Covered Bonds

Year to date covered bond issuance in all currencies has reached €32.3bn, according to Dealogic data. Issuers have launched successful trades in euros, sterling, Norwegian, Danish and Swedish kroner/kronor, Swiss francs and Australia dollars. But US dollar denominated supply, the largest market after euros, has been non-existent.

Norway’s Terra Boligkreditt has mandated leads Commerzbank, Nordea, UBS and UniCredit for a euro offering, possibly due this week. The borrower finished a roadshow in early September, but decided to not issue because of volatile markets. Terra is targeting a €500m deal.

Terra Boligkreditt successfully raised €500m of five year funding on Wednesday morning, nearly five months after it first mandated for a deal. German and Nordic investors looked past the bond’s Aa2 rating from Moody’s, allowing the issuer to price inside guidance on the back of an oversubscribed book.

Secondary market activity has slowed from the brisk pace in the first two weeks of the year but the market remains well supported, particularly in the short end where offers out to three years have started to disappear. Better buying has also been reported in peripheral credits, leading participants to speculate that primary supply might be forthcoming. With the exception of ANZ’s 10-year, the long end is also performing well.

Australia and New Zealand Banking Group issued the first Swiss franc covered bond under the new Australian legislation on Monday — a Sfr725m dual tranche note — which was also the largest new issue in recent years for this asset class.

Commonwealth Bank of Australia has priced the first covered bond for a domestic bank in the home currency. Not only is it the largest covered bond in that currency by a considerable margin, but it is also the largest ever funding exercise undertaken by any financial institution in the local currency. The deal size sends a strong signal that these bonds are eligible for liquidity buffer purposes. Ostensibly pricing 20bp wider than its senior bonds but 45bp inside where it would fund a covered bond in euros, the spread has clearly set a new paradigm.

With the euro pipeline looking light on clear candidates, the Australian market came to life on Tuesday. Commonwealth Bank of Australia’s A$3.5bn five year covered bond, the first from an Australian issuer, is the largest ever Australian dollar FIG transaction. Bank of New Zealand, however, found a very different reception for its euro offering and decided to postpone issuance.

Commonwealth Bank of Australia looks set to become the first bank in the country to issue a covered bond in the home currency. The deal is also set to become the largest FIG bond ever sold in Australia.

Some 43% of National Bank of Greece covered bondholders submitted their paper for buyback below par, helping the bank reach a €300m core tier one gain through its liability management exercise.

Nationwide printed £650m of three year floating rate notes to demand on Monday, the second UK covered floater in that maturity in as many working days. Barclays and Nationwide’s covered FRNs highlight the growing demand for UK covered bonds and the broadening range of investors wanting a piece of the market.

Commonwealth Bank of Australia is closely watching the market this week before selling the first Australian dollar denominated covered bond from one of the country’s banks. But bankers are cautious about pushing ahead with the deal, after downgrades of European sovereigns over the weekend spooked investors.