Covered Bonds

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.

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.