribble down to the depths of the capital structure in search of ever diminishing yields. But fundamentally nothing has changed and with every downward revision to growth budget deficits, relative to growth, must rise.

Pfandbriefbank der Schweizerischen Hypothekarinstitute (Pfandbriefbank) priced a Sfr605m three tranche Swiss franc transaction on Friday morning. Demand for the paper was sharpened by a lack of competing issuance recently, as well as lingering uncertainty generated by the Italian elections last week.

The Norwegian FSA is expected to limit credit growth through the application of a higher capital charge and Norwegian banks will be monitored on a case-by-case basis on mortgage transfers to their covered bond programmes.

HSH Nordbank became the second German borrower of the year to fund SME loans with a covered bond this week, after using a KfW guarantee to turn the loans into eligible public sector collateral. As German Pfandbrief law bars unguaranteed SME loans, this approach offers an alternative to structured issuance. But bankers and analysts are divided over its viability.

Risk appetite continued to improve on Friday with Spanish government bond yields falling to levels not seen for at least two years. Positive peripheral sentiment bodes well for Cédulas issuance, but two German issuers are also considering deals.