Covered Bonds

Aircraft Pfandbriefe raise uncomfortable questions about what is a covered bond. In doing so, they risk jeopardising the regulatory esteem in which the asset class is held.

Secondary covered bonds spreads are grinding tighter as buyers faced with negative yields in the sovereign market drive short dated covered yields towards zero. While core jurisdictions wallow in a sea of demand, investors are still averse to peripheral paper, but the wide spread gap could cause Spanish and Italian spreads to bounce back, said bankers.

Leads working for the UK's Clydesdale Bank released initial price thoughts for its Lanark 2012-2 RMBS on Wednesday. Demand could be boosted by investors predicting a potential dearth of supply as banks turn to the Bank of England’s Funding for Lending Scheme.

Norddeutsche Landesbank has priced 2012’s tightest seven year covered bond — several basis points inside the imputed fair value. The deal highlights the enduring scarcity of supply, particularly in Germany, and underscores the growing divide between the haves and have nots.

Italian issuers are dangling close to junk after another round of downgrades from Moody’s. Though OBG ratings escaped unscathed, analysts expect more covered cuts even without further action on the sovereign or issuers. Moody’s methodology allows for flexibility when rating the bonds of low rated banks, but Italian issuers lack the high overcollateralisation of their Spanish peers.

Italian covered bonds face further cuts despite being given a new rating ceiling of A2 by Moody’s. The rating agency has not yet taken its axe to the issuers, and is expected to cut them all by at least one notch, bringing some OBG’s close to the sub-investment grade border.

Norddeutsche Landesbank will return to the covered bond market just a week after launching its inaugural aircraft Pfandbrief. It has mandated leads for a seven year public sector trade that could be priced on Tuesday. Pricing is likely to be tight, but a technical squeeze, along with a flight to German quality, should ensure a good reception.

Italian issuers are braced for another round of covered bond rating cuts after Moody’s lowered Italy’s government bond rating on Friday. The last of the country’s double-A bonds will fall to single-A as a result, leading to harsher regulatory treatment and a reliance on credit investors, said analysts.

This week’s first ever Pfandbrief backed by aircraft mortgages has been warmly received. But amid the fanfare for the issuer, NordLB, there are concerns over the security of the assets involved that in turn are stoking debate over what assets should be eligible for covered bond funding.

The proposed bail-out of Spanish banks should be good for Cédulas holders, as the draft memo between the EU and Spain specifies the loss absorbing buffer of a bank’s liability structure. However, the impaired assets that are set to be segregated are likely to shrink Cédulas overcollateralisation (OC) and exacerbate a trend that has accelerated recently due to the surge in retained issuance.

Intesa Sanpaolo created two new mortgage backed jumbo covered bonds this week as part of an exchange offer open to public sector backed bondholders, who also voted to allow the issuer to amend its public sector documentation and make existing rating triggers less stringent.

Australia’s Westpac returned to the dollar market on Tuesday, launching a dual tranche three year benchmark covered bond, which it priced without a new issue premium, according to syndicate bankers off the deal.