Covered Bonds

Commonwealth Bank of Australia’s ground-breaking Aussie dollar covered bond deal is the story that everyone was waiting for. Its success disproves the conventional wisdom that euros and dollars are the only really liquid markets.

Moody's looks set to downgrade Eurohypo's Pfandbriefe below triple A, not that it should matter. The rating move is already discounted, and with German supply in such short supply, its outstandng bonds are set to remain well supported. Moreover, with more ECB cheap money coming, Pfandbrief issuers have very little incentive to pay up and go to the public market.

Although the secondary market remains firm with all recently issued deals performing well and new ones likely to be readily absorbed, eurozone borrowers remain noticeable by their absence.

National Australia Bank issued its first sterling covered bond on Thursday, choosing the same three year floating format that worked for Barclays and Nationwide earlier this week.

Santander UK’s Holmes 2012-1, the first UK RMBS of the year, has raised £2.2bn-equivalent and established three year euros as a new sweet spot — a sharp contrast to the dollar-denominated issues of 2011. While the three year dollar tranche stayed at $500m, sized to demand, the three year euro tranche ballooned during bookbuilding on Tuesday.

The non-eurozone, no-euro theme in the covered bond market continued on Thursday with the announcement of two debut currency benchmarks, one of which was priced. After the successes of Barclays and Nationwide, National Australia Bank issued its first sterling dea, Lloyds mandated for another sterling deal and UBS is set to bring its first dollar deal.

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.