Covered Bonds

Euro benchmark supply will drop in 2012, covered bond analysts predict, despite the product having become the cornerstone of bank funding. Rarely have analysts’ expectations diverged so far, with issuance estimates ranging from €120bn-€190bn.

The measures Draghi announced last Thursday aren’t bad, but he could have done much more. A few simple changes could mean a lot more liquidity for the European banking system. The only loser would be the ECB’s pride.

Moody’s has placed five Spanish covered bond programmes on review for downgrade, after taking the same action on the issuers.

Citi has lost one of its covered bond specialists, leaving the firm’s FIG team to take responsibility for the secured funding product. The move comes amid suggestions that other banks could look to do the same in order to reflect the covered bond market’s shift from being a rates product to a more credit-orientated instrument.

Barclays raised €750m from two taps at either end of the curve, in spite of increasing concern that Standard & Poor’s could downgrade France, several other European countries, and the EFSF.

Covered bonds will become an increasingly important bank finance tool in 2012, but their growing stature will not offset a continued downward ratings migration, Moody’s said in its 2012 outlook. The sovereign debt crisis will heap more pressure on issuer ratings and increase refinancing risk, particularly in Italy and Spain but also in core Europe.

The European Bank for Reconstruction and Development and European Investment Bank have bought the second of a three tranche SME backed covered bond from Turkey’s Sekerbank via sole lead arranger UniCredit.

On the back of reverse enquiry, Barclays Bank has launched two self led taps of its three and 10 year covered bonds by a minimum €250m each. There is some consternation that they are not fungible for 40 days, meaning existing shorts will remain exposed over the expensive year end period.

The UK’s FSA has unveiled its policy on regulated covered bonds. It has made the case for loan level data provision and said why stratification is not good enough, in its newly-released policy document.

UK issuers approach 2012 sporting a strong domestic investor base and a tightened framework, having retained market access through some of the most volatile periods of 2011.

Austria’s Erste Group has said it will increase its use of covered bonds to meet €3bn of long-term funding needs next year. The issuer does not plan to participate at all in the senior unsecured wholesale market in 2012, a segment that provided three quarters of the group’s funding in 2007.

Secondary covered bond turnover remains low, but it seems that dealer balance sheets are overly long of inventory. This is not ideal given that new issuance in January is likely to be accompanied by hefty premiums that could leave traders on the wrong side of renewed spread widening.