Covered Bonds

Nationwide’s decision to brave the waters with a €1.5bn five year clearly paid off, with the €2.4bn book sending a strong signal to other borrowers to take advantage of the funding window.

Moody’s took the axe to Italian banks’ covered bond ratings this week after its three notch downgrade of the sovereign and leading banks, including Intesa and UniCredit, to A2. The agency downgraded six issuers on Wednesday and placed the mortgage covered bonds of four others on review.

Nationwide had the audacity to announce, open and price a jumbo deal hours before Thursday’s potentially market moving announcements from the ECB and Bank of England. But its boldness was rewarded as the issuer printed €1.5bn instead of the targeted €1bn, showing the market what could be achieved with the right name, even in the narrowest of windows.

Covered bond bankers disagree over the likely impact of the €40bn buying programme that the ECB begins next month. Only two-thirds the size of the institution’s 2009 purchases, the one year programme’s distribution by jurisdiction is still unclear — as is its capacity to persuade other buyers into peripheral paper.

European credit markets had a slightly better day on Wednesday, with Bund yields rising 10bp to 1.83%, peripheral bond markets tightening versus Germany and equities rallying. The modest respite provided a window for Credit Agricole to jump through with an opportunistic €200m tap of its January 2021s. At mid-swaps +110bp, pricing was in line with its outstanding deal and was driven by reverse enquiry and short covering.

New York City

Moody’s has downgraded covered bond ratings of six Italian banks, and has placed the mortgage covered bonds of four other banks on review for downgrade. The action follows the rating agency’s three notch downgrade of the sovereign and ensuing downgrades of issuer ratings.

The prospect of another ECB covered bond purchase programme (CBPP) has kept issuers and investors in risk off mode all week, but Nationwide bucked this trend on Thursday and took the market by surprise with a €1.5bn five year deal. The offering is the first €1bn-plus, euro covered bond in more than a month and it stands in stark contrast to last week’s sub-jumbo deals — all on a day that few picked out as a window.

Traders reported muted flows in the secondary market on Wednesday ahead of Thursday’s ECB meeting, amid intense speculation that another round of covered bond purchasing could be announced. Italian bonds have reacted remarkably stoically to the republic’s triple notch downgrade — although this might be due to the absence of bids for second tier institutions.

Moody’s three notch downgrade of Italian sovereign debt, from Aa2 to A2 with a negative outlook, will heap more pressure on ratings of Italian banks, which could have a knock-on effect on covered bond ratings, said research analysts.

With the covered bond market waiting for constructive news out of Thursday’s ECB meeting, primary activity on Wednesday was limited to a €200m tap of Crédit Agricole’s 2021s. Syndicates said the tap showed investors were not totally sidelined, but the market — like other asset classes — was in desperate need of a message that would restore confidence and allow new issuance to be absorbed in the secondary market without provoking a sell-off in outstanding bonds.