Covered Bonds

Despite hopes that the result of Spain’s general election would bolster sagging equities and pull in widening government bond yields, market conditions appear prohibitive at the start of a potentially shortened week.

Regulation of rating agencies, as outlined by the EU commission, could have negative repercussions for covered bond issuers, according to Deutsche Bank analysts.

UniCredit has overhauled its funding strategy to insulate itself from hostile wholesale markets, its head of funding said this week. With the senior unsecured market shut even for top tier issuers, the bank announced a new funding strategy for 2013-2015 with an “embedded” policy of no issuance in senior unsecured.

The much vaunted Australian covered bond deals priced by Westpac and ANZ this week have not performed well. Bankers away from the deals say the process has been a sham and the deals’ poor performance bodes poorly for follow-on transactions. But those who worked on the trades say the wider market backdrop turned significantly negative in the last 48 hours, with bids becoming excessively defensive across the entire financial institutions sector, and the fact that both deals were oversubscribed and well placed is a positive development.

Covered bond houses have started to post their predictions for primary supply in 2012, with many having revised their 2011 estimates mid way through the year due to the escalating sovereign debt crisis. Though covered bond supply is expected to remain stable, bank funding could suffer a severe contraction and alternative structures are being considered.

Two benchmark covered bond transactions were priced in euros this week, but neither was from the eurozone. A widening sovereign debt crisis and associated volatility ruled out any possibility of supply from any eurozone issuers this week.

Australia and New Zealand Banking Group launched Australia’s first covered bond on Tuesday. Though the market backdrop was coloured by the spread of Europe’s sovereign debt crisis, ANZ’s dollar benchmark attracted broad demand and a healthy level of oversubscription. Westpac was quick to follow with its own inaugural dollar trade, pricing a strikingly similar transaction in the same maturity and at the level as ANZ on Thursday.

The ECB’s covered bond purchase programme, which started two weeks ago, has failed to have any effect. Its modest buying of core issuance at the short end has been outweighed by considerably better selling, as sovereign volatility has undermined confidence.

The mortgage backed Pfandbriefe of four German Landesbanks are at risk of losing their triple-A ratings, after Moody’s lowered the senior unsecured ratings of the issuers by up to three notches on Wednesday.

RBS braved a hostile market to price the second euro benchmark of the week on Wednesday. Strong domestic and offshore demand made up for a minimal German bid, ensuring a solid €750m print.

European covered bond markets continue to look in poor shape as the macro sovereign backdrop dramatically deteriorates. This suggests that Commonwealth Bank of Australia’s euro denominated benchmark is likely to remain on hold for the time being. But that should not delay Westpac, which is planning to open books on Thursday afternoon.

Australia and New Zealand Banking Group priced the first Australian covered bond on Tuesday, launching a benchmark dollar trade that attracted broad demand and a healthy level of oversubscription. Meanwhile RBS has opened books on the week’s second euro benchmark, though given the jurisdictions concerned CBPP2 remains unable to support the primary market.