Covered Bonds

Despite long being lauded as one of the very few effective private sector solutions for wholesale mortgage funding, covered bonds are not quite so divorced from the state as they might seem. As the bank finance market evolves in Europe, is it possible that the implied state support seen in the most longstanding regime is, over time, replicated in other regimes?

Swedish banks head a group of possible covered bond issuers, despite resurgent volatility. The Swedes have largely stayed away from the euro market so far this year, opting instead to rely on domestic demand. But analysts still expect the need for diversification and name recognition among Swedish banks to yield euro benchmarks.

Spanish banks’ issuance of retained covered bonds has surged, said Moody’s on Monday, as refinancing needs and the threat of deposit flight drives issuers to the European Central Bank. Together with defaulting loans and scant growth in mortgage lending, the surge will hit overcollateralisation hard, just as a fresh barrage of Cédulas downgrades are poised to make OC requirements more onerous.

Italian and Spanish covered bonds widened on Monday morning under sovereign pressure, drowning out any movement on Intesa Sanpaolo’s public sector backed bonds as a result of the issuer’s exchange offer. The borrower will exchange public sector covered bonds into new mortgage backed bonds of the same coupon and maturity, after Moody’s downgraded the public sector bonds.

Moody’s has welcomed a proposal from the Association of German Pfandbrief Banks (vdp) to take account of peripheral sovereign risk in public sector backed cover pools by applying haircuts based on the probability of default.

Moody’s cut two Dutch covered bond programmes on Friday after taking action on five Dutch banking groups earlier the same morning. Issuers’ large mortgage books and reliance on wholesale funding made them vulnerable in a poor market environment, it said. Meanwhile, analysts expect house prices and house sales to continue their decline.

After a busy week, activity in the covered bond market was subdued on Friday as participants awaited the outcome to Sunday’s Greek elections and the G20 meeting that will be held on Monday and Tuesday next week. Primary activity was kept alive as NordLB announced it would go on the road with its aircraft Pfandbrief.

A Belgian covered bond law is almost in place, with final approval by parliament expected in October. And according to delegates at a covered bonds seminar in Brussels this week, at least two issuers are preparing to launch deals next January.

Terra Boligkreditt launched its largest ever covered bond on Tuesday when it followed Nordic peer DNB Boligkreditt with a seven year trade. The borrower boasts a new ownership structure and collateral of exemplary quality, and with increasing redemptions and a growing mortgage book it could soon become an issuer of jumbo deals, according to Kjartan Bremnes, its chief executive.

Caisse de Refinancement de l’Habitat launched the largest French covered bond in months when it tapped a 12 year trade for an impressive €750m on Wednesday. But despite evident domestic demand, syndicate bankers were sceptical about the outlook for further French supply.

DNB Boligkreditt kicked off the busiest week in covered bonds for months with a €1.5bn seven year trade on Monday. Although it had not intended to launch a deal, the borrower said reverse enquiry from buyers and encouragement from syndicates drew it back to the market.

Domestic demand for German covered bonds shows no signs of weakening and is expected to insulate prospective issuers from all but the most volatile conditions following the Greek elections. Deutsche Hypothekenbank Hannover and Aareal Bank launched five year mortgage Pfandbriefe on Tuesday, pricing well oversubscribed deals at the tight end of revised guidance.