Covered Bonds

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.

Covered bonds are more stable, higher yielding and offer better protection than sovereign paper, according to Barclays analysts. But liquidity and security also drive investment decisions, and negative government bond yields show how much the market values both, an investor told The Cover.

Moody's cut one Italian covered bond programme but left another unscathed this week, after the issuers amended their programmes to loosen ratings triggers. The rating agency believes that relaxing programme standards hurts investors, but at least one borrower has been able to prevent downgrades through sufficient overcollateralisation.

Raiffeisenlandesbank Niederösterreich-Wien (RLB NÖ-Wien) is preparing to become the second Austrian Raiffeisenlandesbank to launch a public covered bond.

Balance-sheet encumbrance poses a growing risk to the supply of senior unsecured debt in Europe, according to new research from Fitch Ratings, while bankers said the level of encumbrance at European banks is an increasing concern for investors.

An asset manager in Frankfurt tells The Cover about breaking the link between covered bonds and their respective sovereigns, investing in peripheral markets, and the problem with regulatory favouritism.