Covered Bonds

A new type of Cédulas backed by export finance loans is being lined up to help ease funding pressures on Spain’s banks, writes Bill Thornhill.

Moody’s left Italian covered bonds clinging to single-A ratings this week, after an avalanche of downgrades. If Italian issuers now on the edge of junk suffer further cuts, their covered bonds could stay at single-A with high over-collateralisation. But in the murky world of low investment grade Moody’s methodology becomes more uncertain.

Norddeutsche Landesbank priced 2012’s tightest seven year covered bond on Tuesday, highlighting the scarcity of supply and a growing divide between the haves and have nots of the covered bond market.

The Belgian parliament is expected to approve covered bond legislation on Thursday, after voting was speeded up to push the law through before the summer break. The first deals should now come before the end of this year, with swift implementation of the new framework, said Belgian bankers. Investors starved of covered supply will welcome the new jurisdiction with open arms.

A new type of Cédulas backed by export finance loans is being lined up to help ease funding pressures on Spain’s banks. The Spanish government has set out a legal framework for Cédulas de Internacionalización (CI) which should be repo eligible. However, the market is likely to be a small with limited rating de-linkage to the issuer.

Aircraft Pfandbriefe raise uncomfortable questions about what is a covered bond. In doing so, they risk jeopardising the regulatory esteem in which the asset class is held.

Secondary covered bonds spreads are grinding tighter as buyers faced with negative yields in the sovereign market drive short dated covered yields towards zero. While core jurisdictions wallow in a sea of demand, investors are still averse to peripheral paper, but the wide spread gap could cause Spanish and Italian spreads to bounce back, said bankers.

Leads working for the UK's Clydesdale Bank released initial price thoughts for its Lanark 2012-2 RMBS on Wednesday. Demand could be boosted by investors predicting a potential dearth of supply as banks turn to the Bank of England’s Funding for Lending Scheme.

Norddeutsche Landesbank has priced 2012’s tightest seven year covered bond — several basis points inside the imputed fair value. The deal highlights the enduring scarcity of supply, particularly in Germany, and underscores the growing divide between the haves and have nots.

Italian issuers are dangling close to junk after another round of downgrades from Moody’s. Though OBG ratings escaped unscathed, analysts expect more covered cuts even without further action on the sovereign or issuers. Moody’s methodology allows for flexibility when rating the bonds of low rated banks, but Italian issuers lack the high overcollateralisation of their Spanish peers.

Italian covered bonds face further cuts despite being given a new rating ceiling of A2 by Moody’s. The rating agency has not yet taken its axe to the issuers, and is expected to cut them all by at least one notch, bringing some OBG’s close to the sub-investment grade border.

Norddeutsche Landesbank will return to the covered bond market just a week after launching its inaugural aircraft Pfandbrief. It has mandated leads for a seven year public sector trade that could be priced on Tuesday. Pricing is likely to be tight, but a technical squeeze, along with a flight to German quality, should ensure a good reception.