Covered Bonds

Sparebank 1 Boligkreditt on Monday returned to the euro market for the first time since January. The rare borrower priced a five 1/2 year benchmark many times cheaper than where it sold a longer trade at the start of the year, exemplifying the sustained tightening in core covered spreads.

The covered bond market is gearing up to restart next week, said syndicate bankers, who expect at least two benchmark trades to hit the screens. German and Scandinavian borrowers are tipped as the most likely candidates to take advantage of squeezed secondary levels. But with no end to spread contraction in sight, the urge to wait and watch levels grind tighter could cause some borrowers to hold off.

UniCredit made history on Tuesday when it priced a €750m covered bond at almost 100bp through Italian government debt, crashing through the sovereign pricing floor that has existed until now in the asset class.

After the drama and excitement of UniCredit pricing through BTPs, the European covered bond market has returned to normal — only to be outshone by senior unsecured, where three deals are on the way.

The Cover spoke to HVB’s Holger Oberfrank, head of flow and funding, and Thomas Neupert, head of public sector origination, about its issuance plans for this year, and the outlook for Pfandbriefe.

Intesa Sanpaolo was the most likely candidate to follow UniCredit’s groundbreaking €750m reopener, but could face an even higher spread, investors told The Cover on Wednesday. Italy also represents the only hope for peripheral supply in the short term, as Spain remains priced out of the primary.

UniCredit has rewritten the rulebook this week by pricing a covered bond 100bp tighter than where the Republic of Italy can fund itself. But, other than Intesa Sanpaolo, it is unlikely any other issuer could follow suit.

The secondary market was subdued on Monday but the tone was still clearly constructive with buyers in virtually all sectors bar the medium part of the multi-Cédulas curve. Though the near term outlook is expected to remain buoyant, dealers question whether a repeat of Autumn 2011 will be seen.

Though the secondary market was subdued on Tuesday, the tone was still clearly constructive with buyers in virtually all sectors bar the medium part of the multi-Cédulas curve. Though the near term outlook is expected to remain buoyant, dealers are sharply divided on the outlook for this autumn and beyond.

UniCredit drew a stellar reception for the first Italian benchmark in almost a year on Tuesday, with the vote of confidence for peripheral risk raising hopes for follow on trades from Italian and Spanish names.

Pfandbriefe issuers continue to reduce their peripheral exposure in public sector backed deals, second quarter cover pool data has confirmed. Though there have not yet been any moves to cut peripheral exposure in mortgage backed deals, analysts said this would not be hard, given the small exposure, high overcollateralisation and conservative valuations.

The slew of recent rating downgrades has left many covered bond issues with split ratings. In the event of further downgrades it is likely that some bonds could fall out of the Barclays index but remain in the Markit iBoxx. This could force index tracking investors to deviate from their mandate.