Covered Bonds

DNB Nor and Lloyds came to market on Wednesday with five year offerings that enjoyed a healthy oversubscription. German investors and bank treasuries drove the trades for the non-eurozone credits, enabling both to price at the tight end of guidance. But in terms of spread, the difference of nearly 120bp showed that the similarities ended there.

National Australia Bank launched its debut syndicated covered bond in euros on Thursday, a day after Commonwealth Bank of Australia sold an impressive €1.5bn inaugural trade in the same maturity and currency. The trade looks set to price at the same level as CBA, though without attracting the same demand.

Société Générale launched the third French benchmark in as many days on Thursday. The French trio’s reception has been highly positive, with German investors driving the order books.

Barclays Bank opened books for its inaugural sterling benchmark covered bond on Thursday, a 10 year deal that is being marketed at Gilts plus 215-220bp. After less than two hours the book had grown to £1bn, suggesting it has received a very good reception. The funding represents a dual win for the borrower as, not only does it diversify its investor base, but it is also cheaper than euros.

After Tuesday’s trio of trades, a further flurry of primary issuance hit the covered bond market on Wednesday as DNB Nor, Lloyds TSB, Crédit Agricole and Commonwealth Bank of Australia took advantage of buoyant demand to launch deals with attractive new issue premiums.

Though the first day of activity in 2012 brought fewer trades than in 2011, the number of accounts that participated in the deals was up on last year. Almost 400 buyers participated in Tuesday’s salvo, with Germany taking over half of primary allocation.

National Bank of Greece is set to increase its core tier one capital by buying back its only covered bond alongside several tier one notes in a tender operation launched on Tuesday. The exercise is controversial, with some covered bond participants arguing that the modest tender price differential between the two instruments is not justified and that this undermines the intrinsic relative value of the covered bond.

Caisse de Refinancement de l’Habitat was the first covered bond issuer out of the traps on Tuesday, printing a €2bn 10-1/2 year deal that was driven from the outset by yield-hungry German investors.

The covered bond primary market has opened strongly with a trio of top tier names from core jurisdictions collectively raising around €4.5bn on comfortably oversubscribed books. A further seven deals have been mandated for issuance in the near future. This impressive showing is to be expected given liquidity is technically strong. Yet big challenges lie ahead, specifically for peripheral markets — where borrowers remain shut out.

ING was among the first wave of issuers to restart supply on Tuesday, launching the first Dutch benchmark in almost six months.

UBS was the second of three banks to open books on a covered bond in 2012, bringing a five year euro benchmark on Tuesday. The granularity of the book had the issuer caught in two minds over what to do with the size of the deal, but it eventually chose to print €1.5bn.