Covered Bonds

Standard & Poor’s has resolved rating watches on 12 multi-Cédulas and, in a rare move, even upgraded five other programmes. But hedge funds and fast money buyers continue to dominate interest in the multi-issuer asset class, despite some ratings being as high as double-A.

The covered bond market has remained active into late July and syndicate bankers say conditions are still good for further benchmark deals in the wake of ABN Amro’s success this week. With spreads returning to 2010 levels ABN chose to bring forward a jumbo deal originally scheduled for August. But as the macro outlook deteriorates, issuers cannot be sure that the secondary rally will survive the summer break.

Fitch has resolved its rating watch on Italian covered bonds, downgrading four programmes to between double-A and triple-B. This round of cuts was driven solely by new overcollateralisation requirements, but Fitch is bringing in a new methodology and could look at Obbligazioni Bancarie Garantite (OBGs) again soon.

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ABN Amro launched a €1.5bn seven year benchmark covered bond on Tuesday, building a book of over €4bn for the first Dutch trade since January. Pricing divided syndicate bankers away from the deal. But with the first jumbo transaction in three weeks ABN proved that the covered market remains primed for supply, and could urge other names to take advantage of a closing window.

Deutsche Pfandbriefbank (Pbb) on Monday returned to the covered bond market for the fourth time this year, tapping an outstanding seven year deal. Secondary demand has sent core spreads tighter across the board, and syndicate bankers expect more issuers to take advantage of an exceptionally attractive primary market.

Moody’s said it is concerned that the rising volume of retained covered bonds is allowing issuers to unilaterally relax standards on their programmes. Italian issuers have lowered collateral requirements and delayed the posting of additional collateral through adverse amendments, said the rating agency. Other jurisdictions, such as Spain, that rely heavily on ECB repo funding are also at risk.

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.