Covered Bonds

Crédit Mutuel-CIC Home Loan SFH kept the euro market alive on Tuesday with an increase of an outstanding 10 year trade. The €200m tap is the sum total of primary issuance in the last week, though Canadian Imperial Bank of Commerce proved the dollar segment’s resilience to market volatility by taking supply over the same period to $7bn.

Spreads on French bank paper have been unaffected by Moody’s downgrades, which had been widely anticipated.

Crédit Agricole CIB has hired Nicolas Poli as global head of SSA and covered bond trading from Bank of America Merrill Lynch where he had worked for three years as director of SSA and covered bond trading. He will aim to build the bank’s dollar denominated SSA and covered bond trading platform.

Santander UK has launched Holmes 2011-3, ending a two month drought in the public European ABS market. Market participants had been begging for a large multi-currency master trust deal to kick off a revived market, and Holmes fits the bill.

Covered bonds have been defended after JP Morgan chief executive Jamie Dimon’s criticism of their privileged status in Basel III regulations. Their preferential treatment stems as much from the degree of regulation inherent in the product as its liquidity, said Florian Hillenbrand, head of covered bond research at UniCredit.

UK bank shares fell on Monday after the Independent Commission on Banking recommended ring-fencing the retail operations of UK banks in its final report. Mortgage lending will be permitted within the ring-fence, as will wholesale funding. However, the ICB proposes a wholesale funding limit, which could address concern that if mortgage backed assets such as covered bonds are included in the ring-fence, asset encumbrance would reach unacceptable levels.

Markets opened poorly on Monday morning and hit record wides in some indices, after concerns about Greece’s ability to meet its austerity commitments dominated weekend headlines. Syndicate bankers touted Tuesday as the day to bring a deal if market conditions were constructive, but the volatility means they expect no primary supply this week.

Two weeks of pressure on French covered bond spreads in the secondary market have pushed Dexia Municipal Agency’s outstanding paper to new wides. In the last two days however, spreads have tightened moderately and settled up to 100bp wider than where they were before the market re-opened on August 25. Fortunately the bank has finished its long-term funding for the year, and even if spread levels make public issuance economically prohibitive, it has developed other funding tools. Covered bond analysts see value for investors in buying their bonds now.

The Cover provides a brief summary of the regular covered bond research notes produced by Deutsche Bank, Société Générale CIB, LBBW, Barclays Capital and DZ Bank. With the covered bond to senior unsecured spread having widened considerably in the recent past, one of the key focuses is on relative value, and in some cases senior is preferred over covered. A couple of houses also look at the Scandinavian region with one highlighting the risk of house price declines on high LTV pools in Denmark and Sweden. Finally, one house looks at rising Spanish NPLs and finds that this should not be a problem – provided there’s a €75bn recapitalisation.

Denmark’s Nykredit on Monday started a 12 day bond auction to refinance its adjustable rate mortgages. After two days of selling, bid-to-cover ratios and spread levels appeared to show that demand has withstood concerns about the bank’s new capital centre for ARMs and wider apprehension about Denmark’s weak housing market.

While the European covered bond market continues to misfire as it struggles to distance itself from the eurozone crisis, the dollar market this week showed its increasing strength and depth with its largest deal yet.

After €20bn of covered bond issuance in just over a week, market volatility and announcements by the ECB and German Constitutional Court were enough to keep European issuers sidelined this week. Although there was no primary issuance, the pipeline continued to grow and three issuers finished roadshows, which means there should be deals when conditions improve.