Covered Bonds

The impact of the ECB’s second purchase programme could be lessened considerably by renewed volatility in the markets. Equity and fixed income indices plummeted on Tuesday morning, wiping out at a stroke the positive reaction seen at the end of last week to the European summit meetings that had attempted to inject some confidence back into markets.

A major covered bond investor talks to The Cover about the ECB’s purchase programme and what could follow. He does not think it will adopt a needs-based approach and suspects that a prospective spread tightening will be short-lived.

For the first time in many months, the RMBS market looks set for potentially greater issuance than the covered bond market this week as two issuers are preparing benchmark transactions. Rabobank, which is also out with a tier one hybrid deal today, is also planning on a dual tranche prime RMBS through its Obvion subsidiary. Meanwhile, Barclays, which has been out of the RMBS market for four years, is embarking on a US and UK roadshow for an RMBS issued from its Gracechurch platform.

With the official unveiling of the European Central Bank’s second covered bond purchase plan less then a week away — and the ECB’s new chief Mario Draghi taking over from Jean-Claude Trichet on November 1 — market participants expect the central bank to concentrate its €40bn of fire power on France, Spain, Italy, Ireland and Portugal.

Peripheral covered bonds tightened against government debt on Monday, undoing sovereign outperformance following last Thursday’s rally. Bid offer spreads continued to widen across the board as participants remain cautious ahead of purchase programme details.

Activity has once again shifted into dollars, with European investors paralysed by a lack of detail on the upcoming ECB covered bond purchase programme and a resolution of the sovereign debt crisis. Meanwhile Canadian banks issue dollar deals with ease, and Australia’s big four could be swayed into taking the same route for their respective debuts, said syndicate officials.

Since its inception in 2008, Canada’s covered bond market has grown steadily to become the cornerstone of US dollar supply. The next step will be the enactment of a covered bond law which will allow Canadian banks to reach investors across the globe. Between regulation and legislation, however, Canadian covered bond issuers face stringent limitations on the product’s use.

Bank Austria has followed BPCE successfully raising €500m with a five year public sector backed covered bond that priced at the tight end of guidance on the back of an exceptionally granular book. The decision to price ahead of next week’s announcement on the purchase programme caught some bankers by surprise. But with significant central bank demand in the book, it is doubtful whether there would have been much to gain from postponing.

The UK’s Co-Operative Bank will begin a European roadshow next week, laying the ground for a debut issue out of its €3bn covered bond programme.

The euphoric reception that greeted EU leaders’ statements after their all-night effort to kill off eurozone sovereign crisis contagion fears will quickly regress into fresh worries over detail, bankers warned on Thursday night.

With the official unveiling of the European Central Bank’s second covered bond purchase plan less then a week away — and the ECB’s new chief Mario Draghi taking over from Jean-Claude Trichet on November 1 — market participants have told EuroWeek they expect the central bank to concentrate its €40bn of fire power on the weaker and more illiquid markets including France, Spain, Italy, Ireland and Portugal.

France’s BPCE carried out a heavily oversubscribed tap of its 10 year covered bond on Thursday morning, ending 10 days without any primary supply.