Covered Bonds

Covered bond houses have started to post their predictions for primary supply in 2012, with many having revised their 2011 estimates mid way through the year due to the escalating sovereign debt crisis. Though covered bond supply is expected to remain stable, bank funding could suffer a severe contraction and alternative structures are being considered.

Two benchmark covered bond transactions were priced in euros this week, but neither was from the eurozone. A widening sovereign debt crisis and associated volatility ruled out any possibility of supply from any eurozone issuers this week.

Australia and New Zealand Banking Group launched Australia’s first covered bond on Tuesday. Though the market backdrop was coloured by the spread of Europe’s sovereign debt crisis, ANZ’s dollar benchmark attracted broad demand and a healthy level of oversubscription. Westpac was quick to follow with its own inaugural dollar trade, pricing a strikingly similar transaction in the same maturity and at the level as ANZ on Thursday.

The ECB’s covered bond purchase programme, which started two weeks ago, has failed to have any effect. Its modest buying of core issuance at the short end has been outweighed by considerably better selling, as sovereign volatility has undermined confidence.

The mortgage backed Pfandbriefe of four German Landesbanks are at risk of losing their triple-A ratings, after Moody’s lowered the senior unsecured ratings of the issuers by up to three notches on Wednesday.

RBS braved a hostile market to price the second euro benchmark of the week on Wednesday. Strong domestic and offshore demand made up for a minimal German bid, ensuring a solid €750m print.

European covered bond markets continue to look in poor shape as the macro sovereign backdrop dramatically deteriorates. This suggests that Commonwealth Bank of Australia’s euro denominated benchmark is likely to remain on hold for the time being. But that should not delay Westpac, which is planning to open books on Thursday afternoon.

Australia and New Zealand Banking Group priced the first Australian covered bond on Tuesday, launching a benchmark dollar trade that attracted broad demand and a healthy level of oversubscription. Meanwhile RBS has opened books on the week’s second euro benchmark, though given the jurisdictions concerned CBPP2 remains unable to support the primary market.

Secondary market spreads for covered bonds have visibly widened this week, but by a much greater extent than screen prices would suggest. Dealers widely admit that they are bidding away from the market, as viewed over broker screens, as they are keen to avoid increasing exposure into year-end. If actual bids are taken into consideration, the spread widening seen this week has been much greater. Italian and Spanish covered bonds now trade significantly through the sovereign while French covered bonds are on the cusp of doing so.

Hungary’s OTP Bank was placed on Credit Watch negative by Standard and Poor’s on Tuesday, just one day after its subsidiary, OTP Mortgage Bank, ostensibly issued a €750m two-year covered bond. But at nearly 100bp through the government market, it’s not clear whether the deal was placed with third party investors. The negative rating action follows a similar move on the Republic of Hungary, which was put on CreditWatch negative last week.

Sparebank 1 Boligkreditt plumbed the safe haven bid for Norwegian assets, braving turbulent markets to issue a €1bn five year, which was priced at the tight end of guidance with a modest new issue premium.

The covered bond market traded stably on Monday morning as syndicate bankers assessed the prospects for what could prove to be a fleeting funding window this week. Though the sovereign backdrop has remained calm, the longer term prognosis is unsettling. This suggests that any issuer that has the ability to bring a deal should probably not delay.