Covered Bonds

Demand for covered bonds should theoretically be good at the start of 2012 as investors will be flush with cash and the European Central Bank’s covered bond purchase programme will need to step up purchases to get on schedule. However, unless the wider sovereign backdrop improves, there is a risk that the paralysis continues. The road to redemption is unlikely to happen overnight but will instead be a slow step-by-step process of reform and fiscal integration. And, hopes that the ECB might put its balance sheet to greater use by committing to buy unlimited amounts of distressed sovereign debt, are probably misplaced. But, because the central bank is committed to providing unlimited repo liquidity, local banks in distressed regions should prove to be a force of stability. They should logically use cheap ECB funding to buy domestic government bonds and earn themselves a hefty carry in the process. Bill Thornhill reports

The DZ Bank issuer roundtable brought together French, German, Austrian and Nordic borrowers for a discussion of the changing landscape of the covered bond market.

Fitch has downgraded mortgage backed covered bonds issued by three Portuguese banks, highlighting the risk of peripheral covered bonds falling below the rating threshold for ECB repo eligibility. Issuers still shut out of the market are heavily reliant upon repo funding, and further downgrades could force the ECB to adjust its criteria, though DBRS has offered a lifeline to at least one Portuguese bank.

With a €600bn maturity mountain to scale next year, half of which is in the comatose senior unsecured sector and the remainder split between covered bonds and government guaranteed debt, European banks had been hoping to proportionally increase their covered bond funding. But this avenue has also been constricted and alternatives must now be considered. Covered bonds that might have been publicly placed are now being pledged for bilaterally negotiated repo trades and ECB repos. In addition banks are aggressively deleveraging.

The German Association of Pfandbrief Banks (VDP) is set to launch its secondary market transparency initiative in the new year. It has been piloting the scheme for two months, securing daily price quotes for jumbo Pfandrbriefe from market makers at 12 banks.

Realkredit Danmark looks set to secure lower interest rates next year on adjustable rate mortgages after a successful round of bond auctions. Foreign investors have been marginally more active than last year in the bond sales, according to Danish brokers on the deal, confirming that Denmark retains safe haven status. Nykredit started its refinancing sale on Tuesday and will hope to emulate Realkredit’s success.

The UK is to bring in new regulations to bring the country’s covered bond market into line with European jurisdictions — a move that analysts said would please investors.

Caisse de Refinancement de l’Habitat on Wednesday morning presented the ECB with only its second opportunity to make a primary purchase under the central bank’s second covered bond purchase programme.

With a €600bn maturity mountain to scale next year, half of it in the comatose senior unsecured sector, European banks are being forced to consider alternative sources to bridge the funding gap.

Secondary market activity has slowed considerably as banks wind down their balance sheets ahead of the year end. Market making is still happening but flows are skewed to the bid side, with bids so low that few investors are prepared to deal on them.

HM Treasury has released its review of the UK’s regulatory framework for covered bonds. It includes responses to its April consultation paper and details changes to the UK’s Regulated Covered Bond (RCB) framework, aimed at improving transparency and making the UK market more comparable with other European jurisdictions.

Caisse de Refinancement de l'Habitat on Wednesday morning presented the ECB with only its second opportunity to make a primary purchase under the central bank's second covered bond purchase programme. Following in the footsteps of Crédit Mutuel Arkéa — the only other issuer to have done a deal qualifying for support in the primary market — CRH launched an extension of an outstanding 10 year trade at the widest level for French paper this year.