Covered Bonds

Iceland’s Arion Bank sold Ikr2.5bn (€15m) in its first covered bond auction since the issuer was created from the Icelandic arm of Kaupthing Bank in 2009.

Short dated covered bonds from smaller Italian or Spanish banks are possible this week, bank originators told The Cover on Monday, as risk appetite rises on hopes of a Greek aid decision.

Moody’s on Thursday followed its recent sovereign rating actions by placing 39 covered bond programmes across 10 European jurisdictions on review for downgrade. Austrian, Danish, Dutch, Finnish, French, German, Italian and Spanish programmes were put on review, after the rating agency took the same action on the respective issuer’s senior debt ratings.

After softening in the first part of the week, sentiment improved on Thursday afternoon on the expectation that a Greek deal will be struck over the weekend. Activity was mainly concentrated in the two to five year area, and though clients are looking for offers, dealers are generally seeing mixed two way flows across the board. The long end is inactive, but dealers expect renewed interest in the event 10-year yields back up towards the 4% area.

Nykredit will begin the first Danish auction of 2012 later this month, selling an estimated Dkr115bn (€15.4bn) between February 27 and March 12. The traditional one year adjustable rate mortgage bonds will make up the bulk of the auction, though with the low yield environment borrowers have moved along the curve.

Swiss franc denominated Australian covered bonds remained in vogue this week, with Commonwealth Bank of Australia issuing the largest one yet — a Sfr775m dual trancher — on Wednesday, after Australia and New Zealand Banking Group paved the way for its peer group with a Sfr725m icebreaker in January. However, bankers wondered whether the market could continue to support such deals and whether CBA’s deal would in fact be the high water mark for Australian covered bonds in Swissies.

Liability management has become the must-have accessory for financial institutions over the past four months. The rush to reshape debt profiles is becoming even more pronounced as the clock ticks down to June 30, the European Banking Authority deadline by which Europe’s banks must have a core tier one ratio of 9%. No asset has been left untouched — not even covered bonds.

Covered bond issuers this week launched blow-out trades even as the wider credit market deteriorated, with an investor base still starved of supply piling into euro benchmarks from Compagnie de Financement Foncier and Barclays.

Swiss franc Australian covered bonds remained in vogue this week, with Commonwealth Bank of Australia issuing the largest one yet — a Sfr775m dual trancher — on Wednesday, after Australia and New Zealand Banking Group opened the way for its peer group with a Sfr725m icebreaking transaction in January.

Banks should continue to focus their liability management exercises on subordinated debt and forget about covered bonds. As every covered bond practitioner will tell you, the covered bond market has been default-free since Frederick the Great’s reign some 250 year ago. And, if the latest Portuguese covered bond tender result is anything to go by, investors remain as confident in the product as ever.

The euro denominated covered bond market has been starved of UK supply with Barclays five year being only the second this year. Last year as many as 14 benchmark deals were issued by UK borrowers in euros. Until now, the record number of accounts seen in any euro UK benchmark had been held by RBS, which attracted 186 orders for its March 2016 issued in 2011. But, with around 200 accounts on board, Barclays latest five year has broken that record by some margin. The level of oversubscription in Barclays deal was high, but did not set a record for UK names in euros.

Following a review for downgrade of senior debt ratings, Moody's has placed on review for downgrade the ratings of covered bonds issued by Austrian, Danish, Dutch, Finnish, French and German banks. The decision may cause issuers to drop the agency, analysts said. And in a widely anticipated move, the Moody’s also put on review for downgrade many Spanish, Portuguese and Italian covered bond programmes.