Covered Bonds

After being among the main beneficiaries of tightening secondary spreads last week, Dexia’s outstanding paper pushed out again on Monday. The group’s share price dropped sharply after Moody’s placed the ratings of Dexia’s three main operating entities on negative review. The agency is concerned about Dexia’s access to short term funding and the increase in the amount of collateral the institution is having to use to hedge derivatives.

Moody’s has cut its rating of covered bonds issued by EFG Eurobank Ergasias from Ba3 to B1, on review for downgrade, although the bonds remain eligible for repo with the ECB as they are still rated BBB- by Fitch.

ssuers will need to pick their timing carefully this week given German holidays on Monday, along with an Ecofin meeting in Luxembourg, a decision on another round of covered bond buying to be taken at Thursday’s ECB policy meeting and US non-farm payrolls on Friday.

Covered bond market participants are firmly focused on Thursday, when the ECB could announce another round of covered bond buying. Regardless of market conditions, a deal on Monday was always going to be unlikely because of German holidays. But the weak market opening has made a deal between now and the ECB meeting more tricky — particularly for the smaller names that dominate the pipeline. Covered bond traders reported a very quiet morning, with customers unwilling to take a position before Thursday.

The sleepy covered bond market was woken up this week after it emerged that the European Central Bank will consider a second covered bond purchase programme at next week’s policy meeting. But, the fact that none of this week’s deals reached €1bn, and that many were a long way short of that size, illustrates a continued lack of confidence borne by a belief that the prospective buying is no panacea.

Moody’s and Fitch have downgraded the senior rating of Clydesdale Bank. Though the borrower’s triple A covered bond rating remains intact, the cuts are unhelpful in the context of a recent mandate and a roadshow of its newly established covered bond programme.

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Approval to create a new banking group, Kutxa Bank, has prompted Fitch to place the Long-term Issuer Default Ratings (IDR) and Viability Ratings (VR) of two of the three merging cajas, Bilbao Bizkaia Kutxa (BBK) and Kutxa, on Rating Watch Negative.

A rumoured second round of ECB bond purchasing has breathed life into what had been a dormant covered bond market — but don’t get too excited. Curiously, even with this week’s supply, September issuance is going to fall short of September 2008 when Lehman collapsed. That should tell you something.

Nationwide has mandated leads for a US dollar RMBS. The deal comes after a successful credit card deal from Barclays and an earlier RMBS from Santander UK. With the European market in the doldrums, both in the covered and in ABS, more and more issuers are considering setting up 144A documentation to take advantage of this rich seam of demand.

A new law allowing Hungarian home owners to pay off foreign denominated mortgages in Hungarian forints at a discounted rate highlights the greater risk of sovereign intervention inherent in local banks, according to one covered bond analyst. Moody’s also took a dim view of the law, saying it could affect Timely Payment Indicators (TPI) – and perhaps ratings - of Hungary’s two covered bond issuing banks.