Covered Bonds

Axa Bank Europe SCF had the covered bond market to itself this week, printing its first jumbo trade on Tuesday. The rare issuer sold an obligations foncières backed by Belgian RMBS inside where Belgian government bonds were trading, and said it will remain loyal to the French structure even as Belgian covered bond legislation approaches.

After strong global issuance in the first quarter, sentiment in the European covered bond market is showing signs of turning as unease over Spain weighs in. However, with deal supply likely to remain scarce, the constructive technical situation may well persist.

ASB Finance New Zealand joined the caravan of inaugural transactions from Australasia’s largest banks this year when it issued its debut Swiss franc note on Monday, a Sfr200m 1.375% 6-1/2 year fixed rate covered bond.

Moody’s provided a timely reminder on Monday that all is not right in Spain. Following a 41% year-on-year decline in mortgage lending, over-collateralisation levels have eroded, the agency said in a report that was published on Monday. The news came against a background of cédulas selling as concerns mounted for the country’s banking sector, with non-performing loans soaring and house price falls accelerating.

French legislation and a strong structure allowed Axa Bank Europe SCF to price a jumbo trade backed by Belgian collateral inside of where Belgian government bonds were trading. Even if long awaited covered bond legislation arrives in Belgium later this year, the issuer told The Cover it intends to remain loyal to Obligations Foncières.

After strong global issuance in the first quarter, the European covered bond market is in limbo and sentiment seems to be turning on growing unease about Spain. In the near term, bankers are looking to the European Central Bank for guidance on the covered bond purchase programme.

Axa Bank Europe SCF launched its third and largest euro benchmark covered bond on Tuesday, pricing a €1bn trade at the tight end of guidance. Investors seemed untroubled by the rare RMBS collateral, allowing Axa to follow recent French trades in offering a minimal new issue concession.

Though senior unsecured issuance has picked up this year there are no guarantees that the market can be sustained beyond 2014, when the repo financing from the European Central Bank’s long term refinancing operation expires. Senior unsecured could soon grind to a halt or became prohibitively expensive, and many issuers may return to covered bonds for relief. But banks cannot live on secured bonds alone.

ASB Finance New Zealand joined the caravan of inaugural transactions from Australia’s largest banks this year when it launched its debut Swiss franc transaction on Monday — a Sfr150m minimum 6-1/2 year fixed rate covered bond.

The covered bond market is primed for supply, with syndicate bankers expecting several trades this week and at least one announcement to hit screens this Monday afternoon. Though mandates are otherwise scarce, the range of products and currencies available to issuers means they can afford to launch at short notice, and keep their options open.