Covered Bonds

The AA- rating threshold for the eligibility of covered bonds in bank liquidity buffers proposed under Basel III’s Liquidity Coverage Ratio (LCR) could be dropped under proposals for the fourth iteration of the Capital Requirements Directive (CRD IV), the European Covered Bond Council’s plenary session in Munich heard on Wednesday. CRD IV is the European Union's vehicle for implementing the Basel III regime.

The covered bond market could face hard limits on bond issuance, thanks to asset encumbrance, the European Covered Bond Council’s plenary session in Munich heard on Wednesday.

France’s Axa Bank has returned to the market after a five months with a €500m seven year Obligation Foncière (OF). Though the transaction is backed by Belgian residential mortgages, it is structured under French law and, while it offers a decent premium against French OATs, the spread to Belgian OLOs is unattractive.

Crédit Agricole has promoted its head of covered bond syndicate to a more wider-reaching role covering financial institutions and ABS.

A group of central bankers, portfolio managers and investment bankers came together in mid-August 2012 to discuss the covered bond market in the context of the sovereign debt crisis. Despite a fundamental belief in the soundness of the covered bond product, the roundtable participants warned of the dangers of the inextricable link between a sovereign entity, the issuers within its jurisdiction and their covered bond programmes.

Austria’s Bank für Arbeit und Wirtschaft (Bawag) returned to the covered bond market for the first time in since 2010 on Tuesday, launching an inaugural mortgage backed benchmark.

After a six month absence Banco Sabadell returned to the covered bond market on Tuesday with a two year cédulas. Though it looks like the borrower will successfully raise its target €500m in line with guidance, bankers on the deal warned that the depth of demand for peripheral paper had become too thin to realistically consider another deal until after Wednesday’s German court ruling on the legality of the European Stability Mechanism.

New Zealand’s ANZ National launched its second ever euro benchmark on Tuesday, finding strong demand for a €750m five year deal. The jurisdiction offers an attractive pick-up over its Australian neighbour, which, together with the hunger for fresh supply, is helping raise the bid for New Zealand covered bonds, said syndicate bankers.

Crédit Agricole and Austria’s Hypo Noe Gruppe Bank launched seven year public sector backed benchmarks on Monday, benefiting from strong domestic support amid an explosion of issuance across the capital markets.

Rabobank’s mortgage lending subsidiary, Obvion completed the first public RMBS deal of the autumn, pricing its Storm 2012-4 deal at levels that offered generous premiums for investors but nowhere close to the covered bond funding achieved by its Dutch peers.

Three European borrowers mandated covered bond deals on Monday, taking advantage of what could end up being only a brief funding window in the wake of the European Central Bank’s announcement last week that it would support peripheral sovereign debt markets.

The strong post-ECB rally seen in Spanish government bonds has resulted in a decent performance of Cédulas, and if the current mood can be sustained it could be only a matter of time before a Spanish issuer takes the plunge. But even if that does not happen, syndicate bankers anticipate three to five deals from other jurisdictions emerging in the next 10 days.