Covered Bonds

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UK covered bonds have always enjoyed investor interest because of the pick-up they offer versus core European paper. But there were signs this week that the eurozone crisis has elevated their standing further as Barclays and RBS printed the two largest deals since the covered bond market re-opened. Abbey National followed them on Thursday to make it three UK deals in as many days.

BPCE took French euro covered bond supply in 2011 to over €44bn on Thursday with its second obligations à l’habitat benchmark trade. French issuers have been among the most active since the market re-opened on August 24, with Crédit Agricole and Caisse de Refinancement de l’Habitat (CRH) also launching trades this week. Other names from the country are undertaking investor meetings, but with secondary spreads under pressure and strong supply across the curve, placement may become more difficult.

Nordic covered bond issuers Sparebank 1 Boligkreditt, Swedbank and Nordea Bank Finland all priced benchmark deals in the past week, with each getting a quite different reception.

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 an unprecedented four benchmarks per day, with ever higher premiums hurting secondary liquidity.

Abbey National came to market on Thursday morning with a five year, €1bn benchmark, making a hat-trick of euro benchmark issues from the UK this week. But some syndicates were concerned that Abbey’s association with peripheral Europe through its Spanish parent would make it a tougher sell than the UK banks that preceded it.

BPCE took French covered bond supply in euros to over €44bn for the year on Thursday, launching its second Obligations à l’Habitat. The 10 year transaction followed Crédit Agricole’s five year which was increased due to the high number of quality orders.

With 14 benchmarks in just over one week and several issuers on roadshow, analysts are debating when covered bond primary market momentum will slow. Recent issuance has been well received and generous new issue premiums have ensured spreads have held around re-offer. But with supply coming at all points on the curve, and as many as three trades from some jurisdictions, prospective issuers may find placement increasingly difficult.

RBS on Wednesday secured the largest order book since the European covered bond market re-opened last week, demonstrating the strength of the bid for UK covered bond paper. It was the second UK bank in as many days to print a €2bn deal, and it is the first time the borrower has secured funding with a spread over mid-swaps of less than 100bp.

The surge in covered bond issuance continued on Wednesday, with a trio of benchmarks taking issuance to more than €14bn since the market reopened in the middle of last week. Some 12 trades from 10 jurisdictions have been launched since then.

After €5.75bn of covered bond deals on Tuesday, including a €2bn three year offering from compatriot Barclays, RBS took advantage of the continued window for issuance on Wednesday morning with its own €2bn deal in the same tenor. Investors again showed demand for UK paper, allowing the issuer to price several basis points inside the wide end of guidance.