Covered Bonds

Secondary market spreads for covered bonds have visibly widened this week, but by a much greater extent than screen prices would suggest. Dealers widely admit that they are bidding away from the market, as viewed over broker screens, as they are keen to avoid increasing exposure into year-end. If actual bids are taken into consideration, the spread widening seen this week has been much greater. Italian and Spanish covered bonds now trade significantly through the sovereign while French covered bonds are on the cusp of doing so.

Hungary’s OTP Bank was placed on Credit Watch negative by Standard and Poor’s on Tuesday, just one day after its subsidiary, OTP Mortgage Bank, ostensibly issued a €750m two-year covered bond. But at nearly 100bp through the government market, it’s not clear whether the deal was placed with third party investors. The negative rating action follows a similar move on the Republic of Hungary, which was put on CreditWatch negative last week.

Sparebank 1 Boligkreditt plumbed the safe haven bid for Norwegian assets, braving turbulent markets to issue a €1bn five year, which was priced at the tight end of guidance with a modest new issue premium.

The covered bond market traded stably on Monday morning as syndicate bankers assessed the prospects for what could prove to be a fleeting funding window this week. Though the sovereign backdrop has remained calm, the longer term prognosis is unsettling. This suggests that any issuer that has the ability to bring a deal should probably not delay.

Moody’s cut the covered bond ratings of deals issued by Marfin Popular Bank from Baa3 to Ba3 on Monday, after downgrading the issuer last week.

The risk of a disorderly Greek default has prompted Moody’s to place four of the country’s covered bond programmes on review for downgrade. Three of the programmes are already rated Ba3, though BBB- ratings from Fitch should still ensure repo access.

The race to issue Australia’s first covered bond deal took an unexpected twist today as it emerged that the frontrunner, National Australia Bank, will fall into line with the other three Australian issuers and introduce indexation into its programme. ANZ has moved to the fore, announcing that it will open books for a US benchmark deal next week – by which time NAB’s final documentation should be ready. But whether ANZ will in fact take the glory, is not assured. Commonwealth Bank of Australia could be poised to make an announcement soon.

German banks have been conspicuous in their reluctance to bring benchmarks over the past month, choosing instead to use the MTN market. But bankers say tailor-made private placements will not offer long-term relief for the country’s larger banks, which are for the time being well funded. Moderately improved market conditions on Friday offered hope that borrowers may be able to issue soon.

Cold shouldered by international capital markets, Italian covered bond issuers are increasingly turning to the ECB and domestic retail investors to backstop their funding amid a threats of a sovereign meltdown.

The euro covered bond market began to show signs of life this week with Crédit Mutuel Arkéa pricing a rare dual tranche tap on Wednesday. It took a full five trading days from the formal start of the ECB purchase programme for primary supply to materialise, but euro system central bank participation in both maturities helped the French issuer print an impressive €1bn extension in turbulent conditions.

Australia’s big four will finish roadshowing their debut covered bond programmes at the end of this week and could be ready to mandate deals next week. With the gravity of the European sovereign debt crisis growing every day, some of the banks will tap the US dollar market, though whether all four can issue in dollars in quick succession is less certain.

A group of four US senators from both political parties has introduced US covered bond legislation into the Senate for the first time. Bipartisan support from the upper house is highly encouraging, and though the Federal Deposit Insurance Corp still has issues with the prospective legislation, broad Congressional support could push the bill through.