Covered Bonds

Expectations of supply this week are relatively limited given European holidays on Tuesday followed by Spanish auctions and, at the end of the week, US payrolls. Despite that, there is room for a German or Scandinavian borrower to bring a deal at short notice.

The primary focus for the covered bond market is on Panamanian issuer Global Bank, which could launch the inaugural Latin American covered bond as early as this week, after finishing its roadshow on Monday. Elsewhere, Nykredit’s junior covered bond is due on Tuesday. Secondary flows are mixed, with good interest in core markets versus peripheral — where negative rating headlines persist.

S&P cut Spain by two notches to triple B plus on Thursday night, leaving the sovereign precariously close to junk. And although government bonds have lurched 20bp wider, the Cédulas market has shown a stoic response. But the rating agency’s move came as Banco Popular also announced a jump in non-performing loans in its first quarter results – concentrating minds on the country’s unfolding real estate crisis to which Cédulas are inextricably linked.

The Canadian government has released details of domestic covered bond legislation that will ban issuers from using insured mortgages as collateral. Spreads of Canadian covered bonds issued under the new framework will be wider than those backed by insured mortgages, said analysts, and with just months to go until the ban comes into place, a last flurry of insured deals could hit the market.

Canadian issuers will no longer be able to use insured mortgages as collateral for covered bonds. Finance minister Jim Flaherty introduced a bill into the Canadian parliament on Thursday that will create a register for covered bond issuers. The bill will also prohibit the use of mortgages insured by private insurers or by the government backed Canadian Mortgage and Housing Corp (CMHC).

Perceptions of risk have changed since a covered bond CDS was first mooted a few years ago and though it failed to get off the ground, times have changed. Liquidity in the covered bond market is no longer taken for granted and, because balance sheet availability for trading has been squeezed, banks have become more risk averse. As such, there is value in having another tool available to enhance liquidity and hedge risk – such as a covered bond CDS.

Caisse de Refinancement de l’Habitat (CRH) issued its second chunky Swiss franc covered bond in three months on Wednesday, a Sfr375m dual trancher, bringing its 2012 supply in the currency to Sfr1.025bn.

Dexia Kommunalbank Deutschland (DKD) on Monday announced the second public sector covered bond buyback in as many weeks, as German issuers seek to rid themselves of unwanted public sector assets.

Global Bank is on the road with Deutsche Bank, marketing a structured covered that will be over-collateralised by dollar denominated residential mortgages, with additional security in the form of recourse to the issuer.

Nordea Bank Finland launched a blow-out benchmark covered bond on Wednesday, offering buyers only the second opportunity of 2012 for Finnish exposure in the covered format.

Nordea Kredit Realkreditaktieselskab (Nordea Kredit) announced an auction of three year Danish covered bonds on Thursday, a day after the Nordea Group’s Finnish arm launched its second jumbo covered bond of 2012.

Rising unemployment in Spain could hit residential mortgage portfolios, JP Morgan analysts have warned. An increase in non-performing loans would affect Spanish cover pools, while a lack of adequate measures to deal with mortgage losses means subordinated bondholders could be called on to provide additional capital.