Covered Bonds

Crédit Agricole Home Loan SFH has tapped its 3.25% March 2017 for €275m, at the tight end of guidance at mid swaps 140bp. Financing on the deal, which has now grown to €1.525bn, was done at very competitive levels. Thanks to the solid reverse enquiry and small size the borrower halved the new issue premium, bucking the trend set by other recent taps.

S&P has placed eight covered bond programmes on CreditWatch negative following its decision on December 5 to place the sovereign ratings of 15 eurozone countries on review for downgrade. A two notch downgrade of France’s sovereign rating may mean a loss of triple A ratings for the public sector bonds of Crédit Mutuel Arkéa, Dexia Municipal Agency and Société Générale; all three programmes are on CreditWatch negative.

Fitch expects ratings pressure next year to remain primarily on peripheral covered bond programmes, because of their vulnerability to sovereign rating action. Its overall outlook is less bearish than its rivals, however, and this may be borne out in how it wields its rating hatchet. The rating agency has 21% of covered bond ratings on rating watch negative, “the majority of which are based in peripheral Europe”. In stark contrast, Moody’s has placed 69% of the covered bond programmes it rates on negative outlook.

Banks are being forced to rationalise their FIG desks to respond to the expected sharp drop in senior unsecured issuance next year. Covered bond specialists suggested that FIG syndicators and DCM bankers whose markets had dried up were looking to muscle in on covered bonds. Around 75% of FIG volume has come from the secured funding product this year.

The risk that German Pfandbriefe will be crowded out by a resumption of state guarantees in the form of SoFFin II has increased. Bankers warn that the performance of non-guaranteed Pfandbriefe could suffer — however, the extent of that prospective underperformance is likely to be a function of the spread on new guaranteed deals, along with the amount of guaranteed debt that might be issued.

The covered bond market has become so soft that even taps on outstanding bonds need substantial premiums if they are to be successfully executed. Barclays paid up 20bp this week to raise €750m from two self-led taps, following a trend started by French banks in November.

The European Bank for Reconstruction and Development and the European Investment Bank have bought the second of a three tranche SME-backed covered bond from Turkey’s Sekerbank via sole lead arranger UniCredit.

Euro benchmark supply will drop in 2012, covered bond analysts predict, despite the product having become the cornerstone of bank funding. Rarely have analysts’ expectations diverged so far, with issuance estimates ranging from €120bn-€190bn.

The measures Draghi announced last Thursday aren’t bad, but he could have done much more. A few simple changes could mean a lot more liquidity for the European banking system. The only loser would be the ECB’s pride.

Moody’s has placed five Spanish covered bond programmes on review for downgrade, after taking the same action on the issuers.

Citi has lost one of its covered bond specialists, leaving the firm’s FIG team to take responsibility for the secured funding product. The move comes amid suggestions that other banks could look to do the same in order to reflect the covered bond market’s shift from being a rates product to a more credit-orientated instrument.

Barclays raised €750m from two taps at either end of the curve, in spite of increasing concern that Standard & Poor’s could downgrade France, several other European countries, and the EFSF.