Covered Bonds

Banco Sabadell brought the first deal in nine months from a second tier Spanish issuer on Monday. Rather than wait for a second round of ECB long-term refinancing operation (LTRO) funding, the borrower opted for a more expensive funding option to show the market and rating agencies that it still has wholesale access.

Coventry Building Society followed Santander into the short end on Friday, launching a three year sterling floater – the fourth sterling deal in this format since the start of 2012.

The formation of a Belgian government in December 2011, breaking a year and a half of political deadlock, has improved the chances of Belgium’s covered bond law finally being approved.

Bankers are increasingly bullish on the market outlook, with some predicting a deal a day next week. Issuers are leaving blackout and a string of successful trades across the curve has demonstrated the supportive backdrop. Coventry Building Society is aiming to price a three year sterling trade today, and two more peripheral tender offers have been announced.

Spain’s Catalunya Banc and Italy’s Cassa depositi e prestiti (CDP) are the latest issuers to announce tenders, though CDP is winding down its cover pool rather than attempting to bolster capital. A successful exercise for Catalunya could prompt other Spanish issuers to follow suit, though covered bond analysts said investors have been unwilling to let go of Cédulas in the secondary.

In a flurry of activity that offered another glimpse of the spare cash washing around the European banking sector after the ECB’s first Long Term Refinancing Operation (LTRO) in December, Spain’s CatalunyaCaixa and Banco Popular Español launched tender offers this week, buying back ABS, covered bonds and hybrids.

Bank of New Zealand priced a €500m three year deal this week, only two weeks after it was forced to postpone a five year trade in the same currency. The shorter maturity and capped deal size yielded a far more positive result, with over 100 accounts contributing to an order book that was three times covered.

Prospects for the birth of a Belgian covered bond market have taken a leap forward with the recent formation of a new government after a year and a half of political deadlock. Market participants say that the chance of a covered bond law in the country is finally looking stronger.

The strength of the Long Term Refinancing Operation rally was on vivid display this week as Santander shrugged off a heap of negatives to rack up one of the largest ever order books for a covered bond. Despite its flop last time out, a poorly received recent asset liability management (ALM) exercise and the cédulas sector’s eight month washout, the €2bn benchmark restarted Spanish supply in stellar fashion on Wednesday — and paved the way for more risk-on deals.

Erste Group Bank comfortably printed €1bn off the back of the largest ever book for an Austrian covered bond this week. The successful 10 year offering has opened the door for other Austrian names and countered the negative headlines following the sovereign’s recent downgrade.

ANZ Bank hit the Swiss franc covered bond jackpot for the second time in two weeks on Thursday when its New Zealand subsidiary issued a Sfr500m dual tranche note. The market’s first Kiwi covered bond followed the parent’s blowout Sfr750m debut on January 20.

The secondary market in short dated covered bonds is in danger of breaking, and though it is not there yet, there are concerns over ‘forced delivery squeezes’ in the repo market which may lead to failed trades.