Covered Bonds

Secondary covered bond market activity this week has been dominated by the continuing uncertainty over the political and economic future of Greece which, along with ratings downgrades, has led to selling of Spanish and Italian covered bonds. And with 3CIF still weighing in on sentiment, French covered bonds have not come out unscathed.

Santander UK managed to raise £2.25bn of funding through its Fosse 2012-1 RMBS in a week when Eurozone storm clouds were gathering over the markets. The deal offered bonds across 10 tranches, five currencies and four maturities. And for the first time since 2007, it included double-A rated notes.

Real money accounts are desperate for financial institution paper — but only from the right names. As volatility continues to rock the markets, European covered bond and senior unsecured bankers tried to deduce issuance prospects in the light of OP Mortgage Bank’s successful trade on Wednesday (see separate story). While some are hopeful, others remain extremely doubtful.

Finland’s OP Mortgage Bank shrugged off an appalling market backdrop and ended a two week covered bond drought with a stellar benchmark trade on Wednesday.

OP Mortgage Bank could have easily raised more funding and at tighter levels for its €1.25bn covered bond this week, bankers told The Cover. The strength of demand for Wednesday’s deal was conspicuous at a very early stage, with investors willing to place orders as early as possible to secure an allocation.

Peripheral markets have come under heavy selling pressure this week as covered bond activity has reflected the sovereign backdrop. The French market has been unable to escape this negativity, with questions over 3CIF continuing to blight sentiment. There has been better buying in core German, Nordic and UK names.

Real money investors are desperate for deals — but only from the right names, as volatility continues to rock the markets. European covered bond market participants are trying to deduce issuance prospects in the light of OP Mortgage Bank’s successful deal on Wednesday. While some are hopeful that the situation might now improve, others remain extremely doubtful.

Covered bonds came under further rating pressure on Wednesday after Fitch said a quarter of the deals it rates could be downgraded by up to two notches under new tougher rules. Fitch plans to tighten its Covered Bonds Rating Criteria to reflect its view of “systemic risk and cover pool liquidity”, it said. This followed Moody’s sweeping downgrades of Italian covered bonds this week.

This article has five comments: Securitisation was blamed for causing the financial crisis that was triggered in 2007. But the technique must now be recognised for its potential to resuscitate fragile banks. There was a startling contrast in the market last week between two European issuers, 3CIF and Allied Irish Banks. At the very point that 3CIF was falling from grace, AIB glided, phoenix-like, back into the capital markets.

Finland’s OP Mortgage Bank shrugged off an appalling market backdrop to launch an exceptionally well received €1.25bn deal on Wednesday. Its first covered bond of 2012 provided solid proof of the covered market’s resilience to macro concerns and added weight to syndicate bankers’ arguments that issuers should take advantage of demand overhang.

Moody’s downgraded six Italian covered bond programmes in the first step of a review of 114 banks across 16 European countries. The sweeping cuts left only Intesa San Paolo and UniCredit with double-A ratings and consigned the rest of the Italian covered bond sector to single-A.

Electronic bond trading platform MTS is beta testing a new Sponsored Access covered bond service, which is expected to comply with the extensive market transparency reform proposed by MiFID II. Secondary covered bond market turnover on MTS is growing fast this year, with double or even triple digit monthly percentage increase in volumes in its two existing trading models. Now with clients set to be offered a third, more regulatory compliant way of trading, prospects are likely to remain good.