Covered Bonds

Bankers under fire for their part in last week’s heavily criticised inaugural spate of Australian covered bond deals hit back at their critics this week.

The ECB’s second covered bond purchase programme is already well behind schedule, after only two weeks of business. By the end of Thursday, it had made only €891m of purchases — barely one third of the amount that it needs to buy over the whole month to stay on track for its €40bn programme target.

As primary supply remains elusive, focus is shifting towards the New Year and the question of whether issuance will resume when the market restarts in January. Syndicate bankers were reluctant to suggest either a solid reopening, or continuing malaise.

Apart from the measly €111m recently purchased by the ECB, liquidity has all but dried up, as bankers increasingly look to close down their risk books ahead of the year end. France is once again the focus of attention, with Dexia and BPCE singled out for special attention. Yet, several houses reported good demand for very short dated German and Scandinavian issuance, as asset managers look to park liquidity.

Last week saw a landmark event in covered bonds, with the first two Australian deals coming to market. But the new asset class has arrived stillborn. A rush to issue in spite of weak conditions has ruined the prospects for other deals.

Following the January 2010 implementation of its revised counterparty criteria and the loss of market share that this would have implied, Standard & Poor’s has gone back to the drawing board and taken a more flexible approach. But the principal is the same as, in essence, the higher the counterparty rating, the less onerous the collateral posting requirement.

Commonwealth Bank of Australia has confirmed that it is monitoring the market, and though this does not constitute a delay to its inaugural euro benchmark, it may in practice amount to that, given difficult market conditions. ANZ and Westpac’s dollar deals both continue to trade soft amidst talk that leads are holding significant dollar covered bond inventory.

The ECB’s second purchase programme was one week old last Friday, having taken its first faltering steps on November 11. Its progress has been far from heartening.

The Australian regulator’s proposals on Basel III liquidity reforms could privilege covered bonds at the expense of RMBS, Moody’s has said.

Realkredit Denmark kicked off the Danish auction season on Monday, with sales in both euros and Danish kroner.