Covered Bonds

First Sakrileg, now Sacrilegio. Covered bond purists have had an unsettling few weeks. The cry for structured covered bonds is not only getting louder but has moved across the covered bond bastion of Germany into Italy.

European borrowers backed off from issuance on Wednesday after French government bond spreads reached 16-year wides versus Germany. UniCredit Bank Austria had hoped to bring a deal after investor meetings in Helsinki and Copenhagen on Tuesday, but leads unanimously agreed that market conditions were not suitable and they will wait to see the result of weekend headlines following the EU summit.

Australia’s largest lender, Commonwealth Bank of Australia (CBA), will hold talks with investors ahead of its debut covered bond, it said on Wednesday. The country’s issuers are lining up to make their first forays into covered bonds after domestic legislation received Royal Assent this week.

Despite a widening yield spread between France and Germany, French covered bonds continue to perform well, bolstered by support from domestic investors. French issuers, prescient of their 2012 funding needs and the risk to their country’s top rating, could be tempted to return to the markets with a benchmark before the end of the month.

Swedish investors continue to jettison their covered bond holdings, according to SEB.

Standards & Poor’s has assigned covered bonds issued from BRFKredit’s Capital Centre B and Capital Centre E preliminary triple-A ratings, on stable outlook. These ratings replace those of Moody’s, which the issuer dropped, due to disagreements over rating methodology.

Even if a path through the crisis is found, it seems unlikely that the cédulas market will ever be capable of making a return to the heady levels of five years ago. Slow economic growth, a banking sector that is quickly deleveraging and consolidating, and the fact that some major issuers are close to hitting the minimum legal threshold of 25% overcollateralisation - means that, even when conditions stabilise, the eventual size of the market will be a fraction of what it used to be. Bill Thornhill reports.

Coventry Building Society got the covered bond market off to strong start on Monday morning launching its first euro trade amid a general upturn in sentiment. Core Europe is also showing signs of life, with UniCredit Bank Austria mandating for a public sector backed transaction.

Nomura has hired James Kalbermatter from Morgan Stanley, to take over the head of SSA and covered bond trading position left by Ben Moulle.

The underlying tone to the primary and secondary covered bond markets remains broadly supportive. Though the wider credit market is clearly still dealing with considerable uncertainty, for the right name and spread, investor demand is there — as evidenced last week with deals from Hypo Noe and CRH. The time could therefore be ripe for more French, Austrian or German names to step in. But whether the market is ready for the rumoured BBVA deal remains to be seen.

UniCredit Bank Austria will look to bring its third benchmark covered bond of the year in the next few days, market conditions permitting. The issuer can expect strong participation from Austrian and German investors, but it is also visiting investors in Helsinki and Copenhagen on Tuesday in a bid for more Nordic interest.

Though the wider market weakened on Thursday afternoon, momentum in the covered bond market remained intact. Markit indices and CDS spreads finished slightly in the red at closing, prompting leads on ANZ €500m debut trade to close books with modest oversubscription.