Covered Bonds

Leads on Lloyds Banking Group’s new Permanent RMBS have orders of more than $2.75bn across the tranches, with books expected to close at 13:30pm Wednesday.

German issuers with US dollar assets in their cover pools may start looking at the US 144A market early next year, following the German Association of Pfandbrief Banks (vdp) first US roadshow in three years.

Stress in bank funding markets, exposure to troubled eurozone sovereign bond markets and moves away from implicit government support have affected the creditworthiness of many global banks. But Standard & Poor’s approach to covered bond ratings means they should remain resilient compared to other agencies.

Markets remain on hold until Wednesday in anticipation of a comprehensive EU bailout plan. Two options on the table, which could both be pursued in tandem, involve insuring the first loss 25% of peripheral sovereign new issuance via the EFSF. Another plan seems to involve setting up a leveraged SPV using private and public sector funds (such as China and the IMF) to buy sovereign bonds in the secondary market and create a firewall to protect peripheral nations in anticipation of a hard Greek default involving a potential 60% haircut. It is likely that such a plan would be provisional in nature and therefore subject to full agreement by parties involved, including rating agencies.

The covered bond market remains on hold while it waits for news from the EU summit, the ECB meeting and details of the covered bond purchase programme. Despite continuing systemic doubts, bankers believe the market is open for the right name at the right spread. But even if a solution is unveiled, underlying issues driving the sovereign crisis are expected to resurface — unless the ECB’s mandate is changed.

Speculation that Lloyds would join HSBC and Barclays to issue a covered bond benchmark in US dollars has faded. The allure of RMBS is taking precedence as funding considerations add to other structural advantages. Lloyds, which had been rumoured with a dollar covered bond deal earlier this year, has therefore decided to go for an RMBS.

The concept of liquidity has changed over the course of the financial crisis. Where once it may have been viewed as a free ticket, it is now highly valued — for without liquidity there cannot be a market. Covered bonds are comfortably at the most liquid end of the credit spectrum, but the way they are traded has completely changed since the onset of the financial crisis.

Any benchmark covered bond deals are unlikely to happen before Wednesday when EU leaders unveil their eurozone rescue plan. The lack of any detail emerging from the EU summit has also kept investors sidelined in the secondary market, with traders reporting very limited flows for core and peripheral paper.

Westpac and ANZ have joined Commonwealth Bank of Australia and National Bank of Australia in the race to bring Australia’s first covered bond, following enactment of a new law. But whether they will all issue in euros seems doubtful. Westpac, for example, is believed to be leaning more towards US dollars for its first deal.

The French covered bond market looks vulnerable to a sell off following recent underperformance of the government bond market. Local issuers are still anticipating a spread tightening on the back of the second covered bond purchasing programme, but they may now be wondering if they should not have issued earlier when they had the chance.

The French covered bond market is starting to look vulnerable to a sell-off following the recent underperformance of the government bond market. Local issuers had been anticipating a spread tightening on the back of the second covered bond purchasing programme, but they may now be wondering if they should have issued earlier.

Public sector backed cédulas became the latest victim of sweeping rating cuts on Thursday as Moody’s took negative action on 10 programmes after cutting the Spanish sovereign on Monday. Though secondary spreads have held, there are regulatory implications to the downgrades, and the investor base could shrink as bonds fall below triple-A.