Covered Bonds

Cédulas from strong names tightened on news that the EU is to provide the Spanish banking sector with €100bn in financial aid. But though the move is supportive for secondary levels, Spanish banks have limited issuance capacity in the short term. In addition, saddling the sovereign with new debt could lead to ratings pressure, and Cédulas ratings would not survive a sovereign downgrade.

Bankers complained this week that sweeping reforms to Canada’s housing market proposed by the country’s financial regulator were heavy handed and could destabilise the market. The dampening impact of withdrawing CMHC insurance should be gauged before further brakes are applied.

With Greek elections looming, next week is expected to present what could prove to be a fleeting funding window for issuers lucky enough to still have covered bond market access. But not everyone is so fortunate. Fitch delivered another rating blow to Spain and, along with its prospective stricter methodology, Spanish covered bonds would be on the cusp of junk – where forced sellers lurk.

After all the European Central Bank’s efforts to ensure the solvency of Europe’s financial institutions, it is fair to assume that it will continue to stand by the beleaguered Spanish banks. But their survival is dependent on the continued functioning of the Cédulas market — which faces a burdensome redemption schedule.

The senior claims of holders of covered bonds will not be immune from the new bank bail-in proposals, bankers told EuroWeek after the European Commission released its bank resolution proposals this week (see cover stories and pages 14 and 15 for full details).

In the absence of primary supply, the Spanish banking sector continued to provide the focus of attention in the covered bond world this week. With Spanish banks facing around €200bn of Cédulas redemptions until the end of 2015, and access to the capital markets firmly closed, noteholders have become increasingly tetchy over their exposure — in contrast to the Irish covered bond market.

The senior claims of holders of covered bonds will not be immune from the new bank bail-in proposals, bankers told The Cover after the European Commission released its bank resolution proposals this week.

Spain and its banking sector continue to be the centre of attention. Bankers widely believe that a restructuring drawing on the existing European bail-out fund is the only credible solution — but despite no sign of this happening, sentiment has improved. After heavy selling, better Cédulas buying emerged on Wednesday, particularly for strong single names. Yet, with Spanish banks facing around €200bn of Cédulas redemptions until the end of 2015, the sustainability of the bank sector and longer-term outlook for spreads, remains in doubt. By contrast, Irish bonds look set to perform.

In the absence of primary supply, the Spanish banking sector continued to provide the focus of attention in the covered bond world this week. With Spanish banks facing around €200bn of Cédulas redemptions until the end of 2015, and access to the capital markets firmly closed, noteholders have become increasingly tetchy over their exposure — in contrast to the Irish covered bond market.

The recent run of Pfandbriefe looks set to continue, with at least two more German credits closely monitoring the market. Meanwhile, a rally in OATs combined with an enduring domestic bid mean the first French covered in two months could be only days away, said syndicate bankers.

Suncorp Bank could turn to the euro market for its next covered bond trade after launching an inaugural deal in Australian dollars this week. Meanwhile, both tranches of Clydesdale Bank’s domestic debut were trading tighter on Friday morning. But though the borrower said it will be a repeat issuer in the covered market, the euro basis swap will consign it to sterling for the time being.

Clydesdale Bank sold a long awaited debut benchmark covered bond on Thursday, which was originally mandated in 2010. The borrower opted to take its first step in sterling, and took advantage of demand at both ends of the curve with a well placed £1.1bn dual tranche trade.