Covered Bonds

National Australia Bank has returned to the euro market with a covered bond that is twice as long as its previous euro financing but at less than half the cost. Despite that, initial guidance was cheap relative to its peers. Yet the swell of demand it has attracted should ensure the final print is tighter.

Throughout this year the credit curve has flattened, forcing investors to chase anything offering a decent spread. But this mood cannot possibly last through the whole of next year. That's why challenged issuers should waste no time in accessing the market while they still can.

Redemptions are set to rise by 58% from €99bn in 2012 to around €160bn in 2013 but January may still not be very busy, bankers told The Cover. However, with core issuers able to fund more cheaply in the market than via the ECB, and peripheral issuers under pressure to do deals, supply expectations may be too pessimistic.

French covered bonds offer the best risk-reward, according to just over half the investors polled in the latest buy-side survey from Natixis. However, investors polled by The Cover strongly disagreed and said that Nordic deals offered much better value from a risk reward perspective.

In hindsight, KBC’s first covered bond could have been priced inside its final spread of 30bp over mid-swaps. But the deal was still a great outcome for KBC, taking advantage of a buoyant market — that has probably not seen its last deal this year.

KBC Bank chopped a quarter of the spread off its inaugural covered bond in less than an hour on Monday morning after collecting over €5bn of orders equally quickly. The deal was set to be priced in the afternoon at 30bp over mid-swaps, 15bp inside where Belfius Bank brought the first Belgian covered bond earlier this month.

Six UK banks drew £4.36bn between them from the Funding for Lending Scheme, the Bank of England revealed on Monday. Some of the biggest borrowers have also cut lending, according to data released by the BoE. This suggests that net covered bond issuance from UK banks will be negative in 2013, despite higher redemptions due next year than in 2012.

The two and five year tranches of Delta Lloyd’s Arena RMBS were priced last week in line with Aegon’s Saecure 12, which was the tightest Dutch RMBS issue since the crisis. Books were nearly twice-subscribed. Despite this Dutch RMBS have lagged the UK due to concerns about the mortgage market.

Standard and Poor’s announced on Thursday that it had revised its categorisation of all Spanish covered bond programmes from Category 1 to Category 2, thereby lowering the maximum rating uplift between an issuer and its covered bond programme from seven notches to six.

Royal Bank of Canada on Thursday priced its second SEC registered covered bond of the year, a $1.5bn three year deal, through joint leads Citi, RBC Capital Markets and UBS. The transaction took advantage of strong market conditions and a thirst for Canadian exposure unlikely to be quenched until at least the second quarter next year.

ING’s head of long term funding Martin Nijboer told EuroWeek that the decision to issue the bank’s inaugural dollar covered bond on Tuesday was an easy one to make thanks to close to ideal market conditions and the opportunity to take down long term debt. The $1.5bn 10 year, pre-funding for 2013, was a strong statement as a debut trade. However, rivals in the market questioned whether it was priced too generously.

The coupon on Münchener Hypothekenbank’s two year Pfandbrief that was priced on Monday was just 0.125%, confirming investor perception of the issuer as a "surrogate" for German government bonds, deputy head of treasury Claudia Bärdges-Koch told EuroWeek.