Covered Bonds

Commerzbank will head a number of German banks issuing structured covered bonds next year, market conditions permitting, as momentum gathers in the product’s development.

The covered bond market remains gripped in paralysis as wider sovereign market turmoil continued to weigh in on sentiment. The secondary market remains extremely thin and banks seeking funding liquidity are increasingly turning to the ECB’s repo window.

As Europe dithers and the supremacy of the Atlantic Club gradually fades, power is set to shift towards Asia. Amid this inevitable drift, it is in the common interest of all European nations to recognise their shared values of liberty and freedom and to unify with one voice. Speaking at the DZ Bank conference former German finance minister and Social Democrat politician, Peer Steinbrueck believes the “the only possible route is to go further down the road of integration”.

Covered bond investors, with a collective €265bn of total assets under management, of which €56bn is invested in covered bonds, came together in early November at the DZ Bank Covered Bond Day to talk about the market. Each of these investors represented different parts of the traditional buying base.

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.