Covered Bonds

Prospective issuers stayed out of the European covered bond market on Thursday, ahead of the afternoon ECB interest rate announcement and press conference in Frankfurt. A deal is highly unlikely on Friday, which means the week will probably end without any European supply at all. Looking ahead, Norway’s Terra Boligkreditt finished its roadshow on Wednesday and may be the prime candidate to resume euro supply early next week — as long as weekend headlines don’t spook markets.

Against a backdrop of pervasive hesitancy in the euro market, triple-A rated Toronto Dominion Bank launched the largest ever dollar deal on Wednesday. The $5bn dual tranche trade broke the record held by HBOS, which sold a $3bn 10 year trade in 2007.

A UK based covered bond investor spoke to The Cover about the sovereign crisis. He believes the primary market should still be able to function, though the group of issuers capable of doing a deal will be much smaller. Greece is beyond hope, but he says the rest of Europe can still be saved.

Market participants were not swayed by a moderate rally in sovereign CDS and senior financials on Wednesday morning, preferring to hold out for a more stable backdrop. But with an ECB meeting in Frankfurt on Thursday and the Euromoney covered bond conference and ECBC plenary taking place on 14-15 September, opportunities for issuance might be limited to early next week.

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.

Market conditions improved on Tuesday, though issuance remained elusive as issuers and investors waited to determine whether the relief would hold. Meanwhile Austrian, Norwegian, UK and French issuers are lining up.

Syndicate officials tried to remain positive in the face of worsening market conditions on Monday. After a strong post-summer reopening, market participants had hoped a full pipeline would carry momentum into this week. The primary market remained closed, however, and the secondary market is still hamstrung due to a lack of liquidity. Nevertheless, Raiffeisen Landesbank Steiermark has finished roadshowing and has mandated banks for a trade, while Norway’s Terra Boligkreditt will end its pre-deal investor meetings on Wednesday. Both benefit from strong credit fundamentals and relative rarity, and with investors keen to diversify into high quality paper hopes for issuance later in the week remain high.

Covered bond traders said the secondary market remained inactive on Monday with liquidity still seriously lacking. Most bonds issued since the market reopened have struggled to perform, while the weight of €20bn of supply was pushing spreads on outstanding bonds wider, they said.

Abbey National was the third UK bank to come to market this week, announcing a five year deal on Thursday. Following €2bn trades from Barclays and RBS, Abbey decided to go for a quick execution and achieved this by offering a generous 20bp new issue premium and restricting deal size to €1bn. This was enough to negotiate the greater execution risk it faced because of its Spanish connection and sagging investor demand after heavy issuance.

BPCE SFH sold its second covered bond, pushing its curve out to 10 years with a successful €1.25bn transaction, which was increased on the back of strong participation from domestic pension and insurance buyers.

A deal deluge worth €20bn in little more than a week has pushed the covered bond market to the brink of shutdown. Previously parched, the sector’s rush of new supply has brought up to four benchmarks per day, with ever higher premiums hurting secondary liquidity.

Nordic covered bond issuers Sparebank 1 Boligrekddit, Swedbank and Nordea Bank Finland all priced benchmark deals in the past week with each getting a quite different reception. Meanwhile Austria Erste bank issued a small but successful sub €1bn deal.