Covered Bonds

Fitch downgraded four Spanish covered bond programmes and one Portuguese programme on Friday, following its downgrade of Spain from AA+ to AA- on October 7. Without at least a high double-A rated sovereign, said Deutsche bank analysts, covered bonds will increasingly struggle to remain triple-A.

Woori Financial Holdings and the Royal Bank of Scotland have signed an agreement to work on the sale of covered bonds, according to a statement from the South Korean company, though the terms of the sale have not been decided.

With US legislation still in the committee stage, Canadian and European issuers will remain responsible for dollar covered bond supply for the foreseeable future. Several banks with US franchises are understood to be looking into 3a2 documentation as a way to ensure broader access to a coveted investor base, and remove doubts about liquidity and transparency in the nascent market.

US covered bond legislation could get sidelined and face several more years of delay, frustrating a market that hoped to see results before the end of 2011. In stark contrast, Australian legislation sailed through both houses of parliament this week.

With US legislation still in the committee stage, Canadian and European issuers will remain responsible for dollar covered bond supply for the foreseeable future. Several banks with US franchises are understood to be looking into 3a2 documentation as a way to ensure broader access to a coveted investor base, and remove doubts about liquidity and transparency in the nascent market.

While covered bonds regained momentum this week with seven new issues raising a combined €8bn, the depth and durability of the market’s revival remains uncertain. Only two of the week’s borrowers were from core eurozone countries, while average oversubscription across all deals was only 30%.

The Italian Department of Treasury is considering introducing a new instrument, separate from OBGs and securitisation, that would allow banks to use a wider range of assets for funding. Though only in a discussion phase, the move may see Italian issuers join their French and German counterparts in using structured covered bonds to alleviate funding pressure.

A sudden shower of issuance in senior unsecured and covered bonds delighted borrowers, bankers and investors this week. However, although participants welcomed the development, they said it did not represent a sea change in sentiment and the future of Europe’s banks was still hanging in the balance, with ample room for disappointment.

The RMBS asset class is proving more effective at tapping US investor demand than European covered bonds with Nationwide’s current Silverstone deal attracting demand of $2.7bn. One possible reason is the gulf in collateral transparency. The latest ECBC initiative will not be enough to solve this.

Hypo Noe unexpectedly announced a three year transaction, having decided to hold off earlier in the month due to price sensitivity. Meanwhile ANZ New Zealand brought its long awaited covered bond debut, a five year euro deal, having postponed it in early June.

A stronger than normal bid from Nordic investors helped Finland’s Sampo Housing Loan Bank to sell a no grow €1bn five year covered bond, its second benchmark this year, on Wednesday.

Moody’s has downgraded the mortgage backed covered bonds of two of BRFkredit capital centres, after downgrading the issuer from Baa1 to Baa3 in early July.