Covered Bonds

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.

Banks across Asia have long considered selling covered bonds, but so far only Australian, New Zealand and South Korean banks have tapped the market. That is unlikely to change soon as not enough Asian issuers fit the bill.

Commonwealth Bank of Australia opened books on the first Australian dollar transaction from a domestic bank on Monday, while Bank of New Zealand began taking indications of interest for that jurisdiction’s first trade of 2012.

Commonwealth Bank of Australia (CBA) has sold its first privately placed covered bond, joining ANZ Bank and National Australia Bank (NAB) in taking advantage of an October 2011 change in Australian banking law.

Nationwide has kept up the flow of sterling issuance since the start of 2012, following Barclays and RBS with a three year covered bond priced at 165bp over three-month Libor on Monday. As with Barclays’ three year last week, the deal’s floating rate format makes heavy participation from bank treasuries — some of which will be awash with cheap ECB cash — highly likely.

Covered bond spreads have survived sweeping sovereign downgrades by Standard & Poor’s on Friday. Only French issuer Dexia was reported wider on Monday morning, while the LTRO cash injection has ensured short dated Spanish and French paper remains highly sought after.

Banks from across Asia have long considered selling covered bonds, but so far only Australian, New Zealand and South Korean borrowers have tapped the market. That is not likely to change anytime soon, Ted Packmohr, a covered bond analyst, told EuroWeek Asia. Investors may be ready to move away from a heavy supply of European names — but there are just not enough Asian issuers that fit the bill.

Investors this week warned the European FIG bond market not to get carried away with its impressive start to 2012, cautioning that many of the challenges that plagued the sector in the final months of last year remained.

Covered bond supply was restricted to an impressive €850m tap from BPCE on Thursday, taking the number of long dated French transactions already this year to six.

A series of mandates from outside the eurozone hit screens on Friday. Australian, New Zealand and Norwegian issuers could all launch in the next two weeks, while three Turkish banks have hired UniCredit Menkul Degerler for trades in 2012.

Nordea Bank Finland launched the largest ever Nordic covered bond and Credit Suisse priced the tightest five year trade of 2012 in another successful week for the covered bond market. However, while the tone remains more constructive than many syndicate bankers had hoped for during December, the list of top tier issuers able to launch stand out trades is almost exhausted.

Covered bond bankers of a bygone era could never have envisaged German Pfandbrief issuers benefiting from rarity value in a January window. But deals from Aareal Bank and Deutsche Pfandbriefbank (pbb) this week appeared to show this had become reality.