Covered Bonds

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.

Borrowers could decide to switch senior projects into covered trades, syndicate bankers told The Cover. This would follow the example Nordea set in April when it turned a planned senior deal into a blow out seven year covered deal.

The European Commission’s bid to improve pre trade and post trade price transparency through regulation is counterproductive, the European Covered Bond Council believes. It has responded to EC proposals for regulation on markets in financial instruments (MiFiR), and a related draft report from the European Parliament on pre and post-trade price transparency.

The radio silence surrounding the suspension in 3CIF bonds this week is a textbook case of How Not To Do Investor Relations.

AIB has raised the first unguaranteed funding for an Irish institution since 2009 through its Tenterden RMBS. The securitisation structure was developed precisely to deal with these challenging situations and rests on the effective de-linkage of collateral from sponsor. Just as de-linkage can be abused, it also serves as a major strength. And having come through the crisis the other side, the RMBS market is now in a stronger place. With the EBA recognising the need to grow the securitisation market it can only be a matter of time before it sits alongside covered bonds in the suite of wholesale mortgage funding options.

This week’s shocking suspension of Caisse Centrale du Crédit Immobilier de France’s covered bonds from Euronext and the Luxembourg stock exchange has left capital market participants bewildered and angry.