Covered Bonds

Terra Boligkreditt launched its largest ever covered bond this week and, with increasing redemptions and a growing mortgage book it could soon become an issuer of jumbo deals, its chief executive told The Cover. In addition, a new ownership structure will provide liquidity and capital support, and is expected to lead to rating uplift.

Square Brussels Meeting Centre

A Belgian covered bond law is almost in place, with final approval by parliament expected in October. At least two issuers are ready to launch deals as early as next January, The Cover heard from delegates at a seminar in Brussels this week.

Deutsche Hypothekenbank Hannover and Aareal Bank launched five year mortgage Pfandbriefe on Tuesday. Both deals were capped at €500m and both were priced at the tight end of revised guidance, as the wealth of domestic demand showed no signs of weakening.

Terra Boligkreditt followed Nordic peer DNB Boligkreditt with a seven year benchmark on Tuesday. Boasting a new ownership structure and collateral of exemplary quality, Terra priced a well received trade inside its outstanding curve.

Demand for safe-haven high quality paper played an important role in drawing DNB Boligkreditt to market this week. The borrower sold a successful €1.5bn trade, though it told The Cover it had not intended to launch a deal.

DNB Boligkreditt got the covered bond market off to a flying start on Monday with a €1.5bn seven year benchmark deal. Norwegian peer Terra Boligkreditt has readied its own euro trade and could launch on Tuesday, while two German issuers have mandated for five year mortgage Pfandbriefe.

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).