Covered Bonds

DNB Boligkreditt and Leeds Building Society took advantage of very buoyant conditions to launch €2bn 10 year and £250m three year trades respectively. But, with the spread to senior unsecured continuing to tighten, the incentive to issue covered bonds is becoming less clear-cut for higher yielding credits.

Singapore bank covered bonds have moved a step closer with new proposals from the central bank. The prudential policy department of the Monetary Authority of Singapore (MAS) has issued a consultation paper on a regulatory framework for local bank issuance of covered bonds.

Realkredit Danmark began its March auctions on Monday, offering one year bonds in Danish kroner and euros. The borrower is optimistic after strong auction results from other Danish banks in recent weeks, and reported yields of below 1% from its first day of sales.

Spain’s Bankinter launched a long awaited benchmark on Monday, pricing only the fourth euro jumbo in as many weeks. Spreads could widen suddenly if conditions deteriorate, warned analysts, but with supply scarce and curves steep between three to five years, investors will continue to ride the wave of optimism.

New amendments to the CRD IV have given the European ABS market a glimmer of hope that securitisation will no longer be frozen out of bank liquidity buffers. With the recent reliance on covered bonds diverting demand from other asset classes, concern over the product’s regulatory pedestal has grown. That ABS is back in contention is therefore a welcome sign, even if it is too early to herald the market’s rejuvenation.

Hopes for covered bond issuance rose on news that a Greek debt swap will go ahead, allowing the EU to provide a second bailout for the troubled sovereign. But supply is not dependent on the market environment – borrowers simply don’t need the funding, said syndicate officials.

Banks that encumber assets by issuing secured funding are at risk of sidelining senior unsecured investors. But senior investors say worries about encumbrance will be eclipsed by incoming draft legislation on crisis management. Senior holders will need to focus more on how big the buffer is below them, and not what sits above them.

Turkey’s Sekerbank confirmed that it has sold another tranche of its SME backed covered bond to UniCredit off the same shelf that was inaugurated last year. The placement follows the sale of two tranches to the European Reconstruction and Development Bank and European Investment Bank in December 2011, and comes ahead of an expected sale to another supra-national agency in the near future. The programme’s success has prompted at least three other Turkish banks to mandate UniCredit and set up similar programmes.

As part of a $4bn rates and credit double-whammy from the issuer, a new covered bond from Commonwealth Bank of Australia this week drew notably more investors than dollar debuts from its domestic peers ANZ and Westpac, according to bankers.

Banks that encumber assets by issuing secured funding are at risk of sidelining senior unsecured investors in the event of a default, especially in the wake of the European Central Bank’s second three year long term refinancing operation (LTRO), Barclays Capital analysts warned this week.

Euro covered bond investors voiced concern this week about the weak outlook for new supply as the currency’s tightest and most oversubscribed benchmark bond in more than a year failed to trigger further deals. Analysts, meanwhile, slashed their euro issuance forecasts following the European Central Bank’s two long term refinancing operations.