Covered Bonds

Spanish covered bonds are set to lose the support of bank treasuries and insurance buyers as looming downgrades trigger higher capital charges and risk weightings.

The South Korean Financial Services Commission (FSC) plans to have draft covered bond legislation ready by July and submitted to parliament in November, according an FSC statement on Wednesday.

The South Korean Financial Services Commission (FSC) plans to have draft covered bond legislation ready by July and submitted to parliament in November, according an FSC statement on Wednesday.

Nordic holidays, Spanish auctions and sovereign volatility have put the brakes on primary activity in covered bonds but expectations for next week are better. Just one small Swiss covered bond was issued on Thursday.

There has been plenty of interest in core and even peripheral names in the secondary market this week, especially at the long end, where investors have been tempted by juicy Spanish yields. A briefly negative basis in covered versus CDS spurred interest.

Norddeutsche Landesbank (NordLB) is due to commence roadshowing the inaugural Aircraft Pfandbrief next week. The deal should attract interest from local second and third tier investors in NordLB’s network thanks to the winning combination of a very attractive spread at a low risk weighting. In contrast with ship Pfandbriefe, this asset is more liquid and offers better security.

Spanish covered bonds are set to lose the support of bank treasuries and insurance accounts due to ratings triggers. As a result Spanish issuers face a world of credit buyers and senior level spreads as the Cédulas sector slides towards single-A, Crédit Agricole said analysts on Wednesday.

Despite long being lauded as one of the very few effective private sector solutions for wholesale mortgage funding, covered bonds are not quite so divorced from the state as they might seem. As the bank finance market evolves in Europe, is it possible that the implied state support seen in the most longstanding regime is, over time, replicated in other regimes?

Swedish banks head a group of possible covered bond issuers, despite resurgent volatility. The Swedes have largely stayed away from the euro market so far this year, opting instead to rely on domestic demand. But analysts still expect the need for diversification and name recognition among Swedish banks to yield euro benchmarks.

Spanish banks’ issuance of retained covered bonds has surged, said Moody’s on Monday, as refinancing needs and the threat of deposit flight drives issuers to the European Central Bank. Together with defaulting loans and scant growth in mortgage lending, the surge will hit overcollateralisation hard, just as a fresh barrage of Cédulas downgrades are poised to make OC requirements more onerous.

Italian and Spanish covered bonds widened on Monday morning under sovereign pressure, drowning out any movement on Intesa Sanpaolo’s public sector backed bonds as a result of the issuer’s exchange offer. The borrower will exchange public sector covered bonds into new mortgage backed bonds of the same coupon and maturity, after Moody’s downgraded the public sector bonds.

Moody’s has welcomed a proposal from the Association of German Pfandbrief Banks (vdp) to take account of peripheral sovereign risk in public sector backed cover pools by applying haircuts based on the probability of default.