Covered Bonds

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.

Market sentiment has begun to weaken while the Greek sovereign’s future remains uncertain. The mood has hurt the secondary performance of recent trades across several asset classes, including Barclays’ €2bn five year covered bond which was launched on Wednesday.

Barclays Capital shrugged off sovereign rating action and the possibility of a Greek default to launch a well oversubscribed euro benchmark on Wednesday. The covered bond market remains technically well supported despite negative headlines, and syndicate bankers still expect issuance to move down the credit curve as blackout periods end.

After Moody’s downgraded several European countries and put others on negative ratings outlook, covered bond analysts have assessed the effect on the issuers’ covered bond programmes. Though the most marked impact is in peripheral Europe, many programmes are likely to hold their top rating — provided that the Timely Payment Indicator is not lowered. In any case, the market remains technically squeezed, and so far there has been no effect on spreads.

Covered bond issuance hopes for the forthcoming week have dimmed as the final reckoning on Greece draws closer.