Covered Bonds

The outlook for the senior unsecured market will deteriorate as increasing encumbrance and a draft law on bank resolution dampens the euphoric rush of issuance that followed the European Central Bank’s unprecedented injections of liquidity, according to Barclays Capital. As a consequence, banks may increase covered bond issuance, there could be a third Long Term Refinancing Operation, or bank capital ratios might need to be improved.

Barring a poor outcome from Greece’s private sector initiative, primary supply is poised to pick up, said syndicate bankers, who advised issuers to launch trades while the market remains receptive. Covered bond analysts are lowering their euro benchmark forecasts, however, and investors are concerned about declining issuance.

Increasing encumbrance of balance sheets is at risk of sidelining senior unsecured investors in a default scenario, especially in the wake of the European Central Bank’s second three year long term refinancing operation (LTRO), said analysts at Barclays Capital on Thursday. Bankers said encumbrance was becoming more of an issue for investors, but some senior buyers said it would be eclipsed by incoming bail-in legislation.

A Norwegian issuer – believed to be DnB Nor Boligkreditt is considering a 10 year trade, but is struggling to offer an attractive coupon in such a low yield environment, syndicate officials said on Wednesday. Though real money accounts are long cash and eager to put money to work, they may have to move down the credit curve to hit their targets.

The secondary covered bond rally rolls on, grinding spreads tighter and pushing yields to their limit. But foresight and fundamentals have played no part in the lust for peripheral paper. As lucrative as the carry trade has been for banks, when things turn sour investors could find themselves trapped.

The European Commission’s plan to rotate rating agencies should be scrapped, the European Covered Bond Council (ECBC) and European Mortgage Federation (EMF) have strongly recommended.

The UK’s Financial Services Authority has released further guidance on additional areas of the Regulated Covered Bond regime, which sets out minimum expectations. Issuers and analysts welcomed the increased oversight but felt that, if the regulator had really wanted to convince international investors about the quality of UK covered bonds, it would have made them eligible to be held in bank’s liquidity buffers.

ING DiBa, Commonwealth Bank of Australia and Toronto Dominion all successfully got deals away in the past 48 hours as the credit backdrop started to soften on renewed concerns over Greece. The markets are likely to remain in limbo until next week when more clarity on Greece will be known.

Commonwealth Bank of Australia’s five year covered bond drew three times the number of investors as dollar debuts from its Australian peers Australia and New Zealand Banking Group and Westpac.

Toronto Dominion Bank raised $3bn of five year funding off a well subscribed book 6bp tighter than a recent trade from Canadian peer Caisse Centrale Desjardins du Quebec.

The global covered bond market continues to look strong, with a trio of issuers collectively raising the equivalent of more than €4.5bn, on the back of more than €9bn in demand across two currencies. But whether the market’s euphoria can hold out until the end of this week, however, remains to be seen as doubts are starting to creep back in with Thursday’s Greek liability management cut off date fast approaching.

Cajamar Caja Rural has become the latest Spanish bank to try to buy back debt, tendering for up to €300m of ABS and covered bonds.