Covered Bonds

Hopes of primary market supply evaporated on Tuesday morning as global equity markets dropped and European iTraxx indices and peripheral CDS widened further. In the secondary market activity focused on the embattled Dexia Municipal Agency, with its spreads widening 20bp across the curve. Dexia’s triple-A covered bond rating is under threat, though talk of its parent bank being placed into joint venture with French entities Banque Postale and Caisse des Dépôts et Consignations could bode well for its covered bonds.

The covered bond, once an exclusive triple-A rated product bought by rates investors, is quickly establishing itself as a credit product. Investors — and issuers — have no choice but to get used to the new reality of a double-A covered bond market. Bill Thornhill reports.

New Zealand’s ASB Bank has issued a prospectus for a €7bn covered bond programme, following its compatriots Bank of New Zealand and Westpac New Zealand into the covered market.

With Germany on holiday on Monday, activity in the covered bond market was largely focussed on the secondary – where developments on DexMA took centre stage. Moody’s put Dexia group on downgrade review and covered bond analysts say that, with just a one notch senior downgrade, DexMA’s OF could lose their triple A rating.

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.

The Cover has introduced several new functions that will really help improve your deal intelligence. Find the answers to questions like: how many and what Norwegian deals did Barclays Capital work on this year? Or, how many Austrian deals were there this year and which of them had the highest number of orders? Or, how many and what Spanish deals did BNP Paribas work on and which had the highest oversubscription? The deals priced page introduces a dramatic new tool to assess deals, issuers and leads.