Covered Bonds

The covered bond market has not reacted to the European Central Bank’s announcement detailing the second covered bond purchase programme (CBPP.2). A spokesperson for the ECB told The Cover that it was intentional not to respond to the most crucial question that the market had wanted answered.

Australian covered bond issuers ANZ and National Australia Bank are a step closer to execution after receiving expected triple-A ratings on Thursday. NAB has enjoyed positive feedback on its roadshow, which finishes on Friday, and could be ready to announce a deal at the start of next week.

Activity in the secondary market has been focussed on France where several banks report Street and real money interest – even as the French government bond spread to Germany hit new spread wides. Meanwhile, syndicate officials cast doubt on whether the ECB’s purchase programme will materially benefit Italy and Spain.

Euro jumbo issuance since August fell by a third compared with last year, but a look at the redemption calendar for this quarter and the first quarter of 2012 shows that funding pressures will not wait for Europe to fix itself. The ECB purchase programme may help some borrowers plug funding holes, but with only €40bn at its disposal, not all issuers will be able to rely on the ECB to refinance assets.

Moody’s cut SBAB’s issuer rating from A1 to A2 on Wednesday, because of challenges to the bank’s standalone creditworthiness due to low profitability, a concentrated and unseasoned loan book, and an almost total reliance on market funding.

The ECB’s quest to bring loan-level disclosure to the European ABS market moved forward on Tuesday, with technology and data firm Sapient Global Markets appointed to build the database providing loan-level data to the market. The announcement comes as covered bond borrowers grapple with the provision of far less onerous transparency initiatives being demanded by investors.

The impact of the ECB’s second purchase programme could be lessened considerably by renewed volatility in the markets. Equity and fixed income indices plummeted on Tuesday morning, wiping out at a stroke the positive reaction seen at the end of last week to the European summit meetings that had attempted to inject some confidence back into markets.

A major covered bond investor talks to The Cover about the ECB’s purchase programme and what could follow. He does not think it will adopt a needs-based approach and suspects that a prospective spread tightening will be short-lived.

For the first time in many months, the RMBS market looks set for potentially greater issuance than the covered bond market this week as two issuers are preparing benchmark transactions. Rabobank, which is also out with a tier one hybrid deal today, is also planning on a dual tranche prime RMBS through its Obvion subsidiary. Meanwhile, Barclays, which has been out of the RMBS market for four years, is embarking on a US and UK roadshow for an RMBS issued from its Gracechurch platform.

With the official unveiling of the European Central Bank’s second covered bond purchase plan less then a week away — and the ECB’s new chief Mario Draghi taking over from Jean-Claude Trichet on November 1 — market participants expect the central bank to concentrate its €40bn of fire power on France, Spain, Italy, Ireland and Portugal.