Covered Bonds

Balance-sheet encumbrance poses a growing risk to the supply of senior unsecured debt in Europe, according to new research from Fitch Ratings.

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 relaxing programme standards hurts investors, but at least one borrower has been able to prevent downgrades through sufficient overcollateralisation.

The race is on for the first Belgian covered bond, with KBC and Belfius Bank (formerly Dexia Bank) jostling to bring the debut transaction once the country's covered bond law is finalised. Speaking on a conference call on Tuesday, KBC Groep’s CFO, Luc Popelier, confirmed rumours that the bank plans to sell its first covered bond by the end of this year or early 2013.

Raiffeisenlandesbank Niederösterreich-Wien (RNW) is preparing to become the second Austrian Raiffeisenlanesbank to launch a public covered bond. The borrower begins a European roadshow in the second half of August and should bring its mortgage-backed debut in early September.

Paul O’Connor, chairman of the European Covered Bond Council, tells The Cover about its work in respect of the Label, associated transparency initiatives and legal developments.

Not so long ago, it was commonly accepted that bank resolution regimes would hobble senior unsecured issuance. Unlike holders of fully protected covered bonds, which cannot be bailed in, senior noteholders faced the threat of haircuts in the event of bank insolvencies.

Covered bond issuers in core Europe have been taking steps to protect their southern European subsidiaries from currency reform should Spain or Italy be forced to abandon the euro.

Multi-cedulas suffered a swathe of downgrades from Standard & Poor’s on Thursday, but analysts and hedge funds say that deeply discounted prices of long-dated bonds look attractive.

The fledgling US covered bond market took a big step forward this week, after Royal Bank of Canada gained SEC registration for its $12bn covered bond programme. RBC could now bring the first SEC registered covered bond before the end of August.

Deutsche Hypothekenbank became the second German issuer in a fortnight to answer the clamour of domestic accounts for covered bonds, with a tightly priced summer tap on Wednesday.

Covered bond supply in July almost sank to its record low, set in July 2005. But senior unsecured supply was 10 times greater than in the same month last year.

Covered bond supply in July was close to the record low of July 2005, and €2bn down on the previous two years, as peripheral credits remained shut out and those with access preferred to tap the senior market. As a consequence, redemptions have far outpaced supply causing a severe shrinkage in the overall market – a trend that does not look likely to change.